As the visible impacts of climate change have mounted in recent years, so too have calls to abandon the industries blamed for causing them. Traditionally, fossil fuel companies have borne the brunt of climate activism, but public ire has lately spread far wider. Even asset managers have been feeling a great deal of heat thanFeeling the heat
Usually operating under mandates to deliver stable returns to investors, many large asset managers have been loath to abandon oil giants such as Exxon Mobil Corp. (NYSE:XOM) for fear of losing out on the solid dividends produced by such earnings powerhouses. Private asset managers, mutual fund companies, pension funds and sovereign wealth funds have all historically maintained considerable exposure to fossil fuels. For pension and retirement fund managers, who need to meet the financial needs of their beneficiaries, walking away from a stable source of earnings and dividends may seem to be particularly unsettling.ks to their often significant exposure to fossil fuel producers and other extractive industries.
Yet, while many asset managers have continued to resist the rising public pressure to divest from supposedly “dirty” assets, some of the biggest names in the industry have opted to follow the changing tide.
Even BlackRock Inc. (NYSE:BLK), the world’s largest asset manager, has felt the pressure to change – and has agreed to do so. In January, BlackRock announced its intention to largely divest from thermal coal, cutting its stake in the industry across most (though not yet all) of its funds.
The fact that a company with $7 trillion in total assets under management (including $1.8 trillion in actively managed portfolios) could feel the imperative to abandon coal is clear proof that no asset manager can be considered truly immune from concerted external pressures to divest.
Modern times, modern solutions
BlackRock has set an unexpected course in recent months. In January, the global asset manager announced that climate change would be placed at the heart of its investment and allocation strategy.
This is not pure altruism by any means. Indeed, in his latest annual letter to shareholders, CEO Larry Fink called the decision a long-term strategic necessity, declaring that climate has become a “defining factor” of the global economy that cannot be ignored:
“Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance…In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
According to Fink, shifting public sentiment will inevitably make holding fossil fuel assets untenable for major asset managers. This shift has been driven by a number of factors, including increasing public demands for better, or at least more ethical, corporate behavior.
Consumers have shown increasing interest in the ethical positions of the companies they support. That may have profound consequences for certain industries and corporate strategies. In the case of climate change, public outcry may soon make investing in fossil fuels more costly than it is worth.
Following the tide
In January 2019, Fink argued that companies are increasingly defined by their sense of purpose. To survive and thrive, firms must embrace purpose-driven cultures and strategies:
“Purpose is not a mere tagline or marketing campaign. It is a company’s fundamental reason for being – what it does every day to create value for its stakeholders.
“Purpose is obviously a nebulous concept and can mean many things to different people. However, the idea that companies should act in a way that is congruent with the values of their clients and customers is not terribly shocking. Yet it has only been over the course of the last couple years that the issue has come to a head publicly.
Fink’s intuitions are being born out by the data. Extensive analysis of survey data conducted by Purpose Brand and published in “The Purpose Report 2020” reveals an undeniable explosion of consumer demand for purpose-driven corporate practices. As a cotributor to the study, I explored a number of implications, including the impact on investor behavior. I found that their actions and desires mirrored broader consumer sentiments in most regards. This is supported by a number of observable trends in finance, most notably the meteoric rise in the popularity of ESG funds.
From words to action
Fink appears to be onto something with regard to both corporate purpose and the impetus to step away from unpopular, potentially destructive industries, but words and ideas are easy. Actions are more challenging.
In the next installment, I will discuss BlackRock’s progress on divestment to date and the looming challenges it will face going forward – as well as how savvy value investors may be able to profit from large funds’ divestments.