Larry Fink, chairman and chief executive of BlackRock, was in forthright mood, speaking to the Institute of International Finance’s (IIF) president Tim Adams on the eve of third-quarter results.
The world’s largest asset manager on Wednesday reported a 16% year-on-year increase in revenues, a 10% increase in operating income and $98 billion of long-term net inflows for the quarter.
Fully $31 billion of that went into sustainable active and index strategies.
While he has plenty to say about inflation – “I don’t think it’s transitory” – and labour shortages – “the dominance of the gig economy is playing havoc with how we think about jobs” – Fink is even more outspoken on climate.
BlackRock oversees well over $200 billion dedicated to sustainable strategies, much of that in a new generation of iShares ETFs. Fink points out in his 2021 letter to CEOs that the creation of sustainable index investments has enabled a massive acceleration of capital towards companies better prepared to address climate risk. This, he suggests, is only just starting, will play out over many years and is set to transform asset prices.
But now, Fink is questioning the results from BlackRock’s and other asset managers’ well-intentioned pressure on the large public companies whose shares they own. While he believes that engaging with public companies has been essential and that “we are moving forward”, he warns that “we are doing the easy lifting, saying to public companies and banks, ‘you must do this and that’”.
The emerging world needs $1 trillion a year to achieve net zero and it’s getting $150 billion
He points to one example of what at first looks like a good outcome not being at all helpful. “We have seen large publicly quoted energy companies sell out their hydrocarbon assets to private companies,” he told Adams. “That is not going to get us to net zero. We have just created a public-private arbitrage – which is insane.”
This was even more outspoken than JPMorgan’s Jamie Dimon, who made the same point the day before.
Fink wants to be optimistic, but clearly fears the essential job is not getting done.
“Public companies have done a lot. Banks have done more than ever. They have moved further and faster than the rest of society. And there’s the problem. You have the SEC and the EU talking about the Task Force on Climate-Related Financial Disclosures and more and more large public companies are doing that. But we’re not asking the rest of society to move forward and that will create polarization.”
Fink says it will not be a just transition if a big gap opens up between large publicly quoted firms making net-zero commitments and small private firms in their supply chains that do not know how to match these and so get cut out from doing business with large customers.
If we carry on along the present path, he suggests: “We are not going to get to net zero. We are fooling ourselves.” He argues that just pressing banks to stop lending to carbon-intensive industries such as power is not enough. “It is leading to hyperinflation because it is restricting supply and working to the benefit of the large hydrocarbon economies, because in the US and Europe we’re not doing any new exploration.”
Epicentre
Fink also points out that emerging countries are at the epicentre of climate change, being big emitters of new carbon as they grow their economies and also most exposed to climate extremes. “The emerging world needs $1 trillion a year to achieve net zero and it’s getting $150 billion,” he points out. Fink suggests: “We need to re-imagine how we fund the emerging world. We have to re-imagine the roles of the IMF and the World Bank, which were founded 80 years ago and haven’t changed their charters since.”
Even a manager with $9.5 trillion of AuM can only do so much. Maybe smaller initiatives are better.
In September, the BlackRock Foundation announced a $100 million grant to Breakthrough Energy’s Catalyst Program. Breakthrough Energy was founded by Bill Gates to scale the technologies needed to reach net zero by 2050. The Catalyst Program’s initial focus will be to speed the development and commercialization of four in particular: direct air capture, green hydrogen, long-duration energy storage and sustainable aviation fuel.
Gates states: “We need to make the technologies and products that don’t cause emissions as cheap as those that do. The technologies Catalyst focuses on are vital to the world reaching net zero, but require significant investments so they can become inexpensive enough for the whole world to afford them.”
Price is crucial at a time when real wages are still falling and workers will be paying more of their nominal rises on much more expensive heating and transportation.
Fink says: “If we just went from brown to green, that is hyperinflationary. Transition is a process that starts from dark brown to lighter brown. We have to ask ourselves how do we get to green steel and green cement that is competitive on price with conventional steel and cement.”
He makes the point that many bankers leading the way on net zero are now stressing: the biggest benefit comes not from abandoning the worst emitters – who may simply get capital from private equity and funding from hedge funds instead – but rather from edging them along the path to improvement.
