Two investing themes have become much more dominant of late. One concerns climate change, and the other has a partial overlap as it covers the ESG theme of environmental, social and governance strategies. While “no oil company allowed” is not universal in the holdings within these themes, a growing segment of the investing public is trying to avoid investing in companies that are largely into fossil fuels and that are deemed to be environmentally insensitive. Some investors have referred to this rising theme as a “do-gooder” theme.

Larry Fink, board chair and chief executive of BlackRock Inc. (NYSE: BLK), has just joined in by issuing a letter to CEOs called “A Fundamental Reshaping of Finance.” While BlackRock is a household name in the investing community, the firm’s total assets under management were $6.96 trillion as of September 30, 2019, and that was likely more than $7 trillion under management at the end of 2019. An issue has been blooming in ESG and environmental issues within Goldman Sachs Group Inc. (NYSE: GS) as well.

Fink’s letter tells management of public companies that climate change has become a defining factor in their long-term prospects, that it will have an effect on economic growth and prosperity, and that the markets are not adequately factoring in this risk. Issues include whether cities can afford their infrastructure needs, whether 30-year mortgages can be properly issued/insured with climate risks, as well as concerns about inflation and emerging markets seeing productivity loss. It even assesses what risks municipal bonds face.

The heart of Fink’s letter:

Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.

The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organizations – including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk – is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.

This letter also pointed out the specific importance of climate change and how capital will be allocated ahead. Fink also discussed a more sustainable and inclusive capitalism. The letter went on to say:

Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.

These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.

In a separate letter to its own clients, BlackRock said that newer sustainable versions of model portfolios will use ESG — optimized index exposures rather than traditional market cap-weighted index exposures. The firm also will exit and avoid thermal coal producers, and BlackRock intends to double its offerings of ESG ETF products over the next few years. The firm will expand its ETFs with a fossil fuel screen, and it plans to engage with the major index providers to provide sustainable versions of their flagship indexes. While it already manages some $50 billion in solutions that support the transition to a low-carbon economy, along with renewable power infrastructure, it is offering investors exposure to the companies that are most effectively managing transition risk.

Lastly, Fink has a warning for boards of directors and management if they believe a company is not effectively addressing a material issue and that the directors should be held accountable. The letter ends:

Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

As for the issue brought by Goldman Sachs, the firm’s latest insight and briefing was titled “‘Carbonomics’ and the Future of Energy in the Age of Climate Change.” This podcast talked about how climate change is shifting the rules on energy investing. Michele Della Vigna of Goldman Sachs Research talked about how some of the changes in low-carbon or zero-carbon comes from an abundance of large and low-cost investment opportunities. These are in power generation, industry, mobility, buildings and nature-based solutions. Where the problem arises is that those opportunities mentioned will not be enough to stave off the worst effects of climate change. She said:

We believe about 50 percent of decarbonization is achievable within reasonable carbon costs. But then the cost curve becomes very steep, which means that we would need either of two things: a real technological breakthrough, particularly in things like battery and energy storage, or we will need [carbon] sequestration.

As a reminder, it’s not just words rather than capital coming from Goldman Sachs. The firm has not abolished its exposure to fossil fuels, but its sustainable finance group has said that it believes that climate change is one of the most significant environmental challenges of the 21st century. Even in 2019, Goldman Sachs had an effort to meet this inflection point of deploying clean technology and renewables, with a target of $150 billion to finance and invest in companies that promote clean technology and renewable energy. The latest homepage watch was even more impressive by targeting $750 billion of financing, investing and advisory activity to nine areas that focus on climate transition and inclusive growth over the next 10 years.

Goldman Sachs is very different from BlackRock in that it is still technically a bank holding company. The firm has recently been engaging more broad consumer offerings outside of funds and investment management, but Goldman Sachs is still one of the top investment banking giants in the world. That said, Goldman Sachs’ asset management arm counted roughly $1.8 trillion in assets under management in the third quarter of 2019. The firm has tried to grow its assets by advising large insurers and pension fund systems rather than just increasing its mutual fund assets, where management fees are under pressure.

BlackRock manages the iShares ETFs and its own funds as well, and with new and larger commitments from Goldman Sachs, there are more financial powerhouses focusing on climate change and ESG themes. BlackRock’s own writing showed that it was a founding member of the Task Force on Climate-Related Financial Disclosures, that it has signed the UN’s Principles for Responsible Investment and the Vatican’s 2019 statement advocating carbon pricing regimes, and that it has joined in on the Climate Finance Partnership.

It may seem obvious to say that BlackRock and Goldman Sachs will not be the last two firms to join in on or expand their current efforts in sustainability, ESG issues and climate change. This may be a cynical view, but even firms with managers who may have fewer cares and concerns about these issues are ever more likely to get involved if they think that’s where a large portion of the money headed. Untold billions (or even trillions) of dollars targeting ESG, sustainability and climate change appear to be up for grabs in the coming years.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.