Larry Fink (BlackRock) (Jan 2020)

Larry Fink (BlackRock Co-founder) – Bloomberg Interview on Importance of Tackling Climate Change (Jan 2020)

Chapters

00:00:16 Climate Change as an Investment Risk

00:03:41 Navigating Risk and Climate Change in Investment Strategies

Understanding Risk Tools:
The speaker emphasizes the need for better risk tools to navigate various forms of risk, including yield curves and SASB and TC FB FD. Companies are encouraged to self-report on these metrics to provide clarity on how they are addressing these issues. The speaker believes that there are good tools available now and that we are on a long path to developing even better tools.

Sustainable Funds and ESG Investments:
In 2019, most sustainable funds outperformed regular funds, potentially due to momentum trade and record inflows into ESG investments. BlackRock announced that every one of their products will have a sustainable counterpart, enabling more investors to participate in this dialogue.

Climate Change as a Long-Term Journey:
Climate change is recognized as a 50-plus-year journey, and the world will continue to rely on carbon for an extended period. Only a small percentage of the population has flown in an airplane, indicating the vast potential for carbon-related activities. We need to find ways to mitigate carbon-related risks while we are dependent on carbon, such as carbon recapture and other technologies.

Concerns about Government Dependency:
The speaker expresses concern about the dependability and dependency on governments to achieve long-term climate change objectives. Governments are not seen as working towards these objectives effectively, raising concerns about their ability to drive change.

Divestment from Fossil Fuels:
Some activists argue that divesting from fossil fuel companies is essential for addressing climate change. The speaker disagrees with this approach, arguing that it could lead to lower valuations and missed investment opportunities. The speaker believes that energy companies, particularly in the United States, play a crucial role in investing in sustainable energy and carbon recapture.

ERISA and Fiduciary Responsibility:
In the United States, investment managers are governed by the rule of ERISA, which requires them to maximize profits for their clients. Divesting from fossil fuels could violate this fiduciary duty, as it may not be in the best financial interest of the clients. The speaker argues that changing this requires a change in the law, rather than individual investment decisions.

Voting on Climate-Related Resolutions:
BlackRock has lost some of its focus on climate-related resolutions in recent years. The speaker acknowledges this and states that BlackRock has the largest corporate stewardship team in the world.

00:09:50 Addressing Climate Change: A Multifaceted Approach

Changing the Narrative on Climate Change:
BlackRock aims to change the narrative around climate change by announcing how it votes on significant proxy issues each quarter, coinciding with the vote announcement. The firm encourages companies to publicly disclose their performance under SASB and TCFD frameworks, potentially leading to voting against companies that fail to do so in 2021.

Government’s Role in Climate Change:
Some governments have taken positive steps, but most are focused on short-term election cycles, neglecting long-term planning for climate change. Climate change cannot be solved solely by central banks or monetary policies; it requires collaboration between public and private sectors. Regressive policies, such as carbon taxes, can exacerbate societal fragmentation and slow down government mitigation efforts. Comprehensive solutions are needed to address the societal impact of climate change, including potential disruptions caused by solutions.

Concerns about Big Finance:
BlackRock, Vanguard, and State Street collectively control a significant portion of the S&P, raising concerns about restricted competition and political scrutiny. BlackRock is open to having a conversation about mitigating the risks associated with its influence on corporate outcomes. Creating separate legal entities with distinct proxy teams could be a potential solution, although it would introduce more bureaucracy and costs.

Consolidation in the Asset Management Industry:
The asset management industry is experiencing significant consolidation, with BlackRock raising $430 billion in net new assets in 2019. BlackRock attributes its growth to focusing on client outcomes and solutions rather than products. Clients are increasingly seeking deeper, broader relationships with asset managers that can provide lower fees, better advice, and improved outcomes.

The Future of the Industry:
The myth about the movement to passive strategies persists, but more assets are moving into index strategies for active purposes. BlackRock sees the future of the industry in providing solutions that meet the evolving needs of clients and aligning investments with long-term trends like sustainability and technology.

00:20:04 Transforming Retirement: ETFs and the Case of China

00:22:04 China's Financial Opening and Global Integration

Abstract

“Climate Change and Global Finance: Navigating Investment Risks and Opportunities in a Rapidly Evolving Landscape”

In a world grappling with the complexities of climate change and economic shifts, the investment landscape is undergoing a profound transformation. BlackRock CEO Larry Fink’s evolving perspective on climate change as a critical investment risk signifies a paradigm shift in global finance. This article delves into the emerging trends in sustainable investing, the role of investors in climate action, regulatory challenges, the societal impact of climate solutions, and the dynamic bond market with a particular focus on China’s economic transition, retirement challenge, and the ETF potential. We explore how these interconnected elements are reshaping the investment world, highlighting BlackRock’s proactive approach, the importance of ESG factors, and the global financial community’s response to these unprecedented challenges.

Main Ideas and Expansion:

1. Climate Change as an Investment Risk:

Larry Fink, the CEO of BlackRock, has come to recognize climate change as a pivotal investment risk. In 2020, Fink publicly acknowledged the significant impact of climate change on the financial industry, leading BlackRock to integrate this understanding into its investment strategy. This shift has sparked growing client interest in aligning their portfolios with climate considerations. Industry leaders across sectors are increasingly recognizing the urgency of incorporating climate risks into investment strategies. The role of capital markets in identifying and mitigating these risks is becoming ever more crucial.

2. Shifting Investment Strategies:

The investment focus is increasingly shifting towards sustainable and green portfolios. Companies that adhere to robust Environmental, Social, and Governance (ESG) practices are viewed as more resilient and forward-thinking. BlackRock is at the forefront of this transition, aiming to facilitate the shift to a low-carbon economy through targeted investments.

3. Navigating Risk and Promoting Sustainability:

The investment world is witnessing a rising demand for enhanced risk management tools that include considerations for sustainability. Investors and companies alike are encouraged to be transparent and self-report on ESG metrics. The performance of sustainable funds in 2019 exemplifies a significant shift in investment trends, leaning towards sustainability.

4. The Long-Term Challenge of Climate Change:

There is an acknowledgment within the financial sector of the extended journey required to combat climate change. This challenge necessitates measures like carbon recapture and the development of large-scale non-carbon alternatives, amidst concerns over the inadequacy of governmental actions towards long-term climate goals.

5. The Role of Investors in Climate Action:

The effectiveness of divesting from fossil fuel companies is a subject of ongoing debate. Investors face legal and fiduciary constraints in excluding companies solely based on ESG criteria. The focus is, therefore, shifting towards engaging with companies to adopt sustainable practices.

6. Navigating Regulations and Fiduciary Duties:

Investment regulations vary significantly across different regions, with the U.S.’s Employee Retirement Income Security Act (ERISA) being a notable example. These differences pose challenges in aligning investment practices with sustainability goals within the existing regulatory frameworks.

7. Climate-Related Resolutions and Engagement:

BlackRock plays a critical role in voting on climate-related resolutions and promoting company engagement for sustainable practices. The firm is changing the narrative around climate change by announcing its voting decisions on significant proxy issues each quarter, coinciding with the actual vote.

8. BlackRock’s Perspective on Climate Change and Societal Impact:

BlackRock is committed to transparency in proxy voting and encourages companies to adhere to sustainability frameworks like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). The firm recognizes the limitations of government actions in addressing climate change and emphasizes the need for private-public collaboration. While some governments have taken positive steps, most are focused on short-term election cycles, neglecting long-term planning for climate change. The solution to climate change cannot rest solely on central banks or monetary policies; it requires collaboration across sectors. Regressive policies, such as carbon taxes, can worsen societal fragmentation and hinder governmental mitigation efforts.

9. ETFs: A Paradigm Shift in Bond Market:

Exchange-Traded Funds (ETFs) are emerging as a dominant force in the global bond market. Currently valued at around $100 trillion, the global bond market includes approximately $1 trillion in ETFs. This figure is expected to grow significantly in the next 5 to 10 years, potentially reaching $5, $10, or even $20 trillion. ETFs offer a simplified, cost-effective approach to investing, allowing investors to access a diverse range of bonds through a single fund. This shift towards more index-like strategies is transforming the investment landscape, driven by the benefits of ETFs such as simplicity, low cost, and the ability to navigate complex markets.

10. China’s Retirement Challenge and ETF Potential:

China’s high savings rate, over 40%, is primarily due to the lack of robust retirement and healthcare safety nets, presenting a critical challenge for the nation’s economic stability and growth. BlackRock and the People’s Bank of China (PBOC) hosted a retirement conference in China, signaling the country’s recognition of the need for comprehensive retirement planning. Developing a robust retirement system in China could lead to significant transformations and growth opportunities in the financial sector. However, if China fails to address its retirement needs adequately, its economic development may be hindered. A well-established retirement system could not only enhance China’s economic performance but also aid in its transition to a more balanced economy.

11. Finance and Globalization:

Global financiers play a pivotal role in supporting China’s market growth, particularly as the country transitions from a capital exporter to an importer, a shift that enhances global financial stability. China is endeavoring to become less reliant on exports and more integrated with its domestic economy, addressing its current dependence on external markets. This includes active market opening initiatives, highlighted by partnerships and memoranda of understanding, such as the collaboration between Tomasic and China Construction Bank. Recognizing the necessity of globalization and global input, China is focusing on developing its capital markets and retirement business. The next decade offers significant opportunities for global financiers to assist China in building its financial infrastructure. The transition of China into a capital importer contributes positively to global safety and stability, reflecting how the world has become a safer place over the past 40-50 years, partly due to increased capital movement across borders.

The evolving landscape of global finance, marked by a shift towards sustainability and the integration of ESG factors, underscores the necessity of balancing investment risks with opportunities. BlackRock’s leadership in navigating these challenges, the transformation in bond markets led by ETFs, and China’s pivotal role in the global financial ecosystem highlight the interconnectedness of climate action, economic development, and global stability. As the world moves forward, the blend of regulatory adaptations, investor engagement, and innovative financial strategies will be key in shaping a sustainable and stable economic future.

Notes by: Random Access

Larry Fink (BlackRock Co-founder) – Bloomberg Interview on Importance of Tackling Climate Change (Jan 2020)

Chapters

Abstract

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