Investment Firm BlackRock Sounds Climate Change Alarm

Larry Fink, CEO and cofounder of money management giant BlackRock, recently stated that climate change will soon trigger a fundamental reshaping of finance. He also pledged a variety of actions to support sustainable investments in his letter to investors.

Time will tell, since Fink has made similar claims in the past and BlackRock’s voting priorities have largely remained unchanged. The true value of Fink’s announcement lies in sounding a louder alarm on climate-related risk in the financial sector and driving further standardization and adoption of environmental, social and governance (ESG) standards as a tool for valuing risk.

Risk-Adjusted Returns and ESG

New research suggests the risks and economic effects of climate change continue to be underestimated. Climate change poses risks that cascade throughout the value chain and across economic sectors.

As with any optimization challenge, high quality data is required to train valuation models and investment algorithms. ESG data are filling this role, but industry-recognized standards are traditionally slow to develop and proliferate. This process, however, is changing quickly. S&P Global in finance, Global Real Estate Sustainability Benchmark in real estate, and Global Reporting Initiative offer ESG frameworks that have been seeing wider adoption. According to the Global Sustainable Investment Alliance, $30.7 trillion was invested sustainably at the beginning of 2018, a 34% increase since 2016. A tipping point is fast approaching where use of these benchmarks is expected to become the norm.

In this emerging ESG-driven culture, asset holders of all types are advised to improve the sustainability metrics of their portfolios. Climate-related risk exposure has an increasingly large effect on valuations and investment. In combination with increasing carbon-related regulation and corporate zero-carbon goals, the writing is on the wall. BlackRock has read this writing, and their words (if not their actions) signal the tide is shifting toward a new and more environmentally accountable corporate culture.

Guidehouse Insights, has been tracking the sustainability trend among corporations for several years. Various reports highlight how the market is evolving (see the Building-to-Grid white paper and the How Science-Based Targets Offer Direction for Sustainability Performance report) and can help firms along their sustainability journey.