By Christen Smith

BlackRock, the world’s largest asset manager, said Tuesday it will dump companies that collect more than 25% of their revenue from thermal coal production by midyear as it pivots towards a sustainability-based investment strategy.

CEO Larry Fink told fellow executive leaders in a letter that compelling evidence of climate change has forced investors to reassess “core assumptions about modern finance” and brace for a significant reallocation of capital. This means, he said in a separate letter to clients, BlackRock will evaluate environmental, social and corporate governance (ESG) risk in its portfolios “with the same rigor that it analyzes traditional measures such as credit and liquidity risk.”

“Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts,” Fink said. “With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector.”

BlackRock manages $7 trillion in assets worldwide and is a founding member of the Task Force on Climate-related Financial Disclosures. Fink said the company also signed the U.N.’s Principles for Responsible Investment and the Vatican’s 2019 statement advocating for carbon pricing.

“Climate change has become a defining factor in companies’ long-term prospects,” Fink said. “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.”

Fink said BlackRock will double the number of sustainable exchange-traded funds (ETFs) it offers to 150 over the coming year and update its screening tool to allow clients to sort out companies with the highest ESG ratings and identify those with an undefined connection to fossil fuels.

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios,” Fink said. “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.

“Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

Lingering Questions

It’s not the first time BlackRock has revised its products to reflect changing political and social attitudes. In 2018, the company rolled out ETFs and index-tracking funds that exclude gun makers and retailers — including Sturm Ruger, American Outdoor Brands and Vista Outdoor — as criticism grew over the industry’s influence in Congress and on Wall Street.

Fink said that while the government must continue to lead the way when it comes to addressing social issues, companies must act too.

“We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider,” he said. “But there is no denying the direction we are heading. Every government, company and shareholder must confront climate change.”

The Sunrise Project, a conservation group long critical of BlackRock’s investment strategies, said that while “there’s a lot to celebrate” in Fink’s letters, questions remain about which companies it will drop as a result of coal revenues.

“BlackRock beginning its shift of capital out of fossil fuels, including today’s divestment of coal in its actively managed funds, is a fantastic start and instantly raises the bar for competitors such as Vanguard and State Street Global Advisor,” said Diana Best, Sunrise’s senior strategist. “We will be looking for additional leadership from the company in, as Larry Fink put it, ‘fundamentally reshaping finance to deal with climate change,’ including additional shifts of capital out of fossil fuels.”

Sunrise’s analysis found gaps in how BlackRock will determine which companies derive 25% or more of their revenue from coal production. The exclusion metric appears to focus solely on producers and could possibly miss companies — such as utilities — included in the sector’s supply chain, the group said.

Ben Cushing, a Sierra Club spokesperson, said via Sunrise that “the financial giants propping up the industries driving us towards climate disaster can no longer escape public scrutiny.”

“As the biggest financial institution in the world, BlackRock’s announcement today is a major step in the right direction and a testament to the power of public pressure calling for climate action,” he said. “But BlackRock will continue to be the world’s largest investor in coal, oil and gas. It is time to turn off the money pipeline to dirty fossil fuels for good. BlackRock should expand on its commitments, and other financial institutions should follow suit.”