Bocconi Students for Sustainable Finance

At the beginning of 2020, BlackRock, the largest asset management firm in the world, announced radical changes in its investment strategy and climate change engagement.

Among the actions undertaken by the company, in January BlackRock joined the Climate Action 100+, an investors’ coalition that aims at supporting carbon emissions reduction of the largest corporate greenhouse gas emitters by pressuring them to take action on climate change and improve climate disclosures.

In addition, BlackRock published its annual letter to clients and Larry Fink’s letter to CEOs, announcing that climate change would, from that moment on, be a priority in setting the company’s strategy.

This was seen as a pivotal step in the asset management industry, especially to pave the way toward the emissions reduction targets set by the Paris Agreement, which cannot be met without the commitment of financial players.

What was seen as a turning point one year ago raised a lot of questions, among which: will BlackRock keep its word? And most importantly, will other asset managers follow BlackRock’s lead?

One year later, we want to take a look at where we stand and why it matters.

In 2020, $490 billion were raised in green, social, and sustainability bonds. Plus, $347 billion were put into ESG-focused investment funds.

According to Moody’s, in 2021 sustainable-debt issuance is expected to reach $650 billion and green bond issuance is expected to rise by 39%. Despite the pandemic, there is a willingness by major countries to create a “green recovery” pace by reducing carbon emissions. This, combined with an increasing investors’ awareness in pursuing sustainable investments has pushed asset management firms to create ESG-focused funds. According to Morningstar, in the US only – that represents a small fraction of the overall market – Sustainable funds raised $51.2 billion in 2020, more than doubling the $21.4 billion of 2019.

However, despite this apparently “green” scenery, the financial industry has been accused of greenwashing by green campaigners. And they may not be totally wrong.

One issue is that many of the labeled ESG funds have positions in companies that are not doing the necessary efforts to reduce their carbon emissions. Moreover, investors are questioning if the proceeds from the sustainable bonds are actually being used to fund projects that pursue social and/or environmental goals. Since some companies are taking advantage of ESG investing’s complexity and loopholes, this will likely lead to more regulation and stronger standards to respect.

2021: Where do we stand?

According to Reclaim Finance and Urgewald, today More than 4000 institutional investors – asset managers, pension funds and sovereign wealth funds – hold positions in companies exposed to coal for a total amount of $1.03 trillion.

 One thing to note is that, according to Ganswindt, there is a substantial difference between EU investors, that started divesting from fossil fuel companies and US investors, that account for nearly 60% of institutional investments in the coal industry and are still reluctant to exit from it.

Talking specifically about the asset management industry, the “Big Three” – BlackRock, Vanguard, and State Street – own collectively 15% of assets under management in the world, which gives them around one-fifth of the S&P500 companies’ shares and one-quarter of votes cast at companies’ annual meetings. Therefore, they hold the largest blocks of shares in publicly-traded firms in the U.S., including in the carbon-intensive energy and utility companies. This is relevant as it makes them crucial players in sustainability and climate-related issues since their votes are determining when deliberating on climate-related resolutions.

As of today, Vanguard and BlackRock hold $170 billion invested in coal assets – i.e. companies that produce or burn coal, respectively with $86 billion across 222 companies and $84 billion across 200 companies, making Vanguard the biggest coal investor in the world.

Vanguard had announced to support companies in pursuing the fossil fuel consumption targets from the Paris agreement and to assist them with disclosure of climate-related risk. As a result of this commitment, Vanguard did add more ESG investment products to their investment solutions, but it lacked concrete moves. In fact, Vanguard has not joined the Climate Action 100+, it did not divest from coal-intensive companies, nor it has record in voting to support climate-related shareholder resolutions.

On the other hand, BlackRock, despite still holding significant positions in coal companies, started considerably divesting from the industry and is recognized to vote on resolutions at shareholders’ meetings to pressure companies in reducing their carbon emissions by increasing transparency and creating action plans to mitigate climate-related risks.

In this mitigated scenery, it is important to track the next moves of the biggest asset managers, since according to Paddy McCully, climate and energy program director at Rainforest Action Network, “Wall Street’s massive investments in the coal industry are driving us ever deeper into a climate crisis”.

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At the beginning of 2020, BlackRock, the largest asset management firm in the world, announced radical changes in its investment strategy and climate change engagement.

Among the actions undertaken by the company, in January BlackRock joined the Climate Action 100+, an investors’ coalition that aims at supporting carbon emissions reduction of the largest corporate greenhouse gas emitters by pressuring them to take action on climate change and improve climate disclosures.

In addition, BlackRock published its annual letter to clients and Larry Fink’s letter to CEOs, announcing that climate change would, from that moment on, be a priority in setting the company’s strategy.

This was seen as a pivotal step in the asset management industry, especially to pave the way toward the emissions reduction targets set by the Paris Agreement, which cannot be met without the commitment of financial players.

What was seen as a turning point one year ago raised a lot of questions, among which: will BlackRock keep its word? And most importantly, will other asset managers follow BlackRock’s lead?

One year later, we want to take a look at where we stand and why it matters.

In 2020, $490 billion were raised in green, social, and sustainability bonds. Plus, $347 billion were put into ESG-focused investment funds.

According to Moody’s, in 2021 sustainable-debt issuance is expected to reach $650 billion and green bond issuance is expected to rise by 39%. Despite the pandemic, there is a willingness by major countries to create a “green recovery” pace by reducing carbon emissions. This, combined with an increasing investors’ awareness in pursuing sustainable investments has pushed asset management firms to create ESG-focused funds. According to Morningstar, in the US only – that represents a small fraction of the overall market – Sustainable funds raised $51.2 billion in 2020, more than doubling the $21.4 billion of 2019.

However, despite this apparently “green” scenery, the financial industry has been accused of greenwashing by green campaigners. And they may not be totally wrong.

One issue is that many of the labeled ESG funds have positions in companies that are not doing the necessary efforts to reduce their carbon emissions. Moreover, investors are questioning if the proceeds from the sustainable bonds are actually being used to fund projects that pursue social and/or environmental goals. Since some companies are taking advantage of ESG investing’s complexity and loopholes, this will likely lead to more regulation and stronger standards to respect.

2021: Where do we stand?

According to Reclaim Finance and Urgewald, today More than 4000 institutional investors – asset managers, pension funds and sovereign wealth funds – hold positions in companies exposed to coal for a total amount of $1.03 trillion.

 One thing to note is that, according to Ganswindt, there is a substantial difference between EU investors, that started divesting from fossil fuel companies and US investors, that account for nearly 60% of institutional investments in the coal industry and are still reluctant to exit from it.

Talking specifically about the asset management industry, the “Big Three” – BlackRock, Vanguard, and State Street – own collectively 15% of assets under management in the world, which gives them around one-fifth of the S&P500 companies’ shares and one-quarter of votes cast at companies’ annual meetings. Therefore, they hold the largest blocks of shares in publicly-traded firms in the U.S., including in the carbon-intensive energy and utility companies. This is relevant as it makes them crucial players in sustainability and climate-related issues since their votes are determining when deliberating on climate-related resolutions.

As of today, Vanguard and BlackRock hold $170 billion invested in coal assets – i.e. companies that produce or burn coal, respectively with $86 billion across 222 companies and $84 billion across 200 companies, making Vanguard the biggest coal investor in the world.

Vanguard had announced to support companies in pursuing the fossil fuel consumption targets from the Paris agreement and to assist them with disclosure of climate-related risk. As a result of this commitment, Vanguard did add more ESG investment products to their investment solutions, but it lacked concrete moves. In fact, Vanguard has not joined the Climate Action 100+, it did not divest from coal-intensive companies, nor it has record in voting to support climate-related shareholder resolutions.

On the other hand, BlackRock, despite still holding significant positions in coal companies, started considerably divesting from the industry and is recognized to vote on resolutions at shareholders’ meetings to pressure companies in reducing their carbon emissions by increasing transparency and creating action plans to mitigate climate-related risks.

In this mitigated scenery, it is important to track the next moves of the biggest asset managers, since according to Paddy McCully, climate and energy program director at Rainforest Action Network, “Wall Street’s massive investments in the coal industry are driving us ever deeper into a climate crisis”.