Unpicking Larry Fink’s latest letter

It’s been two years since BlackRock chief executive Larry Fink set corporate alarm bells ringing with a promise that the world’s biggest asset manager would no longer invest in companies that ignored climate threats. Since then, the amount of capital flowing into sustainable funds has surged — as has BlackRock’s own clout, with more than $10tn now under management. Yet, in his latest annual letter to company bosses, published yesterday, Fink was careful to stress the limits of what investor pressure could achieve without serious climate action from governments.

“Businesses can’t do this alone,” Fink said. “We need governments to provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets.” His warning came amid delays and haggling around climate disclosure regulations in Europe, while the shape of equivalent rules in the US is still more unclear. And in his protestation that stakeholder capitalism was not “woke”, he nodded to the culture wars that are undermining political momentum on climate issues, particularly in the US.

Still, Fink increased the pressure on big companies to help drive the energy transition as he urged “bold incumbents” to get involved in disrupting their own industries, rather than leave the playing field to start-ups.

There was a pronounced emphasis on social issues, too. This week, Edelman’s latest global Trust Barometer showed that respondents had more faith in businesses than in governments, non-governmental groups or the media. And, as we noted last week, pressure is growing on companies to take a stand on contentious political issues. “In this environment, facts themselves are frequently in dispute, but businesses have an opportunity to lead,” Fink wrote.

Fink’s critics — who include his former head of sustainable investing, Tariq Fancy — were broadly unimpressed by the letter. They noted that, unlike some previous editions, it contained no new policies to reduce BlackRock’s environmental impacts. In particular, they criticised his position on natural gas, which Fink argued would continue to play “an important role” during the energy transition. “There’s not much to see here other than more hot air from a would-be climate leader,” said Ben Cushing of the Sierra Club, calling the letter “just another rehashing of the same vague rhetoric”.

For now, Fink is sticking to his guns, dismissing calls for wholesale fossil fuel divestment by arguing this would simply push assets into the private markets. BlackRock and its peers “cannot be the climate police” in the absence of serious government policy, he wrote.

That debate is set to rumble on as one of the hottest issues of the year in sustainable business and finance. Read on for fresh takes on two of the others — energy inflation and international climate finance — and a curious new development in Australia’s embattled coal industry. And for more thought-provoking fodder on some of the key sustainability issues, check out two big FT special reports published today, on responsible business education and on the state of the world in 2022. See you on Friday. — Simon Mundy

When should business take a stand?

Our next Moral Money Forum report will explore one of the most contested questions in modern capitalism: when — and how — should companies speak out on environmental, social and political issues?

There are growing expectations that business should lead on matters that were once the preserve of governments, and public support for corporate activism is stronger than ever. But the perils of speaking out on issues from voting rights in the US to human rights in China are also clear: what some consumers, employees or investors see as the right stance may prompt a costly backlash from others.

We want to hear how Moral Money readers are adapting to the new demand for “corporate political responsibility”. The thoughts you share in this survey will inform our reporting.

Surging inflation: the death knell for central banks’ climate concern?

The numbers are startling: on both sides of the Atlantic, inflation in the world’s rich economies has hit a 25-year high. Combating inflation is the sole mandate for many central banks, so the new price problems put pressure on the banks’ plans to attack climate change, possibly with green asset purchases.

Evidence suggests the European Central Bank already might be leaning away from Christine Lagarde’s exploration of “every avenue available in order to combat climate change”. Isabel Schnabel, the ECB executive responsible for market operations, told our colleague Martin Arnold this month that the planned transition away from fossil fuels to a greener low-carbon economy “poses measurable upside risks to our baseline projection of inflation over the medium term”.

With inflation and climate progress seemingly on a collision course, Generation Investment Management, the sustainable investment firm co-founded by Al Gore, on Tuesday published new research suggesting that green energy might not be inflationary. For example, the cost of fossil fuel production is going to increase since easy access to oil and natural gas is getting harder to find. But once installed, “renewable energy never runs out” — once a windmill is in the ground, its owner does not need to hunt down stronger and stronger winds.

Already, the costs to produce renewable energy have dropped significantly in recent years, largely due to technological improvements, Generation argued.

Central bankers are well aware that inflation will not die down quickly, but neither will the climate crisis. If green bond-buying is to become a reality, the ECB and other central bankers will need to adopt some of Generation’s arguments to push back against sceptics who were always cool to the idea of adding a social purpose to price stability mandates. (Patrick Temple-West)

A new model for emerging market finance?

How can you fill a $2.5tn hole? That is the question that has been vexing global policymakers in recent months, as it has become clear that emerging markets are in desperate need of funding to implement an energy transition and uphold other development goals. But the money has so far been missing.

That is not because the developed world private sector lacks cash. Instead, the problem is that lenders are reluctant to back EM projects because of credit risks, multilateral development banks cannot supply the money on their own, and efforts to create so-called blended finance projects around the Sustainable Development Goals — or private sector loans with a public sector guarantee — have largely come to naught. Hence the estimated $2.5tn annual gap for SDG goals.

Now, a Dutch venture is stepping forward to test a fourth possible route: co-investment structures. APG, the largest pension fund in the Netherlands, announced this week it would invest $750m in a new private credit fund focused on emerging markets, which is being organised by the Amsterdam-based fund management group ILX.

This aims to use the funds collected from pension funds to co-invest alongside multilateral development banks (MDBs) and other development finance institutions (DFIs) in projects linked to the SDGs.

The details of this may not sound too thrilling to voters (or politicians). But the structure is striking. The organisers hope that if private sector players co-invest alongside MDBs, this will enable them to piggyback off the multilateral institutions’ project sourcing and implementation skills and thus channel funds to emerging markets more efficiently and flexibly than with blended finance structures. The plan should enable pension funds to get investment projects that are SDG compliant, and to benefit indirectly from the high ratings that MDBs attract — while earning steady, albeit not spectacular, returns. Or so the hope goes.

“Private capital and the MDBs must find a way to work together,” said Manfred Schepers, a former luminary at the European Bank for Reconstruction and the founder of the ILX initiative. “The assets that the MDBs do are totally investable, only the business model has not been set up to do such. So very little progress has been made mobilising private capital to enable the MDBs to scale.”

Can it work? It may not be simple. As Schepers said, it is currently hard for private investors to assess which MDB projects would produce returns, since “the research and data on emerging markets cannot be found on Bloomberg, the MDBs have it”. Still, what could provide momentum is the hunger that pension funds now have for SDG-compliant projects, to satisfy their own customers. And ILX plans to use the emerging markets credit data base known as GEMS to plug the data gap, which should offer more comfort to the staid institutions. All eyes on the Dutch. (Gillian Tett and Kristen Talman)

Chart of the Day

Edelman’s annual Trust Barometer contained some striking findings this year, with business considered more trustworthy on a range of issues than governments and media. Here’s the chart that especially caught our eye: whereas respondents tended to consider their own governments a source of division, businesses were viewed as a unifying force. The survey polled over 36,000 people in 28 countries.

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

How do you find insurance if no insurer wants to work with you?

Australia’s coal industry is looking at self-insurance as a possible solution, as major insurers have walked away from the industry in droves amid global efforts to reduce emissions.

Businesses in the sector are now looking at the option of creating their own “captive” insurance companies — a prospect that has sparked alarm among some activists and investors.

“Captive insurers might enable coal companies to continue coal mining when many of the biggest insurers have decided that is against the goals of the Paris Agreement”, said Nick Holmes, a former managing director and head of insurance at Société Générale Corporate & Investment Banking.

The coal industry’s access to insurance is shrinking rapidly. The Adani Group’s Carmichael coal mine, which has just started to export coal to India after years of mass opposition, has been shunned by more than 40 major insurers. A contractor of the mine also failed to obtain insurance, our colleague in Sydney, Jamie Smyth, reported last year.

In December 2021, an Australian parliamentary inquiry concluded that the government should work with the resources sector to set up a self-funding insurance model, which the opposition Labor and Green parties immediately opposed.

“Government underwriting for an insurance mutual would not only deepen the climate crisis but also expose the Australian public to enormous financial risk,” said Christian Slattery, campaigner for environmental group Market Forces.

Smart Reads

• ESG-focused funds face a more uncertain outlook in 2022, as pressures mount from research costs and hits to the big growth stocks that have helped power the investments’ outperformance, the FT’s Adrienne Klasa reports. ESG inflows surged throughout 2021, even as they slowed in pace towards the end of the year, according to data provider Morningstar.

• European energy policy has focused on environmental sustainability and social impact while neglecting security concerns, argues Constanze Stelzenmüller of the Brookings Institution. Now, facing an increasingly hostile Russia, it is paying the price, she writes.

• In this stimulating extract from his new book Davos Man, New York Times journalist Peter S. Goodman describes billionaires publicly preaching about stakeholder capitalism, while deploying sharp tax practices “that starved the system of resources”.