Why BlackRock’s climate challenge is harder than it makes out

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Two months ahead of the COP27 climate conference, it seems safe to say that this year’s appalling floods in Pakistan will loom large over the event. About 1,400 people have been killed after extraordinarily heavy rains, and a third of the country has been submerged.

As developing nations redouble their call at COP27 for financial assistance from the rich countries that bear outsized responsibility for climate change, expect Pakistani climate change minister Sherry Rehman to play a prominent role. A few days ago she made a powerful call for reparations, saying starkly: “Obviously the bargain made between the global north and global south is not working.”

Asia is already the scene of some of the most desperate challenges in the climate struggle. But it’s also a hotbed of activity and ideas around climate action and broader questions of sustainable investment and development. So it was a pleasure for Patrick and me, along with our FT colleagues, to host the latest edition of our Moral Money Summit series this week in Singapore, featuring lively debate among leading figures from across the region.

You can read below Patrick’s take on a key topic of conversation at the conference, along with my thoughts on the stand-off between BlackRock and Republican state officials. And we hope to meet many of you at our Moral Money Summit Americas, happening in New York on October 26 and 27 — you can book your pass here. (Simon Mundy)

Republican ‘fiduciary duty’ arguments on climate action need to be addressed

A month after receiving a searing indictment of its approach to climate issues from a group of Republican state attorneys-general, BlackRock finally hit back this week. Far from delivering a knockout punch in this tussle, however, BlackRock’s letter merely underscored the increasingly uncomfortable position it faces along with other members of corporate climate alliances.

Before diving into the latest missive from the world’s biggest asset management company, it’s worth taking another look at the original letter from the Republican officials. It’s tempting, and perhaps convenient, for some to dismiss that text as the ravings of anti-science fanatics. We’ve previously highlighted the absurdity of some moves in the Republican anti-ESG campaign, such as Texas’s move to block its fund managers from investing in some financial companies and products.

But the AGs’ letter made some points that deserve debate — about the potential tension between the climate objectives that BlackRock has vowed to support, and its legally binding fiduciary duty to pursue financial returns for its clients.

As a member of the Net Zero Asset Managers initiative (NZAM), BlackRock has committed to “support the goal of net zero greenhouse gas emissions by 2050”, and to pursue “an ambition” to achieve net zero in its managed assets by the same date. But as the AGs correctly noted, “governments are not implementing policies to require net zero”, and their stated pledges — even if achieved — would not get us there.

For people who care about climate change, there’s an instinctive appeal to BlackRock’s aim of allocating its clients’ assets in line with a scenario where the world achieves net zero emissions by 2050. But it would need some very aggressive assumptions, given the current global trajectory, to call that the most likely scenario. And this could mean potential tensions with fiduciary duty, which broadly requires fund managers to put their clients’ money into investments that will do well in the world they expect to see — not the one they would like to see.

In its letter this week, BlackRock used the word “fiduciary” 10 times, as it insisted that there would be no trade-off between its climate efforts and the financial returns achieved for clients. But instead of giving a full-throated defence of its work to support net zero targets, it seemed keen to talk down its clout in this space. To the extent that US pension funds disagreed with its climate analysis, BlackRock said, “we have now given them the choice to vote their shares differently in many of our investment products” — a line that rather understates the huge influence that BlackRock continues to wield through its voting decisions and engagement with management. And while it correctly pointed out that it would ill serve its clients by ignoring climate risk altogether, this doesn’t necessarily mean that an investment strategy built around a 2050 net zero scenario will be optimally profitable.

It may be that there is a perfect match between the investment pathway needed to minimise the devastation of climate change (which will disproportionately affect poorer people in the global south), and the pathway that will maximise the financial returns of BlackRock’s clients (disproportionately richer people in the global north). But if the two paths diverge, then the scope for headaches looks obvious.

This problem is laid out clearly and in detail in a compelling recent blog by London Business School’s Tom Gosling, who warned that “the only fiduciary duty cover [for NZAM-aligned investment strategies] seems to be extremely clear and informed client mandates that support investment aligned with a 1.5°C scenario”. Without such clear mandates, he wrote, NZAM members are “increasingly on a collision course with their fiduciary duty to clients”.

As Gosling noted, this is an uncomfortable point to make for someone who cares about climate action. But to highlight this issue around fiduciary duty is not to argue against such action, or against the serious work being done on climate by large and growing numbers of people in the financial sector.

It does, however, underscore the limitations of corporate alliances in the face of inadequate government action — and the danger of relying too heavily on such voluntary business initiatives to stave off catastrophic climate change. In any case, we think the debate is worth having and — as ever — we welcome our readers’ input, at moralmoneyreply@ft.com. (Simon Mundy)

Coal: An elephant in the room for south-east Asia

Coal power continues to be the dominant problem for combating climate change in the Asia Pacific region. How to reconcile carbon emission cuts with keeping the lights on was a recurring theme at this week’s Moral Money Summit in Singapore.

In 2020, the Asia Pacific region comprised about 60 per cent of the total global carbon emissions from power generation, and 90 per cent of those emissions came from coal alone, IHS Markit said. Use of coal, the most carbon-intensive major fossil fuel, is still increasing in the region and is not expected to peak until 2027, IHS Markit found.

That said, companies are trying to shed coal assets. Speaking at the conference on Wednesday, Mark Konyn, AIA’s chief investment officer, reiterated the company’s complete divestment from coal, which was announced last year. For life insurer AIA, the decision to divest hinged on concerns about stranded assets years down the road, Konyn said. Amid the energy shocks this year, I asked Konyn if AIA had any second thoughts on its divestment. “None at all,” he said.

As coal is phased out, alternative energy sources are not yet able to meet the full energy needs of the region — but they are gaining market share, said Pedro Vasconcelos, chief operating officer of Apac at EDP Renewables, one of the world’s largest clean energy groups. “We are showing today that renewables are absolutely competitive,” he said. Last year, EDP acquired 87 per cent of Singapore-based Sunseap, the largest distributed solar operator in south-east Asia, for €600mn.

Coal concerns are continuing to drive dealmaking in the region. Earlier this week, Singaporean-based energy group Sembcorp Industries sold its Indian coal assets. Eugene Cheng, Sembcorp’s chief financial officer, said on a panel Wednesday that the divestiture deal follows through on the company’s promises “to meet emissions targets” and transition from brown to green. These emissions targets are also incorporated into executive pay at Sembcorp, he said.

When pushed on whether divesting coal assets was the right way forward — rather than maintaining ownership and bringing forward their closure — Cheng said that his company’s focus was on ramping up its investment in renewables. To pursue that strategy, he said, Sembcorp needed to free up capital that had been tied up in coal investments.

The cash from the Indian coal sale should help Sembcorp’s investments in renewable energy projects, analysts for Morgan Stanley said in a report this week. The company has increased its renewable portfolio by 50 per cent this year. And by ditching coal assets, Sembcorp will reduce its exposure to Singapore’s carbon tax, the bank analysts added.

Obviously, much more work needs to be done. But efforts to divest from coal and prioritise renewable energy underscores the fact that south-east Asia is taking climate concerns seriously. (Patrick Temple-West)

Smart read

Our colleague John Thornhill has detailed many encouraging examples of collaboration between public and private sectors to accelerate green investment. For example, the UK offshore wind industry now covers the energy needs of one-third of British homes.