BlackRock Goes Green

BlackRock Goes Green

When it comes to the financial markets, I am a perennial optimist. Investing not only makes us richer in the long run, it makes the world healthier, happier, and better in almost every dimension.

My optimism extends even to the ability of financial markets to solve what economists call coordination problems, an excellent and timely example of which is global climate change: everyone would be better off on average if we all took steps to reduce carbon emissions. But as an individual, am better off if I don’t do anything about my carbon footprint, because using fossil fuels is convenient to me, and my using them has no noticeable impact on the environment that can possible effect my life. Because everyone on earth faces this same logic, in equilibrium we all end up using more fossil fuels than what we would agree would be ideal from the perspective of the human race as a whole, or so the thinking goes. This is supposedly a problem that private actors cannot solve on their own, but that only governments can fix.

Not so, say I! For the true power of the financial markets is to align the interests of the collective and the individual. If it is true that climate change will cause great economic damage if it continues on its current course, then there is a great deal of money to be saved by preventing it from continuing on its continuing course. Though some actors in the economy (namely the traditional energy sector) may benefit from ignoring the dangers of climate change, their profits may be outweighed by the losses in other industries (say, insurers and real estate developers with coastal properties). An investor with a globally diversified portfolio, with enough capital to influence the corporate governance of companies around the world, would then have an incentive to push the markets in a greener direction, even if they were motivated purely by the desire to earn the greatest possible return.

But who could such an investor be? Who could have the vast sums of capital and the strength of will required to take on such a Herculean task of solving one of the greatest challenges facing the world?

BlackRock. With over $5 trillion in assets under management, BlackRock is the single largest investor in the world, and with its recently published engagement policies for 2017-2018, is now possibly the greatest force for environmentalism on earth as well.

In the brief post, BlackRock outlines their goals in engaging with the directors and executives of the companies they are invested in (which, by the way, is basically every publicly traded company in the world). Among them is seeing that corporate boards address issues related to climate risk. Rather than repeat the empty platitudes you might expect in a briefing from a multinational financial firm, however, BlackRock has decided to bare it very big teeth: they have stated that they will vote out the boards of companies they see as ignoring climate risk:

For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary. Where we have concerns that the board is not dealing with a material risk appropriately, as with any other governance issue, we may signal that concern through our vote, most likely by voting against the re-election of certain directors we deem most responsible for board process and risk oversight.

Though this may seem understated, it is a surprisingly and refreshingly bold announcement. Economists and financial journalists have long bemoaned the fact that institutional investors are often too cozy with the managements of the companies they hold, often giving corporate boards the stamp of approval at the expense of their own shareholders. BlackRock’s decision to ruffle some feathers on such a divisive issue stands in sharp contrast to the usual corporate passiveness.

This is not BlackRock’s first foray into environmental corporate activism. Last year they were one of 32 members to join the Financial Stability Board Task Force on Climate-related Financial Disclosures, an industry group spearheaded by Michael Bloomberg to encourage corporations to voluntarily disclose how their activities relate to climate change in their financial statements. Blackrock also recently published a white paper, Adapting Portfolios to Climate Change, that details how the physical, technological, social, and regulatory implications of climate change may impact investors’ portfolios. The paper is a fascinating exposition on the topic from the often unconsidered perspective of an institutional investor. One of the details in it that struck me is how concentrated the matter of carbon emissions is: according to BlackRock a mere 80 companies account for more than half of all the emissions of publicly listed corporations in the world (in quant-finance-speak we would say that carbon emissions follow a power law distribution). BlackRock notes, “As a large asset manager, we prefer dialogue over divestment. The biggest polluters have the greatest capacity to move the dial if they modify their behavior… Engagement can help nudge some in the right direction.”

As we see above, “engagement” here means “fire, if necessary.” It would seem that BlackRock has drawn up a hit list of climate change’s worst offenders, and they will be going after them in turn. Before the governments of the world really begin to take serious steps to curb carbon carbon emissions, profit-maximizing financiers may have already done the job for them. I say this is good news for investors, and potentially good news for the planet.


Disclosures: This post is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by RHS Financial, LLC unless a client service agreement is in place. Please contact us at your earliest convenience with any questions regarding the content of this post. For actual results that are compared to an index, all material facts relevant to the comparison are disclosed herein and reflect the deduction of advisory fees, brokerage and other commissions and any other expenses paid by RHS Financial, LLC’s clients. An index is a hypothetical portfolio of securities representing a particular market or a segment of it used as indicator of the change in the securities market. Indexes are unmanaged, do not incur fees and expenses and cannot be invested in directly.

2024 Disclosures

RHS Financial is an SEC registered Investment Advisory Firm and distributes this presentation for informational purposes only. This presentation ( hitherto referred to as the presentation throughout this disclosure), blog post, infographic, slide deck or whatever form of informational modality the reader wishes to describe this as is provided for informational purposes only and should not be construed as investment advice in any way.

We believe the information, including that obtained from outside sources, to be correct, but we cannot and do not guarantee its accuracy in any way. RHS Financial uses information from outside sources to develop graphs, charts, infographics, etc. to enhance this presentation and while we believe the information from these outside sources, to be correct, we cannot and do not guarantee its accuracy in any way,

Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors who may be employees of but do not necessarily reflect the views of RHS Financial as a company. There can be no guarantee that developments will play out as forecasted. The information in this presentation is subject to change at any time without notice. This presentation contains “forward-looking statements" concerning activities, events or developments that RHS Financial expects or believes may occur in the future. These statements reflect assumptions and analyses made by RHS’s analysts and advisors based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Because these forward-looking statements may be subject to risks and uncertainties beyond RHS Financials’ control, they are no guarantees of any future performance. Actual results or developments may differ materially, and readers are cautioned not to place undue reliance on the forward-looking statements. In a nutshell; these are our best guesses and please don’t assume they are fact.

Mentions of specific securities, investment products, investment indices, companies or industries should not be considered a recommendation or solicitation. Data and analysis does not represent the actual or expected future performance of any investment or investment product Index information is used to illustrate general asset class exposure, and not intended to represent performance of any investment product or strategy.

This post may contain references to third party copyrights, indexes, and trademarks, each of which is the property of its respective owner. Such owner is not affiliated with RHS Financial and does not sponsor, endorse or participate in the provision of any RHS’ services, or other financial products. Index information contained herein is derived from third parties and is proffered to you unaltered as we derived it from the third party.

RHS Financial, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where RHS Financial, LLC and its representatives are properly licensed or exempt from licensure. This presentation is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by RHS Financial, LLC unless a client service agreement is in place.

If the client is deemed suitable and agrees, RHS may employ leveraged strategies for these clients. Leverage attained through margin on a client’s account can add additional risk. While RHS tends to seek to improve return with theses strategies by applying leverage to less risky indexes, there is no guarantee that that RHS will lower risk or improve returns.

RHS Financial. 4171 24th St. Suite 101 San Francisco, CA 94114

Colby Davis

Colby Davis

Colby Davis, CFA is the Chief Investment Officer at RHS Financial. He brings passion to the investment management process and takes no shortcuts when it comes to delivering investment value to our clients.