Climate change has come to Wall Street in the guise of Larry Fink. For those who don’t know, Fink runs BlackRock, a $7 trillion collection of investment funds consisting of stocks, bonds and other securities. Fink is a global opinionmaker, and he believes that worldwide climate change is driving “a fundamental reshaping of finance.” This is, or could be, a big deal.
It’s tempting to cast this as a collision between capitalists and environmentalists — and the environmentalists win. They take charge of the nation’s investment flows, which are redirected toward various green technologies. These, in turn, rescue us from the baleful effects of climate change.
Sounds exciting and consequential.
Unfortunately, it doesn’t seem to be what Fink has in mind, which is more tedious and less momentous.
“Climate risk is investment risk,” he writes in his annual letter to other CEOs, the heads of firms in which BlackRock invests. Companies need to take advantage of the opportunities and protect themselves against the threats. Those that do will flourish; those that don’t will falter. Profitability and performance will suffer.
What kinds of changes does Fink expect? He writes:
“Will cities . . . be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage — a key building block of finance — if lenders can’t estimate the impact of climate risk over such a long timeline?”
As huge investors, poor performance hurts BlackRock and the big and little private investors who commit their savings to its funds. The solution, Fink argues, is for companies to publicize more information (that is, “disclosure”) by which outsiders, including firms such as BlackRock, can better judge their performance.
The underlying goal is improved profitability. This is not exactly revolutionary. Without “robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk,” he says.
Poor performance must have consequences, Fink contends. Last year, BlackRock did not support management-backed directors at 2,700 companies as a way of registering its disapproval with firms. The punishments could get harsher. If companies don’t improve, “we will be increasingly disposed to vote against management and board directors,” he writes.
Viewed through the prism of profits, Fink’s ideas are well within Wall Street’s traditions. Details may differ, but the central purpose of boosting profits hasn’t.
To be sure, none of this precludes the possibility that companies may make significant advances involving climate change — whether to reduce greenhouse gas emissions or to improve energy efficiency. But there are two overriding realities to keep in mind when discussing the prospects for Fink’s framework.
First — and foremost — combating global warming is mainly a governmental problem and can’t conceivably be accomplished without acknowledging that. Private firms, whether electric utilities or vehicle manufacturers, may be the instruments to attack climate change, but they will respond to the policies and incentives created by the political process.
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The trouble, of course, is that the policies that would mobilize the private sector against climate change are highly unpopular for obvious reasons. One approach involves very high taxes on fossil fuels, the source of most greenhouse gases. This would presumably push consumers toward electric cars, and solar and wind power.
People want to be known as ethical investors. So BlackRock is devising new investment portfolios that advertise “values.” Coal companies are being eliminated, for example. This is more about marketing than energy policy.
The political reality is that, although many Americans say they oppose global warming, the buying public prefers SUVs and lower electricity bills to smaller cars and higher bills. As a result, federal anti-climate-change laws are virtually nonexistent. In theory, capitalists and environmentalists should get along. In practice, both are frustrated by popular opinion.
Second, the forecasting that Fink advocates as a way for companies to anticipate the future is highly desirable — but almost impossible to achieve in the real world. We know too little about too many things. Knowledge is too specialized for most of us to acquire much of it.
The difficulties are not just limited to climate change. Dozens of major issues qualify. Some examples: China’s rise as an economic and military superpower; the Internet’s expansion into dubious and antisocial activities (examples: loss of privacy, the hacking of cybersystems); the aging of populations in virtually all advanced societies. Excepting aging, none of these upheavals was genuinely foreseen.
Still, Fink has done us a favor. On climate change, he’s reminded us that little can be done until — and unless — there is a political settlement that encourages a shift away from fossil fuels. The necessary groundwork involves public persuasion. If that fails or simply isn’t tried, because it’s too controversial, then all the rest is sound and fury, signifying nothing.
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