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Last month the Federal Reserve tapped BlackRock, the world’s largest asset manager, to facilitate billions of dollars of purchases of securities authorized under the coronavirus economic rescue package. As the Fed has begun to implement its CARES Act–related stimulus efforts, though, it and BlackRock have sparked a partisan battle at the intersection of climate change and finance. Senate Republicans are worried that BlackRock could take climate change–related financial risks into account in making its securities purchase recommendations, as the firm has pledged to do when shaping its own investment strategies. Concerned that this approach would block fossil fuel energy and airline companies from their share of the financial rescue, Republicans are seeking to bar BlackRock from considering these risks in CARES Act purchasing. If BlackRock is going to make the best decisions for American taxpayers, it must be allowed to assess these climate risks as it does for other clients.
As the pandemic itself has demonstrated, failing to properly assess risks can lead to disastrous outcomes. That is just what BlackRock is being asked to do, though. Earlier this month, 17 Republican senators sent a letter to Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell (the secretary of energy was also CC-ed) expressing concerns related to BlackRock’s implementation of CARES Act programs.
Shortly after the passage of the economic rescue bill, the Fed announced that BlackRock would administer three of the CARES Act’s security purchasing programs, facilitating billions of dollars of Fed purchases of corporate bonds and commercial mortgage-backed securities.
The senators’ letter pointed to the headline-dominating news from January that BlackRock intends to include the assessment of climate-related risks in its investment strategies going forward. Larry Fink, BlackRock’s CEO, wrote that “climate risk is investment risk,” a fact that “markets to date have been slower to reflect.” BlackRock’s new strategy includes many measures across the asset manager’s sprawling array of investment products, with the most immediate move being the divestment of thermal coal from all its active funds—about $1.8 trillion worth of equities.
Fink’s letter echoed the growing concern that investors will be left holding the bag once markets adjust to reflect the reality of fossil fuels’ unprofitable future. This risk, that companies and their investors might be left with stranded (i.e., unprofitable) assets is only one type of climate-related risk, often referred to as transition risk. A second type of investor-relevant climate risk is physical risk: the risk that markets have poorly forecasted the increased likelihood that business operations will be disrupted by changes to the planet’s physical climate. Last year BlackRock released its investigation into the pricing of physical climate risks in several types of assets: municipal bonds, commercial mortgage-backed securities, and equities of electric utilities. The research was conducted alongside the climate-risk consultant Rhodium Group and concluded that for each asset type, climate-related risks were underassessed and underpriced. Analysis showed that the market was failing to price in the exposure of these assets to the predictable increase in severe weather events and rising seas.
While Republicans are concerned that BlackRock will bring these insights to its management of security purchases for the Fed, the American people should be concerned that it won’t. The asset manager found that the “median risk of a building that backs a [commercial mortgage-backed securities] bond being hit by a Category 4 or 5 hurricane today has risen by 137 percent since 1980.” And that “economic impacts of a warming climate could lead to rising CMBS loan loss rates over time.” BlackRock similarly calculated the climate risk exposure of hundreds of publicly listed U.S. utilities. Its conclusion: “The risks are underpriced.”
The senators, however, want the Fed to “emphasize that, in carrying out its fiduciary duties … BlackRock must act without regard to [climate-related divestment] or other investment policies BlackRock has adopted for its own funds.” This requirement may help secure extra financial support for fossil fuel companies. It will also likely harm the country’s financial standing.
In truth, the letter is probably unnecessary. It is unlikely that BlackRock will implement climate risk screening tools in its short-term Fed program contract when it’s only just beginning to roll them out for its own specialized products.
But this letter is just the latest in a string of partisan measures aimed at the intersection of climate and finance. As private investors are belatedly waking up to the economic realities of a changing climate, politicians with ties to fossil fuel executives are trying to use their power to slow the inevitable market realignment.
Over the past year, the Trump administration has moved to prevent retirement funds from considering material risks related to climate change. Last April, the president issued an executive order on “Promoting Energy Infrastructure” that directs the Department of Labor to investigate “discernible trends” regarding retirement funds’ investment in the energy sector and to issue guidance clarifying fund managers’ fiduciary duties with respect to the use of environmental criteria. This was after the Department of Labor had already issued guidance discouraging investment manager engagement with companies on environmental issues. In 2019, the Securities and Exchange Commission allowed companies to exclude 45 percent of all climate-related shareholder proposals from the proxy voting process. This meant that proposals at Exxon, Duke Energy, and Chevron requesting the disclosure of emissions reduction targets never made it in front of shareholders.
These partisan measures are all based on a false framing of a trade-off between “sustainable investments” and making money. But if the objective is to accurately price financial risks from climate change, no such trade-off exists. The president of the San Francisco Fed, Mary Daly, has said that the consideration of climate risk is “essential” to achieving the central bank’s mission of promoting a stable economy. As Congress and the Fed roll out further support for corporate America, they would do well to keep in mind that many financial assets were already riskier than their sticker price suggested, long before the coronavirus.
For more on the impact of COVID-19, listen to Monday’s What Next.