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20 November 2023

Asset managers won’t fix the climate crisis

Institutional investors won’t finance the green transition on their own, when the rewards from fossil fuels are still so great.

By Will Dunn

As the CEO of BlackRock, the world’s largest asset manager, Larry Fink directs the investment of nine trillion dollars of other people’s money. Each year, Fink writes a letter to the CEOs of all the companies in which BlackRock invests. In 2020 he wrote that he had foreseen “a fundamental reshaping of finance” in response to climate change, which would usher in “changes in capital allocation more quickly than we see changes to the climate itself”. Or at least that was the theory.

The reality, according to analysis published today by the think tank Common Wealth, is that institutional investors such as BlackRock continue to pour money into fossil fuel companies, which have themselves issued $1.9trn in corporate bonds since the Paris agreement on limiting global warming to 1.5°C. Since the agreement became legally binding in 2016, the amount of fossil-fuel debt issued to financial markets has almost tripled, and the biggest asset managers collectively hold more than $149bn in coal, oil and gas bonds. BlackRock’s own holdings of these “toxic bonds” amount to $28bn, making it and Vanguard, another investment giant, the biggest holders of these assets.

To be fair, Vanguard and BlackRock are statistically likely to be the biggest investors in a lot of things because they have more than $15trn in assets under management between them. For scale, the cumulative spending of the British government last year was around a trillion pounds – a record high – so the money managed by BlackRock and Vanguard is enough to finance all UK public spending for a generation. That money’s got to go somewhere, and energy investments are a significant opportunity in financial markets. As the Common Wealth research shows, BlackRock’s environmental concerns did not result in divestment in its fossil-fuel assets.

Nevertheless, Fink’s climate-positive 2020 letter to CEOs was an affront to the American right, and a number of states began threatening to move their investments. By 2021 BlackRock was reassuring Texans that it would “continue to invest in and support fossil fuel companies”. This time last year, when the MPs of the House of Commons Environmental Audit Committee asked BlackRock if it would support the International Energy Agency’s assertion that no new investment in fossil fuels was necessary, the company replied: “No.”

In less than two weeks Fink will head to Dubai to sit on the advisory committee of the Cop28 UN climate conference, an event which increasingly resembles a trade show for the oil and gas industry. Fink will be joined on the committee by Bob Dudley, who was CEO of BP when the oil and gas company was the world’s biggest lobbyist against climate legislation (Dudley was also on the board of Rosneft, one of Russia’s three oil giants, until the invasion of Ukraine in February 2022). Cop28 itself will be chaired, for the first time, by a businessman: Sultan Ahmed al-Jaber, the CEO of the Abu Dhabi National Oil Company. The United Arab Emirates is planning to continue exploiting its oil and gas reserves until at least 2085; Energy Monitor recently estimated that the total planned extraction to be the equivalent of 38 billion barrels of oil – or around twenty times all the estimated North Sea reserves, just from this tiny Gulf state.

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The planned highlight of Cop28 is the first “global stock-take” of progress towards climate goals, but the truth is that financial institutions have their own targets and measure their progress towards them differently. Some count absolute emissions, some count intensity, some measure the financing of new wind and solar, some measure debt issued on existing assets. Most of them conclude that they’re doing a great job, which tends to happen when you let people mark their own homework.

At the same time, there is no getting around the fact that the global petrochemical infrastructure represents trillions of dollars in assets that are owned by companies and people (maybe you, through your pension), and it provides huge profits in a way that renewables won’t. That is the lesson of the government’s last auction of contracts for difference, which failed to attract a single bid for new offshore wind development. And that’s why the government yesterday had to hike the amount that those contracts allow companies to charge for energy by 66 per cent: if it’s not as profitable to build wind turbines as it is to pump gas, the investment won’t materialise. 

Further evidence of the market’s indifference to climate change can be found in warehouses across Europe, where solar panels adding up to more than 80GW in capacity are gathering dust in storage. (The UK’s total solar energy capacity is around 15GW.) European solar manufacturers have warned the European Commission that without help, they face being driven out of business by the oversupply of cheap solar panels from China (which invested $546bn in renewable energy last year, almost half of global spending on the energy transition).

The good news is that thanks largely to that enormous investment by China, carbon emissions from energy production are thought to have peaked this year. A rapid descent from this peak will require sustained and very considerable intervention. Financial institutions appear to have concluded that their fiduciary duty to their clients and their ability to effect a transition to net zero are not the same thing. The problem for the rest of us is, they’re right.

[See also: Oil’s five decades as ruler of the world]

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