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Big investors, Fed raise scrutiny of climate risks

28 January 2021 Karin Rives

BlackRock, the world's largest asset man­ager, is to flag climate risks in its portfolio holdings for "potential exit," and New York City officials made good on a similar threat by announcing the divestiture of $4 billion in fossil fuel-related securi­ties from two large pension funds—one of the largest such actions to date.

Meanwhile, the US Federal Reserve Board signaled greater scrutiny of climate risks by announcing it is setting up its first-ever committee to better understand how rising global temperatures and resulting environmental disruption will affect finan­cial markets.

The multiple developments over a matter of hours in the same week President Joe Biden had a " climate day" underline fast-growing concern in the financial industry about whether companies are taking effective action to address risks to their business strategies-and investors' dol­lars-from climate change. They also illustrate the increasing pressures on coal, oil, and other fossil fuel providers to transition to low-carbon sectors—or lose their ability to raise capital.

"No issue ranks higher than climate change on our clients' lists of priorities," BlackRock Chairman and CEO Larry Fink said in a letter to corporate leaders 26 January that laid out the firm's plans for transitioning away from carbon-heavy companies in man­aging its $7.3 trillion investment portfolio.

"No company can easily plan over 30 years, but we believe all companies-includ­ing BlackRock-must begin to address the transition to net zero today," he wrote.

Fink announced to clients a year ago that the company would overhaul its actively managed portfolio and exit $500 million in coal-related securities by the mid-2020s. However, the asset manager contin­ues to be pressured by shareholder activists who say it is not backing up its increasingly tough public stance on climate risks in its investment actions and shareholder votes on corporate management.

In a separate letter to BlackRock clients, its Global Executive Committee described the steps BlackRock will take to live up to Fink's words. That includes increased scrutiny of the firm's active portfolios to flag carbon-intensive holdings, or to single out companies that are not preparing as expected for a transi­tion to net-zero emissions, it wrote.

"Where we do not see progress in this area…we will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients' returns," it added.

BlackRock did not immediately respond to a request for more details on when the heightened scrutiny will be implemented, or how progress will be measured.

Divestments

Not far from BlackRock's Manhattan headquarters, New York City Comptroller Scott Stringer together with Mayor Bill de Blasio on 26 January announced two large city pension funds-the Employees' Retire­ment System and the Teachers' Retirement System-had voted to approve divestments from securities "identified based on dem­onstrated risk from fossil fuel reserves and business activity."

The $4 billion divestiture, to be completed in the next three years, is one of the world's largest, they said. The names of the compa­nies the pension funds will no longer hold stakes in will be announced when the securities are sold.

The pension fund votes followed a goal their trustees set in January 2018 to divest from fossil fuel reserve owners within five years. A third pension fund, the New York City Board of Education Retirement System, is also expected to follow suit with a divest­ment vote in the coming days.

"The impacts of the actions we are announcing today will be felt for generations to come," Stringer said in a 26 January tweet. "It is my sincerest hope that other municipalities and other funds around the country take note and see that divestment from fossil fuels is possible—and necessary. We will win this fight."

Federal Reserve forms committee

The Federal Reserve Bank of New York, meanwhile, said 25 January that Kevin Stiroh will leave his post to head up the Federal Reserve Board's new Supervision Climate Committee. The initiative follows the central bank's acknowledgement in a November report that climate change can destabilize the world's financial markets.

The committee will be tasked with analyzing such risks and coordinate work across the Federal Reserve system, Randal Quarles, Vice Chair for Supervision at the Federal Reserve Board, said.

"Climate change has become one of the major challenges we face, which impacts all aspects of the Fed's mission," he said in a statement.

The sudden push by the Fed, and the intensifying efforts by investment and pen­sion funds, to address climate change follow resolutions and shaming by shareholder activists seeking to push corporate America toward decarbonization.

BlackRock has been among several big investment firms faulted by those activists for insufficient support of shareholder reso­lutions pushing for strong corporate action on climate change,

BlackRock has pushed back on such contentions, saying last year it took "voting action" at shareholder meetings involving 53 companies-including 37 in the energy industry-for failing to show adequate progress in assessing their climate risks and adopting sustainability policies. It also iden­tified 244 companies as making insufficient progress, of which 191 were warned they needed to do more to disclose their climate risks or BlackRock would vote against management at those companies this year.

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