BlackRock’s Letter on Climate Risk and the National Climate Bank

Last month, Larry Fink, the Chairman and CEO of BlackRock, wrote in his annual letter to CEOs of the world’s largest companies that BlackRock would “place sustainability at the center of our investment approach.” As the letter implies, this may well be a turning point for how capital is invested, and for that BlackRock deserves tremendous credit. The actual underlying work is a complex task, one made easier by a new $35 billion National Climate Bank.

As the world’s largest asset manager, BlackRock redirecting its investments even slightly can have a dramatic impact on capital markets.  The company manages nearly $7 trillion in assets, so the incorporation of sustainability into its investment decisions will have an important, material effect on capital allocations around the world.

And more broadly, this fundamental recognition of the investment risk presented by climate change will have ripple effects. It is a critical step for moving capital out of activities that exacerbate climate change. BlackRock said its initiatives will include, “making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.”

Each activity is laudable and can powerfully move money out of both direct fossil fuel investments and activities that are not resilient enough to withstand the clear and present effects of climate change.

Once one recognizes the investment risks posed by climate change, the next step on the journey is to invest directly in climate mitigation. Not only will losses be reduced by avoiding climate-risky investments, new profits can be realized by deploying that now-freed up capital directly into the activities that halt the negative effects of climate change.

That is why the National Climate Bank is an essential part of the story. Moving money out of risky activities creates an opportunity to invest at enormous scale in renewable power, clean transportation, industrial decarbonization, sustainable agriculture and transmission. But that money will only move from climate-risky to climate-friendly if the returns and risk are right.

The purpose of the National Climate Bank is to expand the opportunity set of attractive, profitable investments for the private sector while mitigating risks. Risk mitigation, co-investment, deal structuring, warehousing and other techniques can be used to enable private capital to flow into greenhouse gas reduction activities that are viable, but suffer from lack of capital. BlackRock’s decision combined with a Climate Bank can unleash that necessary capital.

BlackRock moving its money out of climate-risky activity means there will now be trillions of dollars of capital looking for a new home. The Climate Bank can ensure the capital is invested in solutions that not only avoid climate risk, but proactively reduce that risk through greenhouse gas mitigation.

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