BlackRock won't save the planet

The planet faces a collective action problem of existential proportions. No one country or company can prevent catastrophic global warming; all of them need to work in conjunction with one another.

Why it matters: That kind of cooperation flies in the face of the standard capitalist mode, which is competition. If shareholders were to unite and force companies to cooperate on carbon reduction, that could prevent the death and displacement of millions of people.

• Fortuitously, the rise of indexing means that fund management giants like BlackRock and Vanguard are increasingly in a position to do just that.
• Disappointingly, however, those asset managers are unlikely to grow real teeth.

Driving the news: BlackRock CEO Larry Fink released his annual letter this week, in which he said that climate change is "almost invariably the top issue that clients around the world raise with BlackRock," and that it will drive "a fundamental reshaping of finance."

The big picture: If, like most BlackRock clients, your investment time horizon is measured in years or decades, then you are almost certainly worried about the effect of the climate emergency on your asset portfolio. Aggressive attempts to mitigate the crisis make economic sense.

• What they're saying: "The near-term impacts of climate change add up to a planetary emergency that will include loss of life, social and geopolitical tensions and negative economic impacts," according to the World Economic Forum's Global Risks Report 2020.
• All five of the most pressing risks facing the world are environmental. Extreme weather tops the list for the 4th consecutive year, followed by climate action failure.

Failure on climate action happens at both the government and the corporate level. We've already seen government failure from leaders like Donald Trump, Vladimir Putin and Jair Bolsonaro.

• At the corporate level, it makes little economic sense for a company to unilaterally constrain its options while its competitors retain freedom of action. The option to pollute is worth money.
• The only way to eradicate that competitive disadvantage is to ensure that all companies have to play by the same rules. Those rules can be drafted by governments or by shareholders.

The glimmer of hope: BlackRock, which manages $7 trillion, last week joined Climate Action 100+, a group that manages some $41 trillion in total and aims to pressure major carbon emitters into becoming more climate-friendly. Fink, however, still put the onus of responsibility on governments rather than shareholders.

• But, but, but: The other giant fund manager, Vanguard, doesn't even go that far. “We have to make sure we’re talking to companies on how they are dealing with and addressing these issues, but not crossing the line and telling them what to do,” CEO Tim Buckley told the FT. A spokesperson later confirmed to The Guardian that the company has no plans to join Climate Action 100+.

The bottom line: The growth of indexing means that at some point in the foreseeable future, it's possible that BlackRock and Vanguard between them will control a majority of most companies' shares. But it's very unlikely that asset managers will ever go further than governments in terms of mandating environmentally responsible corporate behavior.

Go deeper: Why climate change is so hard to tackle