Climate Change: Sustainability & Investing

I have questions about sustainable finance. When I read Larry Fink’s letter to CEOs (see https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter), I wonder what would happen if institutional investors withdrew from the hydrocarbon sector?

The first big questions are about whether or not the role of hydrocarbons in our lives would change? And, would the shift help to alleviate climate change?

If one divests from hydrocarbons, then how easily may one make investments in clean, green alternatives that pick up the slack?

Consider two data points: According to the International Energy Agency (IEA), there are about three million electric cars on the roads today compared to 1.4 billion total vehicles (Wards Intelligence). By 2030, the IEA thinks that there will be 23 million electric vehicles. CarsGuide.com.au believes that there will be 2.8 billion automobiles by the mid 2030s. The data doesn’t promise a reduction of carbon emissions from the automotive sector.

About those electric cars, where does the electricity come from? To what degree are we making our hydrocarbon consumption indirect? Instead of our engine, the a coal or gas fired plant provides the electricity for our car. The IEA points out that the increase in electric vehicles requires a change in power generation.

And, this brings me to Chris Skinner who posted a blog in mid 2019 “BlackRock’s BS … and other stories of sustainable finance” (see
https://thefinanser.com/2019/07/blackrocks-bs-and-other-stories-of-sustainable-finance.html/). Skinner shares the data that Black Rock talks the talk, but does another walk as “… the world’s single biggest investor in companies that develop coal plants and also a large investor in companies that produce oil and gas.”

I am less interested in the hypocrisy, even though it fascinates me, than the alternative routes. Could the markets, the listed sustainable and green companies, absorb the capital available if Black Rock exited dirty investments? If they invested, how long would it take for there to be an impact? Skinner errors in claiming that finance focuses on the short term. Certain parts of finance are short term focused, commercial banks. But, Black Rock and its peers are investing our retirement money. That is supposed to be a long term outlook.

I would like Larry to walk the walk. Maybe his next CEO and investor letters will show that he flipped his investing from 97.5% conventional to 97.5% sustainable. But, to get there, he will probably point out:

Black Rock alone is huge. The sustainable investment universe is still quite small. Luxembourg for Finance points out that sustainable investments are worth billions today. But, Black Rock is worth trillions.

Black Rock has to make listed investments, the universe of listed sustainable investments is even smaller.

Black Rock would have to divest from many dirty investments. When a big investor sells, the markets move. What will Larry tell his stakeholders if the sales trigger a loss of value?

If we wish for our grandchildren to enjoy this planet, the sustainable journey must be made with urgency. Answering Larry’s questions is imperative because when our grandchildren are alive, we would also like for them to enjoy some of the wealth that we created by investing with the Larry’s of this world.

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