BlackRock to Hold Companies and Itself to Higher Standards on Climate Risk

World’s largest asset manager to take tougher stance against corporations that aren’t providing a full accounting of climate change risks

BlackRock Inc. BLK -0.21% said it would take a tougher stance against corporations that aren’t providing a full accounting of environmental risks, part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change.

Among the moves, BlackRock said it would be increasingly disposed to vote against management and boards if companies don’t disclose climate change risks and plans in line with key industry standards.

BlackRock is also pulling back from thermal coal producers in actively managed debt-and-equity portfolios by mid-2020, a move that will lead to $500 million in sales. It will expand the range of sustainable investment products as well as double to 150 the number of exchange-traded funds that address environmental, social and governance challenges.

BlackRock is the world’s largest asset manager, with about $7 trillion under management. It has risen on the back of index funds that trade on exchanges and through these funds has extended its reach across nearly every company and is part of the retirement accounts of millions of people around the world. The firm also sits at the backbone of Wall Street as its software is used by banks to monitor their risks.

The firm said it is putting the focus on sustainability because the costs of climate change have ramifications on the price of assets and the financial ecosystem.

“Climate change has become a defining factor in companies’ long-term prospects,” BlackRock Chief Executive Laurence Fink said in his annual letter. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

The letter is a reflection of Mr Fink’s towering influence over companies. But the letter has rankled some rivals who have sometimes grumbled about what they consider to be a moralistic tone.

The rise of index funds transformed three firms into major forces in corporate America and thrust them into the public spotlight. The biggest—

  1. BlackRock,
  2. Vanguard Group and
  3.  State Street Corp.

—hold roughly a fifth of the S&P 500 through funds they run for investors. They can cast critical votes and have the ears of chief executives. How they exercise this power—or choose not too—has ripple effects across markets.

All three have faced questions over their responsibilities as shareholders on behalf of investors in funds they run. In years past, these firms have targeted gender diversity in boardrooms among other issues.

Lately, there has been increased pressure on them to do more on climate change.

BlackRock’s offices around the world have been frequented by activists who blast the firm for being slow to act on green issues. The firm has debated a question internally: how can BlackRock ensure it has public support to operate in the countries where it does business as it continues to grow?

The firm said it would provide more information on data on the carbon footprint and other potentially controversial holdings in its mutual funds. It also said it would disclose more details of its conversations with the companies its funds invest in. BlackRock also recently said it had joined Climate Action 100+, the world’s largest group of investors by assets pressuring companies to act on climate change.

The moves come as regulators are scrutinizing ESG funds across the asset-management industry in an attempt to determine whether those claims are at odds with reality.

“Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy,” Mr. Fink said in his letter.

He added that “while government must lead the way in this transition, companies and investors also have a meaningful role to play.”

One Cause of Market Turbulence: Computer-Driven Index Funds

In many ways, this stampede toward passive investing — in which people put their money into funds that track indexes and broader market themes as opposed to relying on human stock pickers — is uncharted territory.

.. the key question is how this transformed market holds up during a financial storm that lasts more than a few days.

.. Cheaply priced exchange-traded and index funds .. They now own close to 40 percent of stocks in the United States

.. BlackRock..  is the leading issuer of exchange-traded funds, with $1.3 trillion under management

.. The popularity of E.T.F.s has concentrated unparalleled financial power in BlackRock and Vanguard, the two biggest providers of index funds and E.T.F.s. Together, they sit on $10.5 trillion in assets and control 65 percent of the 1,700 exchange-traded funds that exist.

.. As the flows have grown in volume, much of these funds have gone toward index heavyweights like Amazon, Apple and Facebook, pushing their valuations ever higher.

.. Active fund managers — human stock pickers  .. because they are the ones who buy when others sell.

Buffett Assails Money-Manager Fees as Berkshire Reports Profit Rise

Billionaire also declares victory in his $1 million bet with another asset manager that low-cost index funds would out earn hedge funds over a decade

 Warren Buffett intensified his attacks on Wall Street money managers Saturday, saying that investors wasted more than $100 billion over the last decade on expensive advice.
.. “The bottom line,” Mr. Buffett wrote, is that “when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
.. Book value, a measure of assets minus liabilities that is Mr. Buffett’s preferred yardstick for measuring net worth, rose 10.7% in 2016, compared with a 12% total return in the S&P 500, including dividends.

.. Berkshire’s BNSF railroad subsidiary. Net earnings at Berkshire’s railroad fell 16% in 2016 due largely to a drop in coal demand.
.. Ajit Jain, widely considered to be one of the leading candidates to take the Berkshire CEO job when Mr. Buffett is no longer on the scene
.. Berkshire, he said, is still willing to buy back its shares if prices fall below 120% of book value.
.. Mr. Buffett praised some companies, including Bank of America Corp., for buying back shares. “Some people have come close to calling [buybacks] un-American—characterizing them as corporate misdeeds that divert funds needed for productive endeavors,” Mr. Buffett said. “That simply isn’t the case.”
.. Berkshire has warrants to buy 700 million shares of Bank of America at $7.14 apiece. The stock closed Friday at $24.23, so Mr. Buffett is looking at a paper gain of about $12 billion.
.. He attributed America’s “miraculous” economic growth to “human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law.”
.. He instead saved his sharpest comments for pricey money managers who pledge to beat the market, saying that in his lifetime he has identified “ten or so professionals” who can do so successfully.
.. “If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years,” he wrote.
.. In 2007 Mr. Buffett bet $1 million that his chosen index fund, the Vanguard 500 Index Fund Admiral Shares, would outperform hedge funds over the next decade.
.. Mr. Buffett in his letter Saturday praised Vanguard founder Jack Bogle as a “hero.”
.. “If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle.”