BlackRock is the canary in the coalmine. Its decision to dump coal signals what’s next

John Quiggin, The University of Queensland

The announcement by BlackRock, the world’s largest fund manager, that it will dump more than half a billion dollars in thermal coal shares from all of its actively managed portfolios, might not seem like big news.

Announcements of this kind have come out steadily over the past couple of years.

Virtually all the major Australian and European banks and insurers, and many other global institutions, have already announced such policies.

According to the Unfriend Coal Campaign, insurance companies have stopped covering roughly US$8.9 trillion of coal investments – more than one-third (37%) of the coal industry’s global assets, and stopped offering reinsurance to 46% of them.

Blackrock matters because it is big

The announcement matters, in part because of Blackrock’s sheer size.

It is the world’s largest investor, with a total of $US7 trillion in funds under its control. Its announcement it will “put climate change at the center of its investment strategy” raises questions about the soundness of smaller financial institutions that remain committed to coal and to a carbon-based economy.

Exract from BlackRock’s letter to clients, January 14, 2020

Blackrock is also important because its primary business is index funds, that are meant to replicate entire markets.

So far these funds are not affected by the divestment policy. BlackRock’s iShares United States S&P 500 Index fund, for instance, has nearly US$23 billion in assets, including as much as US$1 billion in energy investments.

But the contradiction between the company’s new activist stance and the passive replication of an energy-heavy index such as Australia’s is obvious. The pressure to find a solution will grow.

In time, the entire share market will be affected

One solution might be for large mining companies such as BHP to dump their coal assets in order to remain part of both Blackrock’s actively managed (stock picking) and passively managed (all stocks) portfolios.

Another might be the development of index funds from which firms reliant on fossil fuels are excluded. It is even possible that the compilers of stock market indexes will themselves exclude these firms.

The announcement has big implications for the Australian government.

Read more:
Fossil fuel campaigners win support from unexpected places

Blackrock chief executive Laurence Fink noted that climate change has become the top issue raised by clients. He said it would soon affect all all investments – everything from municipal bonds to mortgages for homes.

Once investors start assessing government bonds in terms of climate change, Australia’s government will be in serious trouble.

Australia’s AAA rating will be at risk

The bushfire catastrophe and the government’s inadequate response have shown the world Australia is both among the countries most exposed to climate catastrophe and one of the worst in terms of contributions to solutions.

Once bond investors follow the lead of Blackrock and other financial institutions, divestment of Australian government bonds will follow.

This process has already started, with the decision of Sweden’s central bank to unload its holdings of Australian government bonds.

Taken in isolation, Sweden’s move had virtually no effect on Australia’s bond prices and yields. But the most striking feature of the divestment movement so far is the speed with which it has grown from symbolic gestures to a severe constraint on funding for the firms it touches.

Read more:
Climate change: why Sweden’s central bank dumped Australian bonds

The fact that the Adani corporation was unable to find a single bank willing to fund its Carmichael mine is an indication of the pressure that will come to bear.

The effects might be felt before large-scale divestment takes place. Ratings agencies such as Moody’s and Standard and Poors are supposed to anticipate risks to bondholders before they materialise.

It’ll make inaction expensive

Once there is a serious threat of large-scale divestment in Australian bonds, the agencies will be obliged to take this into account in setting Ausralia’s credit rating. The much-prized AAA rating is likely to be an early casualty.

That would mean higher interest rates for Australian government bonds which would flow through the entire economy, including the home mortgage rates mentioned in the Blackrock statement.

The government’s case for doing nothing about climate change (other than cashing in on past efforts) has been premised on the “economy-wrecking” costs of serious action.

But as investments associated with coal are increasingly seen as toxic, we run an increasing risk that inaction will cause greater damage.The Conversation

John Quiggin, Professor, School of Economics, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Risky business: how companies are getting smart about climate change

Tayanah O’Donnell, University of Canberra

The divestment movement is gaining momentum – and is just one of the emerging risks from climate change that businesses face. The Paris climate agreement not only signalled social change but also sent the market a strong signal to move away from carbon-intensive investment.

The divestment movement may be seen by some businesses invested in fossil fuels as a risk. But it is not the only force shaping how companies address climate change. So, what are some of the other factors in rethinking climate risk?

Evolving social norms

The Paris Agreement recently gained more steam with ratification by the United States and China. This signalled the intent of these leading global economies to commit to helping to limit global warming to 2℃. Achieving this will require a transition to a low-carbon or decarbonised economy. China, for example, has been aware of how important this is since 2008.

Since the launch of the Low Carbon Economy Index by PricewaterhouseCoopers in 2009, companies have been better equipped to understand and measure private sector climate risk. This has flow-on effects to just about all human behaviours, and has had a particularly significant impact on private equity investments.

In particular, pension funds and the insurance sector are among the leading sectors in considering future climate risk within and across their portfolios. This is facilitating evolving social norms around climate change. These changes have long been recognised as critical for climate change mitigation and adaptation.

The role of law

Liability risk remains at the forefront in current trends. The acceptance of legal responsibility demonstrated by global leaders’ ratification of the Paris Agreement is all the more interesting when we consider recent developments in climate litigation.

Some argue that, in future, there will be parallels between tobacco and asbestos tort litigation and climate litigation, given that the consequences of a changing climate have been well known for decades, and widely cited by scholars and practitioners alike. It is therefore difficult for a legal entity to claim ignorance of climate risks.

Internationally, a decision in 2015 held Dutch public officials legally accountable in reducing emissions. In the United States, instances of litigation have increasingly focused on companies’ disclosure of known future climate risk. Pressure has also been building on Exxon Mobil as evidence emerges that the company may have lied to shareholders about this known risk.

In Australia, some recent interesting developments in coastal planning law are contributing to a more coherent body of climate law.

Fiduciary duties are an important aspect of rethinking climate risk. In law, they can require companies to disclose future risk. A failure to disclose on “the business strategies, and prospects for future financial years” under the Corporations Act may be considered a breach of the law and subject to ASIC enquiry.

While some regulatory guides exist for how to achieve general compliance, recent submissions to the Senate inquiry into carbon risk disclosure have argued that specific regulatory guidance for future climate risk is needed. Arguably, disclosing future risks includes future climate risks to assets and company investments.

The courts are moving where regulation and policy may be slower to act. In April 2016, the New South Wales Supreme Court relaxed the hurdles for shareholders to bring action against a company in a case where an insurer, HIH, led the market to believe it was trading more profitably and had greater net assets than was the case. This artificially inflated the HIH share price, resulting in shareholders suffering a loss because they bought overpriced shares. This case is important for shareholder class actions because it is the first time the court has accepted the principle of indirect market based causation.

In a similar way, a failure to disclose known future climate risk in required disclosure documents could potentially amount to misleading and deceptive conduct. This is particularly the case where companies may fail to disclose their asset exposure to climate change impacts.

Technological risk

The World Economic Forum’s Global Risks Report 2016 noted that the number-one risk to the global economy was a failure to mitigate and adapt to climate change.

Some argue that technological responses, including carbon capture and storage, continue to require research and development input. Others suggest that investing in renewable energy, particularly for developing countries, will lead to more sustainable global outcomes including, importantly, social equity.

While mitigation technologies continue to compete for long-term success, investors need to be increasingly aware of where and how they prioritise their mitigation efforts.

Where to now for Australian companies?

The 2016 carbon risk disclosure inquiry was due to publish its report in June 2016 but lapsed due to the federal election. This Senate inquiry ought to recommence as a matter of priority.

Additional legal mechanisms that will have flow-on effects for evolving social norms and for rethinking climate risk could include legislative change to require the inclusion of reporting asset exposure risks, under the National Greenhouse and Energy Reporting Act.

Climate risk, the transition to a low-carbon economy, evolving social norms and the continued growth of climate law evidence a need to ensure coherence across economic, social and governance frameworks.

The Conversation

Tayanah O’Donnell, Research Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.