The influential US asset manager headed by Larry Fink has started to change its long-term forecasts of risk and return, known as capital markets assumptions, to reflect its view that climate change will become the biggest driver of valuations for assets such as shares. According to a briefing given to The Australian, energy and utility stocks are seen most at risk due to the greater climate focus, with tech and healthcare among the winners, in a move likely to ricochet through the fund manager’s $US8.7 trillion investment pool. BlackRock plans to focus on boosting its exposure to shares in developed markets over high-yield and emerging debt markets where the energy and utility sectors face structural challenges. The move is expected to be felt across the ASX, which has a heavy exposure to mining and energy stocks and extend to some financial stocks. “There is now a recognition that these risks are real and they do impact our portfolio returns and the returns of our individual securities,” BlackRock chief Asia-Pacific investment strategist Ben Powell told The Australian. “Climate risk is just investment risk. It’s not like you do your investment analysis and then separately add on a sustainability component. It’s an intrinsic part of the risks to your company.” BlackRock in January revealed plans to launch investment products with explicit temperature alignment goals, more forcefully use its votes on environmental shareholder proposals and called for a single global standard to pressure corporates to disclose how their business models will be compatible with a net zero economy. That came a year after it pledged to ditch investments including thermal coal as part of a response to rising climate change concerns. The fund manager is pushing ahead with a move to establish a list of companies with heightened risk attached to global warming. The three criteria will be high carbon intensity, insufficient preparation for the move to net zero and a “low reception” when it engages with companies on green issues. It plans to focus on companies’ environmental credentials to drive its capital market assumptions with social and governance to be weaved in as stronger and more consistent data becomes available. While most companies where it holds shares are on board with its climate push, Mr Powell said the next test was applying rigour to its measurements of companies’ performances and allowing some wiggle room in its investment framework, depending on how quickly the transition to a green economy took place. Its new capital market assumptions are based on different risk for asset classes, a climate change-led repricing due to the falling cost of capital for sustainable assets and changes to corporate earnings depending on exposure to climate change. “Generally there’s a broad acceptance of that philosophical point but now the focus is on how confident do we feel on the data we are using to make that analysis because it is still quite new to think about investments in this way.” BlackRock was one of the key institutional investors that urged Rio Tinto’s board to take stronger action against key executives over the destruction of heritage sites at Juukan Gorge, before a parliamentary inquiry into the affair found there were serious deficiencies in the miner’s culture, processes and systems.In the past year it has supported eight environmental proposals, including at Australian blue chip companies BHP, AGL Energy and Origin Energy. In 2021 BlackRock will expand its target climate universe from more than 440 to more than 1000 companies, which will include financial services companies — including banks — that finance emission-generating projects. BlackRock’s investment stew­ard­ship team is holding meetings with companies including some in Australia as it follows through on the goals outlined in Mr Fink’s annual letter to clients, released in January. “As the world’s largest investor we feel it is our responsibility to engage with the companies that we have ownership in and talk to them around all risks. We think having a conversation with them that includes how resilient this company might be to climate is a normal interaction for equity owners,” Mr Powell said. BlackRock has previously named Australia among countries where investors were asking how they should change their portfolios to reflect increasing climate risk. The pandemic, which caused a spike in market volatility, has also accelerated thinking about the transition to a green economy. “The conversation has shifted from should we incorporate this into our risks to how do we do it,” Mr Powell said. A move by China, Japan and South Korea to target net zero emissions was also being closely watched by BlackRock given both rely on hydrocarbons for 80 per cent of their primary energy supply. That will have to halve to a 40 per cent share by 2050 for the economies to meet their targets.“The consequences will take time to flow through but markets look forward and as they become increasingly driven by sustainability it should drive companies to take advantage of those situations over time and the cost of capital should be shifting now looking forward,” Mr Powell said.



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