Following decades of activism, shifts in shareholder preference, and developments within sustainable energy, big banks are finally ditching the fossil fuel industry. However, systemic issues within the financial sector, as it currently operates, are impeding this transition, and may sustain fossil fuel companies despite record losses. The primary barrier?
Passive investment.
As opposed to actively-managed funds — which allow brokers to pick and choose the companies they invest in — passive funds track a default index; the S&P 500, for example, is a basket of 500 large US companies. These indices have gained massive popularity in recent decades, as they are conducive to low-risk, buy-and-hold investing. However, they come with a significant drawback; the metrics used to compile them are antiquated in a climate sense, ignoring vital factors like environmental footprint, compliance with climate legislation, and plans to increase sustainability. Consequently, most prominent index funds contain dozens of fossil fuel titans, making climate-conscious investing a near-impossible feat.
This conundrum is epitomized by BlackRock, the largest asset manager in the world.
In a letter to chief executives earlier this year, BlackRock CEO Laurence Fink announced plans for long-awaited environmental reform within the company — namely, divesting its active funds from companies that receive more than 25% of their annual income from thermal coal production. “BlackRock does not see itself as a passive observer in the low-carbon transition,” Fink began; “We believe we have a significant responsibility — as a provider of index funds, as a fiduciary, and as a member of society — to play a constructive role in the transition.” This sentiment is encouraging; however, the environmental advocacy group Extinction Rebellion has stressed “the world’s biggest miners and polluters will not be losing any sleep.” A large portion of BlackRock’s $6.9tn (£5.3tn) holdings will continue to flow to companies like BP, Shell and ExxonMobil through index funds — so whether or not active funds are divested in earnest, fossil fuel companies have a lifeline.
At least for now.
The indices that bolster the fossil fuel industry are not immalleable; they are just directed by conglomerates like Vanguard and Standard and Poor’s whose avaricious profit motives have historically made them staunch opposers of climate reform. This rigidity could soon yield, however, as green energy investments beckon a more lucrative future. The New York Times explains, “Had Mr. Fink moved a decade ago to pull BlackRock’s funds out of companies that contribute to climate change, his clients would have been well served. In the past 10 years… companies in the S&P 500 energy sector had gained just 2 percent in total. In the same period, the broader S&P 500 nearly tripled.”
The incentive to ditch fossil fuels, thus, is no longer purely ideological. Such assets are doomed to fail, and with a titan like Blackrock leading the way, a transformation within the financial sector becomes ever more nascent. “I’d be surprised if [BlackRock] didn’t persuade Standard & Poor’s and other index makers to produce ‘sustainable’ versions of their main products,” writes author and activist Bill McKibben — “at which point, if BlackRock began nudging its biggest customers into those investments, the shift of money would be far greater.” This bodes auspiciously for a comprehensive dismantling of the fossil fuel industry — one that world governments may not be able to offer as quickly, or as absolutely.
Governments are inherently slow-moving. And when you combine bureaucratic complexity with intense negative partisanship, any effort to put forth serious climate legislation becomes a painstaking and unlikely process — especially in countries where the highest-ranking officials have historically denied the mere existence of climate change, like the US, Brazil, and Australia, to name a few. Even if changes are made, they are too often modest in scope and transient in effect. Thus is the fickleness of government — and why financial institutions represent an attractive alternative. The Exxons of the world cannot operate without the support of their age-old benefactors, and if these benefactors move their assets in a different direction, the fossil fuel industry will crumble practically overnight.
The future is where the money is. The future is green.
Isaiah Maynard for Times Media Mexico
