A new policy from the world's largest asset manager may initially have a limited impact on global coal production, but it marks a significant milestone in the finance sector's move away from fossil fuels.
Not only is BlackRock Inc. Chairman and CEO Larry Fink moving his company away from fossil fuels, he is also calling on other corporate leaders to take a harder line on climate change. BlackRock is currently a substantial holder in several coal companies, a new S&P Global Market Intelligence analysis confirms. However, many of the world's top coal producers will not meet the company's new divestment criteria. A review of recent data shows companies in the coal and consumable fuel sector, including diversified miners, constitute about $18.62 billion of BlackRock's investments. It has $7.43 trillion in assets under management.
BlackRock is removing companies generating more than 25% of revenues from thermal coal production from its discretionary active investment portfolios. The goal is to eliminate those investments in thermal coal — a sector BlackRock said is significantly carbon-intensive, becoming less economically viable, and highly exposed to regulation — by the middle of 2020.
"This is a declaration by the world's largest manager that you're not going to get our vote if you're asleep at the switch on climate," Tim Smith, director of ESG shareowner engagement at Boston Trust Walden, said in an interview. Boston Trust Walden is an investment manager with $10 billion in assets under management.
Top insurers and bankers are increasingly walking away from the coal sector. The move is making it more challenging to finance and service coal operations as cheap natural gas and renewables pose a rising competitive threat to a business model significantly contributing to global carbon dioxide emissions, multiple coal executives warned in recent months.
An announcement from an investor the size of BlackRock is a major milestone for rapidly growing divestment campaigns aimed at bankers, investors and insurers who do business with the coal sector. About $18.62 billion of BlackRock's portfolio is invested in companies that are either categorized in the field of coal and consumable fuels or are diversified metals and mining companies that produce some level of coal, according to an S&P Global Market Intelligence analysis.
BlackRock said its announced policy on thermal coal would impact about $500 million of its assets under management, representing less than 1% of its total investable assets.
"This is the most important company in the investment world making a very important, substantive decision that will take time to implement," Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis, said.
Up and down Wall Street, large financial institutions have been curbing involvement with carbon-intensive sectors. For example, a month before Fink's letter, Goldman Sachs Group Inc. pledged to cease funding certain fossil fuel-related projects.
Analysts watching the coal industry expressed varying levels of concern about the likelihood of investors increasingly screening for environmental, social and governance risk factors in the wake of the BlackRock announcement.
"In our view, ESG is one of the strongest headwinds facing the industry today," wrote Daniel Scott, an analyst with Clarksons Platou Securities. "We believe that valuations have become compressed and that miners have lost a full turn on their prior cycle EV/EBITDA multiples due to a restricted investor base and limitations of capital."
A lack of access to capital is spawning an emerging credit issue for the entire coal sector, said Benjamin Nelson, senior credit officer and lead U.S. coal industry analyst for Moody's Investors Service, following the BlackRock announcement. Combined with a drop in coal prices compressing cash flow generation and debt trading at meaningfully weaker prices, coal companies are likely to become more financially conservative in 2020, Nelson added.
Lucas Pipes, an analyst with B. Riley FBR, said companies meeting BlackRock's divestment threshold are likely held within the asset managers' passively managed funds and may not necessarily be sold under the policy.
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"In our opinion, the immediate effect of this announcement on share prices is likely to be minimal and the announcement is largely symbolic," Pipes said, noting that the cumulative impact of ESG considerations looms in the longer term.
There is some doubt around the effectiveness of divestment campaigns when it comes to a push for lower carbon dioxide emissions. Divestment campaigns on their own are not effective at reducing carbon dioxide emissions and are unlikely to accomplish this goal over time, according to an April 2018 working paper published by the Political Economy Research Institute at the University of Massachusetts Amherst.
On the other hand, the campaigns are garnering increased attention and may soon force even more governments, investors and companies to distance themselves from coal.
BlackRock might not have much to lose by dismissing coal either. The stock prices of U.S. coal companies have been flailing for years, and global prices for coal remain relatively weak after a significant contraction in 2019.
"The focus on thermal coal is financially appropriate given deteriorating financial performance and a decidedly negative outlook," Sanzillo said.
BlackRock owns a substantial stake in several U.S. companies, the S&P Global Market Intelligence analysis shows. For example, it owned roughly 15.7%, 12.7% and 8.3% of the outstanding shares of Consol Energy Inc., Contura Energy Inc. and Arch Coal Inc., respectively. It also owns roughly 5.4% of Peabody Energy Corp., the largest coal mining company in the U.S.
Pipes noted many companies under his firm's U.S. coal coverage would likely meet BlackRock's divestment criteria, including Peabody, Arch, Hallador Energy Co. and Consol.
Several major coal producers on the global playing field will not be screened out from investment by BlackRock under its new strategy as the companies' revenue streams from other mined materials dominate balance sheets, despite being large producers relative to other coal miners.
For example, BlackRock's threshold would not block investments in Glencore PLC, Anglo American PLC and BHP Group. Each of these companies produces large amounts of coal but not enough to overshadow other revenues and exceed the 25% thermal coal revenue threshold. Some of those companies, like BHP Group, are already making moves to exit the coal sector themselves.
Norway's sovereign wealth fund, with over $1 trillion in assets, took a harder line in 2019 with plans to cut off investments to companies mining 20 million tons of thermal coal or more per year. That limitation would apply to a much broader range of coal investments.
BlackRock said in a letter to clients issued alongside Fink's annual address that the asset management giant could move to broaden its divestment net, possibly even including businesses heavily reliant on coal, such as utilities that continue to burn coal to generate electricity. The company also said it plans to take a harder-line stance on engaging with corporate boards and management teams over climate issues.
While many applauded BlackRock's latest step toward eliminating coal from its portfolio, others were critical.
"If BlackRock is serious about its commitment to phase out thermal coal, it should use its voting rights to get major coal financiers to do the same," Jeanne Martin, campaign manager at responsible investing organization ShareAction, said in a news release.
Still, BlackRock's initial efforts to screen thermal coal from its active portfolio are "nothing to sneeze at," according to Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management LLC. Trillium is a socially responsible investment management firm with $2.5 billion in assets under management that sponsors many shareholder proposals related to ESG topics.
In addition to potential financial impacts, Fink's recent letter to CEOs sends a strong message to the rest of the financial community, Kron noted.
"This letter signals an understanding that there's no such thing as neutral," Kron said. "Either you support the status quo, or you support progress."