Could BlackRock’s share price weather climate change claims?

BlackRock’s [BLK] share price climbed by nearly 4% the week after CEO Laurence Fink pledged to make environmental stability a core focus for the asset manager. The firm wants to increase assets it manages in sustainable strategies from the $90bn it holds today to more than $1trn.

The firm announced it is putting emphasis on sustainability because the costs of climate change have damaging effects on the price of assets and the financial ecosystem. So far, investors in share price have reacted favourably to the firm’s renewed longer-term focus.

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

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

How will BlackRock achieve its sustainability goals?

BlackRock has said that it will be tougher on corporations that aren’t providing full accounting of environmental risks. The asset management firm has said it will increasingly vote against management and boards if companies don’t disclose climate change risks.

The firm is also pulling back from thermal coal producers in actively managed portfolios by mid-year – a move that will result in $500m in sales, according to The Wall Street Journal.

As part of its move to build a sustainable future, the firm will expand the range of sustainable investment products (including new fossil fuel-free products) and double the number of exchange-traded funds that address environmental, social and governance challenges to 150.

Will this benefit BlackRock in the long term?

With $7trn in assets under management in 2019 and a stake in many of the world’s biggest companies, BlackRock’s latest move could influence commercial business for the better. However, a research paper published by Morningstar last September highlighted that BlackRock has been among the asset managers least likely to support critical climate-related shareholder resolutions when they happen.

While the firm may have changed its stance, it is also likely that the financial benefits of such a move are undeniable. Financial Times writer Huw van Steenis stated earlier in January that “investors and boards have begun to realise that it can be more costly to ignore these issues, than to try grapple with them.”

Funds focused on sustainability attracted a surge in interest in the past year though. US open-ended funds and exchange-traded funds focused on those strategies took in over $20bn in net flows last year, which is nearly four times more than 2018, The Wall Street Journal notes. Furthermore, Morningstar data shows that funds that consider environmental, social and governance (ESG) issues outperform those that do not consider them. For example, 73% of ESG indexes have been beating their non-ESG counterparts.

All things considered, BlackRock’s Fink and the rest of the board have a strong business case for taking such a drastic turn, even though the move will “fundamentally shift” the firm’s investing policy.

BlackRock share price vitals, Yahoo Finance, 29 January 2020

Looking ahead

With a rally of more than 30% in 2019 and a share price that has settled at over $500 in January, Forbes had suggested that any upside is unlikely for BlackRock in 2020. However, when a strong fourth-quarter report – which saw profits up 40% to $1.3bn – and news of its climate change focus arrived in the third week of January, its price jumped to the $540 area.

As a result, Morgan Stanley raised the firm’s target price from $603 to $621, 16% upside from its current price of $535.45 (as of 29 January). Wells Fargo reiterated Morgan Stanley’s buy rating.

Among 15 analysts polled by CNN, the median projected price target for the next 12 months is $590. The current consensus among 17 polled analysts on the platform rate BlackRock a buy.