Indian cos may take a hit as BlackRock moves away from coal-based firms

The world’s largest asset manager BlackRock’s announcement that it will pull out its investments in companies that get 25 per cent of their revenues from thermal coal production, besides making no future direct investment in such firms, could shrink the bouquet of investors for players like NTPC, the Adani group and Coal India (CIL).

“We are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25 per cent of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020,” BlackRock’s 19-member Global Executive Committee said in a letter to clients.

As part of evaluating sectors with high environment, social and governance (ESG) risk, the asset manager with a $7 trillion investment portfolio said it would “closely scrutinise other businesses that are heavily reliant on thermal coal as an input, in order to understand whether they are effectively transitioning away from this reliance”.

It is in this category that thermal power generators like NTPC and Adani Power could face risk. In addition, BlackRock’s alternatives business will make “no future direct investments in companies that generate more than 25 per cent of their revenues from thermal coal production”.

According to a report of the Institute for Energy Economics and Financial Analysis (IEEFA), the announcement could mean firms like China Shenhua, China National Coal Group, CIL, Adani Enterprises, Peabody Energy, Arch Coal, Contura Energy, CONSOL Coal Resources LP, PT Bumi Resources, Whitehaven Coal, New Hope Corp, and Yancoal Australia are up for immediate review and likely divestment.

BlackRock will then scrutinise sectors heavily reliant on thermal coal as an input. “That will likely see divestment of a much wider range of firms, like KEPCO, TEPCO, Duke Energy, RWE, Southern, NTPC, and Adani Power, and will also include Chinese power utility majors such as China Huaneng Group, China Datang Corp, China Huadian Corp, State Power Investment Corp and China Energy Group,” said IEEFA. Service and infrastructure providers to thermal coal, like Aurizon and Adani Ports & SEZ could go in the third round of review.

When asked about the development, spokespersons for NTPC and Adani did not comment.

In a separate letter, Larry Fink, chairman and chief executive officer, BlackRock, in his 2020 letter to group CEOs said the investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn impact the pricing of risk and assets around the world.

BlackRock’s latest report states it has invested in firms like NTPC, Adani, Oil India, Power Finance Corporation, and Rural Electrification Corporation through a host of funds. This includes its India fund, which has the largest exposure in the financial sector (39.7 per cent), followed by information technology (11.63 per cent), and energy (11.6 per cent).

According to IEEFA’s compilation, global managers with over $11 trillion of assets under management have made similar fossil fuel divestment commitments. As many as 116 globally significant banks and insurers have announced their exit from coal. Earlier this year, Dutch insurance major Aegon announced a significant tightening of its coal divestment policy.

IEEFA’s analysis shows that once a financial institution accepts its fiduciary duty to act on the climate’s clear financial risk, the initial announcement is almost always just the first step. “A firm committing to align with the Paris Agreement is committing to deep decarbonisation, and anything other than a superficial greenwash highlights the profound stranded asset risks,” Tim Buckley, director of energy finance studies and Tom Sanzillo, director of finance, IEEFA, wrote in an article published Wednesday.

They, however, added that while this divestment across BlackRock’s $1.8 trillion of active funds is couched in climate terms, the rising technology-driven economic viability risk makes this a clearly sensible financial decision, “irrespective of the moral responsibility that Fink has long argued for, but done little about”.

In its letter, the executive committee said thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts. “With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector.”

Fink also underlined the pressure from millennials in directing investment towards sustainable goals. “Young people have been at the forefront of calling on institutions – including BlackRock – to address the new challenges associated with climate change…And as trillions of dollars shift to millennials over the next few decades, as they become CEOs and CIOs, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability,” he said.

By the end of 2020, all active portfolios and advisory strategies of BlackRock will be fully ESG integrated — meaning, at the portfolio level, managers will be accountable for appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions.

BlackRock’s Risk and Quantitative Analysis Group (RQA), which is responsible for evaluating all investment, counterparty, and operational risk at the firm, will be evaluating ESG risk during its regular monthly reviews with portfolio managers to provide oversight of portfolio managers’ consideration of ESG risk in their investment processes. “This integration will mean that RQA – and BlackRock as a whole – considers ESG risk with the same rigor that it analyzes traditional measures such as credit and liquidity risk.”

While the asset manager has developed proprietary measurement tools to understand material ESG risks, this year it will build additional tools, including one to analyse physical climate risks and one that produces material investment signals by analysing the sustainability-related characteristics of companies. “We are integrating these measurements into Aladdin, our risk management and investment technology platform,” the executive committee said.

BlackRock currently manages $50 billion in solutions that support the transition to a low-carbon economy, including an industry-leading renewable power infrastructure business, which invests in the private markets in wind and solar power, green bond funds. As a group, it will be expanding dedicated low-carbon transition readiness strategies, offering investors exposure to the companies that are most effectively managing transition risk.