BlackRock, the world’s largest asset manager, recently released a report on its engagement with agricultural firms and the risks and opportunities the industry faces connected to environmental and social (E&S) issues. The communication comes just weeks after the investment firm joined the Climate Action 100+ group and emphasized that climate change is now central to its decision-making. Larry Fink, BlackRock’s CEO, predicted that responses to climate change will dramatically restructure the financial world in the coming years.
In its report on agriculture, BlackRock recognizes the various financial, reputational and climate risks that companies must acknowledge when evaluating their long-term outlooks. Its engagement with agricultural companies centers on risks related to land use management, deforestation, greenhouse gas emissions (GHG), and biodiversity, among other matters. BlackRock will question companies on various issues, including (but not limited to):
- The board’s experience on E&S issues
- The board’s awareness of important E&S trends, changes in regulation, and trends in consumer preferences
- Assessment of how the company is managing/monitoring its supply chains and mitigating E&S risks
- The ability to prevent illegal activity such as bribery and corruption
- Investments in technology
- Adherence to international and industry sustainability standards
- Breaches in policies or standards by subsidiaries, joint ventures and foreign investments
BlackRock’s scrutiny could increase pressure on the agricultural industry to enhance sustainability standards and transparency. As a result, laggards could face financial, business, and reputational risks. Moreover, BlackRock’s pivot toward higher sustainability benchmarks could influence other asset managers with large exposure to agriculture, such as State Street Global Advisors, Fidelity and Vanguard, to increase engagement with industry.
The Intergovernmental Panel on Climate Change (IPCC) has emphasized the need for sustainable land management to help mitigate climate change and keep global warming below 1.5 degrees. IPCC estimates that 23 percent of GHG emissions are from agriculture, forestry, and Other Land Use (AFOLU). Deforestation, which accounts for approximately 15 percent of global greenhouse gas (GHG) emissions, is central to agriculture’s CO2 footprint. Forests and land are also a natural carbon sink, partially offsetting emissions. Given the agriculture sector’s key role in curbing climate change, BlackRock’s engagement may impact companies in the soy, beef, pulp and paper, and palm oil supply chains.
BlackRock, which has USD 7 trillion in assets under management, is highly exposed to risks in the agricultural sector. Last year, a report from Friends of the Earth (FoE), Amazon Watch and CRR partner Profundo noted that BlackRock is the third largest shareholder in commodity traders Bunge and ADM, and also owns USD 98 million in stocks linked to cattle-driven deforestation. BlackRock’s palm oil holdings have a combined value of above USD 630 million as of Q4 2018.
Criticisms of BlackRock’s Agriculture Strategy
Although BlackRock’s voice is vital in raising awareness on the importance of sustainable agriculture, critics have pointed out weaknesses in its approach on engagement. FoE and Amazon Watch, for instance, argue that BlackRock lacks a framework that holds companies to account for their emissions, connections to deforestation or land-grabbing, or violations of human rights.
The investment firm focuses on governance and transparency without detailing what it considers best practices. Without providing a system of accountability, it is unclear how BlackRock would press companies to change so long as their leadership follows what they consider best practices are. Guarav Madan, FoE’s Senior Forest and Land Campaigner, said in a statement: “BlackRock needs to disclose its standards for gauging companies’ operations and the consequences companies will face when they fail to put an end to deforestation, land grabbing, and human rights abuses.” With regards to deforestation, it has yet to compose a specific, time-bound zero-deforestation policy.
In a briefing last year, BlackRock highlighted the complexity of engaging with companies in the agricultural sector. The firm stated that it was in dialogue with palm oil companies to better understand the industry’s risks associated with deforestation, biodiversity, and other ESG issues.
The mixed reactions to BlackRock’s approach to engagement with agricultural firms echo the response to its announcement in mid-January to raise ambition in tackling climate change. One major concern is that a majority of BlackRock’s holdings are in passive funds, where integrating ESG criteria is more complex than actively managed funds, and could increase fees for investors in those funds. However, the investment firm is planning to double the number of ESG-focused exchange traded funds (ETFs) in the next few years. BlackRock also said that it would divest from companies that produce coal, yet it will remain one of the largest holders of shares of fossil fuel companies.
While BlackRock is unlikely to shift capital out of the agricultural sector anytime soon, it could increase public pressure on companies. During the first week of February, BlackRock criticized Germany’s industrial firm Siemens over its USD 19.6 million deal to provide infrastructure support for the Carmichael coal mine in Queensland, Australia. Despite its protest, BlackRock voted with the Siemens board. Nevertheless, its more aggressive agriculture engagement strategy may expose companies to greater reputational risks for policies and actions that exacerbate climate change. In a sign that activists will continue to pressure BlackRock on climate change, campaign groups entered BlackRock’s offices in Paris this week, calling for the asset manager to divest from fossil fuel companies.