The world is changing… are your investments?

When even the world's largest fund manager is making changes…

a woman

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This week, something seismic happened in investment markets.

And, despite the headlines, the full fallout isn't even close to being felt yet.

The event was an announcement by Larry Fink, head of the world's largest fund manager, BlackRock.

Henceforth, he said, BlackRock would divest a certain type of company from all of its active funds: those who mine thermal coal.

Thermal coal, for those who aren't familiar, is the type burned for power generation (as opposed to metallurgical coal used in steel making).

Yes, in short, BlackRock no longer wants to have its investors' money in coal-fired energy production.

But here's where the plot thickens, at least for those who might be thinking this a little 'virtue signalling' from a CEO trying to curry favour with the cool kids.

For what it's worth, my personal view is that companies should — along with governments and consumers — be acting to deal with climate change. But, in this case, neither my nor Fink's view on climate action is relevant (if he even has one).

See, Fink isn't — at least publicly — a virtue-signalling, tree-hugging, deep green, capitalism-hating, revolutionary.

On the contrary, the company's stance is pretty much the most capitalist position possible.

This decision isn't about stopping global warming.

This decision isn't about saving the whales, trees, or koalas.

The decision isn't about pressuring governments.

It is all about… drumroll, and you might want to sit down for this…


(I know, from a fund manager… who'd have thought?)

And that's why this is such a seismic move, as I said.

In the past, divesting coal companies has been an 'ethical' decision from those who wanted to sleep better at night. Or one aimed to put pressure on companies to change their practices.

But this is all about the moolah (or 'the Benjamins' as our American cousins apparently say these days).

BlackRock's Asia Pacific Chief, Geraldine Buckingham, explained it to the Financial Review thus:

"This is really about us believing that these companies, given the carbon risk, represent poor sources of long term [outperformance] and we don't believe it's in our clients' best interest to be investing in them on their behalf"

Yes, Carbon risk.

She goes on:

"This is not about people's personal or individual views about environment or, you know, what the right policy responses are, this is really about how do we fulfil our role as a fiduciary to help clients understand how to manage the risk in their portfolio.

"It's become very clear, I think, in the last few years that climate risk represents significant investment risk in portfolios and I think that the regulators, as well as managers like BlackRock, are saying that this risk in the portfolio is material."

Let that sink in for a second.

For BlackRock, at least, thermal coal represents 'climate risk', and that equals investment risk.

They're not saying 'we believe in climate change'.

They're not saying 'Here's what governments should do'.

They're saying — and I'm paraphrasing here, of course: "We think it's likely that future events — policies, choices, and whatever else — will conspire to make it unlikely thermal coal companies will deliver market beating performance"

And, just to double-underline this one — they don't care a jot about pollution, water tables or a warming climate… at least not from the perspective of their day jobs. (I'm sure the team at BlackRock have a range of views on those things that mirrors the wider community, so I'm not for a second saying its people don't care about the climate — just that it's not the driver, here.)

Now, it's also possible that there's a little cynicism here, too.

Maybe BlackRock is also trying to get a little positive PR, in a world where money is absolutely gushing out of 'active' stock-picking funds and into 'passive' index-based fund investments.

Maybe it's a subliminal reminder to those index fund investors: "Don't forget, there's coal in those indices!"

It's a legitimate business and marketing strategy, even if it's leaning on some poor quality thinking on behalf of investors.

But you know what's more powerful than attracting some socially-conscious funds? Actually beating the market.

BlackRock can't afford to just appeal to a niche. It manages trillions of dollars. Performance is truly all that counts.

So while they won't mind being seen as a 'greener' investment option by those for whom such a label is beneficial, I have no trouble believing their stance is driven by profit maximisation — and, for them, that means avoiding what they think will be underperforming thermal coal companies.

There are plenty of ways to invest well. But, at heart, what's important to investors who seek to beat the market is to find investments that will outperform, and avoid those likely to underperform.

BlackRock is not investing based on how they wish the world was, or how they want it to be.

They're investing based on how things really are, and how they expect events to unfold.

That's a good lesson for all of us.

Fool on!

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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