• Companies across the world have been asked to disclose their business plans to reach net zero by the world’s largest asset manager
  • The simplest way to reach this target — negative emissions — is also the most likely to be overwhelmed by the demands of companies that haven’t found other ways to bring down emissions
  • Financial institutions can find opportunity if they provide ESG-linked and transition financing to deliver other ways to reduce emissions, which brings more value than just money for companies struggling to meet investor expectations around net zero

BlackRock Chairman and CEO Larry Fink’s latest letter to CEOs has brought renewed attention to the importance of addressing climate-related financial risks. The world’s largest asset manager, which oversees US$8.7 trillion in assets, plays an important role in setting market direction on issues like responsible finance.

In addition to calling on companies to increase their sustainability disclosure by following SASB standards and guidance from the TCFD, Larry Fink focused on long-term climate change planning. He told CEOs that “the world is moving to net zero, and BlackRock believes that our clients are best served by being at the forefront of that transition.” Mr. Fink sent another, more detailed letter to CEOs on the topic of net zero.

BlackRock asks companies specifically to “disclose a business plan aligned with the goal of limiting global warming to well below 2ºC, consistent with achieving net zero global greenhouse gas emissions by 2050.” Many companies will be on the receiving end of engagement by BlackRock and others to follow through on a net zero target, but it’s not as simple as it sounds, and one feature in particular — the ‘net’ in net zero — will be determinative of how well received it will be.

Many steps forward in responsible finance, even ones that ultimately benefit the sector, open up room for either an earnest or greenwashing response. However, there is a ‘tragedy of the horizon’ problem facing those who have to evaluate company and country commitments on climate issues. For example, companies can either address or dodge immediate climate-related financial risks while still aligning with long-term targets like net zero emissions by midcentury.

BlackRock’s letter is noticeably silent on the issue of how to manage global limits on negative emissions technology and the significant uncertainty that exists about its future growth. For example, the Global CCS Institute for carbon capture & storage estimated that capacity was 40 MtCO2 per year in 2020, which expands to 110 MtCO2 when projects under construction are included.

In contrast, to be on track to meet the 2° C target, annual global emissions need to fall by 15 GtCO2e by 2030. They must fall by more than twice as much (32 GtCO2e by 2030) to stay within the 1.5° C target. That requires a huge change in business as usual, and even if emissions grow slower post-Covid than they have in the past, it will be unsustainable to rely on CO2 removal to meet the 2050 net zero target on a global basis.

What we should expect as a result is a flurry of net zero target announcements that are mum on the degree of contribution of emissions removal or rely on it for a significant share of emissions reduction. Although net zero targets are seen as a good thing (and they are), having net zero become a specifically singular focus for such a globally important asset manager risks some devaluation of that step forward if the business strategy becomes another box to check.

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Republished from the RFI Foundation’s weekly newsletter. Subscribe for free here!

Linking responsible finance & Islamic finance. CEO, @RFIFoundation.