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Why climate change means new risks for U.S. financial markets

From fires to floods, the warming climate is reshaping the globe. In fact, the decade of the 2010s was the hottest ever recorded on Earth. And although activists and scientists have long been sounding the alarm, a new voice joined the chorus recently: investment firm BlackRock. William Brangham talks to BlackRock’s Brian Deese about how climate change is altering American business and finance.

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  • Judy Woodruff:

    Earlier, we showed you the impact of wildfires in Australia.

    From fires to floods, the changing climate is affecting countries around the world.

    This past decade, in fact, was the hottest decade since data was first recorded. Scientists and activists have long been sounding the alarm.

    And, this week, one of the larger players in investing and the markets joined the chorus.

    William Brangham explains how it might change the way America does business.

  • William Brangham:

    The investment firm BlackRock manages roughly $7 trillion. That makes it the largest asset manager in the world.

    Now the firm has announced that environmental sustainability will be a core goal. In his influential yearly letter to companies, BlackRock CEO Laurence Fink wrote climate risk is investment risk and that every government, company and shareholder must confront climate change.

    Fink went on to say that the climate crisis will likely force — quote — "a fundamental reshaping of finance."

    The firm indicated it will begin to move money away from heavily polluting industries like coal and into others with a greater focus on sustainability.

    Brian Deese is the global head of sustainable investing for BlackRock, and he joins me now.

    Brian, thank you very much for doing this.

    Because of the enormous size of your firm, you have been under a lot of pressure to push companies to take a more active stance on climate change. And I know that there's a lot of environmentalists that have celebrated your recent move.

    Help us understand, why now? Why did you guys decide to do this?

  • Brian Deese:

    Well, what we communicated this week is really driven by our increasing conviction around the investment risk that climate change is posing.

    And, you know, a lot of the way that, traditionally, people have approached investing has assumed that the climate was going to stay relatively stable.

    But if you look at what's happening, whether it's the wildfires in Australia or California, floods in the Midwest increase, hurricanes and flooding that we have seen across the country, it just isn't viable to assume that stability going forward.

    And when we look closely at it, we increasingly recognize that those risks are not fully appreciated in financial markets. And so we believe that we are going to see a massive reallocation of capital. And we want to be ahead of it and make sure that we are taking those risks into account when we're delivering investment solutions.

  • William Brangham:

    So, when you're doing that, how will that actually look? What is it you're trying to get companies to do? What will you guys actually be doing?

  • Brian Deese:

    Well, the first and most important thing is being able to actually measure this risk.

    And we're talking both about the physical risks, so increased flooding that would affect the value of a building or the value of a company, but also the risks of the transition.

    And so we know that the society and — is going to move toward lower-emissions solutions. And that means that companies that are reliant on — where their business model is very reliant on fossil fuels are going to face pressure.

    And on the upside, companies that are competing for new carbon-efficient technologies are going to win. And so we want to understand those risks, and then we want to integrate them into how we're going to deliver an investment solution, whether that's in somebody's 401(k) or whether it's for a large pension plan or college endowment.

  • William Brangham:

    So you want companies to think about this starting today and going forward, their carbon footprint, their own climate exposure.

    What if a company, if it is in your portfolio, doesn't do that? How do you exert pressure to get them to do what you think they ought to be doing?

  • Brian Deese:

    Well, in portfolios where we have discretion, we can implement by buying or selling the companies' security.

    And so, for example, we have — we have announced that we intend to exit companies that rely on thermal coal mining for a significant amount of their revenue.

    In those portfolios where we don't have discretion, what we can do is, we can engage directly with those companies and communicate our expectations in terms of how they're going to change their business model and how they're going to plan for this coming transition.

  • William Brangham:

    I'm curious. Would BlackRock ever consider phasing out some of the biggest polluting companies out of your portfolio entirely?

    I mean, that, according to many, would be the true market signal that it's time to change.

  • Brian Deese:

    Well, look, we're focused on this from the perspective of investment risk.

    And so, in some cases, like, for example, thermal coal, we believe that the risks to that business model are so pronounced, that it doesn't make sense to bear the risk.

    As we look more broadly, we're really focused on understanding that position with respect to the transition, and this will be a transition across time. But I think the most important thing for us is to reinforce that these risks are more pronounced than financial markets currently understand and that we want to get better and better at measuring those risks over time.

    And over time, as we do so, we're going to take action in our portfolios as well.

  • William Brangham:

    Again, we talked about this a little bit about at the beginning, but how much of this movement comes from the hundreds of thousands of people that we have been seeing marching in the streets, pressuring governments, citizens, governors, presidents, and corporations to try to address climate change?

    Was that part of the decision-making process?

  • Brian Deese:

    Well, it's interesting.

    As we actually think about investment risk, that pressure and society's frustration and expectation on companies is part of driving us to believe that we are going to see this big reallocation of capital.

    It's both those physical risks that come from climate change, but also that society has different expectations of companies. And going forward, the future savers and the future investors are the young people today, and they have different expectations, and they are going to speak with their capital.

    And that's another reason we believe why we really are seeing this fundamental reallocation of capital. And that's why — that will itself in some companies performing better and some companies performing worse.

    So that actually has investment implication, and we believe that that's only going to increase across time.

  • William Brangham:

    All right, Brian Deese, head of sustainable investment at BlackRock, thank you very much for doing this.

  • Brian Deese:

    Thank you.

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