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Larry Fink’s each-way bet on fossil fuels

5 February 2022

9:00 AM

5 February 2022

9:00 AM

‘God make me pure – but not yet’. When the leader of American capitalism’s public-approval-seeking sanctimonious push for environmental, social and governance purity decided to usher in 2022 by announcing that he was not yet ready to abandon his sinning corporate ways and would not do so for quite some time, his greenie acolytes went bananas. This latter-day St Augustine is Larry Fink, described by Forbes magazine as a legend in the finance industry, who runs the world’s biggest investment fund, managing $US10 trillion of assets. ‘If BlackRock were a country, it would rank as third largest (in nominal GDP) behind the United States ($US21 trillion) and China $15 trillion).’

In January’s annual encyclical that effectively sets the US corporate agenda for the year, Fink, as in recent years, talks the talk on the need for companies to address social issues, particularly the ‘climate crisis’. But this time he steered clear of the coal exclusion policies or frameworks to lower BlackRock’s own emissions that featured in past letters. Far worse, he abandoned previous calls for ‘urgent and immediate’ emissions actions to save the planet, replacing them with a refreshingly rational view that a (necessary) shift to a decarbonised future ‘is not going to be a fast shift’ and should not be economically damaging through being rushed.

‘It will not happen overnight. We need to pass through shades of brown to shades of green… a slow clean-energy transition, would ensure that people continue to have access to reliable and affordable energy sources. Any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices making it more expensive for the poorest and most vulnerable populations globally. This will lead to greater polarisation around climate change and erode progress’.

So BlackRock is to take its time. While Fink proselytises the need for corporate America to embrace clean energy for a net zero future, BlackRock will not be walking its climate action talk – it is not divesting its coal and other fossil fuel assets. Fink says that ‘to ensure continuity of affordable energy supplies during the transition, traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen. Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero’.

Predictably, Fink’s tepid stance on the need to end dirty energy has irked environmental activists, some complaining that his latest letter ‘does not invoke confidence that he is the leader we need him to be’. Others point to BlackRock’s effective rejection of IPCC and IEA calls for an immediate end to new fossil fuel infrastructure as evidenced by its continuing to hold $US85 billion in coal companies, of which $US24 billion is in companies planning to expand their coal operations. And late last year it finalised a $US15 billion deal with Saudi Aramco to acquire 49 per cent of its gas pipeline subsidiary. ‘Fink is insisting on continuing to prop up dirty fuels like fracked gas and peddling the outdated and dangerous view that gas has a place in the energy transition, despite the scientific consensus that we need to stop expanding fossil fuels immediately’, is the green lament. And this was before they became aware of a private letter from Mr Fink to Texas oil and gas executives and a state lawmaker (since leaked to the local press) that BlackRock expected to be ‘long-term investors’ in the fossil fuel industries ‘because these companies play crucial roles in the economy’.

So American capitalism is alive and well, if Larry Fink is its exemplar. Making a buck takes precedence over principle. And even his support for the principle was commercially motivated. As Fink says, ‘I believe the decarbonising of the global economy is going to create the greatest investment opportunity of our lifetime.’ And in the meantime, there are rich financial rewards for his refusing to decarbonise that are flowing from the current boom in fossil fuel prices – and that provide a fiscal salve to the personal wounds inflicted by widespread cries of ‘hypocrite’.

Larry Fink’s BlackRock is cited as one of the reasons coal is sharing in the 2022 fossil-fuel boom – to the benefit of BlackRock’s continuing $US85 billion bet on coal. ‘Demand is rising, while supply is constrained because institutional investors, led by BlackRock Inc., have convinced nearly every miner to stop opening new pits. The arrangement is so good that from the outside it almost looks like a cartel’, says Bloomberg’s Javier Blas. ‘Coal is the world’s most carbon-intensive fuel, and every energy scenario compatible with net zero carbon emissions by 2050 features a rapid decline in its use.’ After last December’s climate summit, the UN proclaimed that coal ‘was being consigned to history’.

The opposite is happening. Last year, the world burnt the largest amount ever of coal to produce electricity. And on current trends, total global consumption, which on top of power generation also includes industrial uses such as in steel and cement, will hit a record high this year, according to the International Energy Agency’.

In China, the world’s biggest coal miner and consumer, output reached a record 4.07 billion tonnes in 2021, up 4.7 per cent. Since October, the government has ordered coal miners to run at maximum capacity to help boost production for power station use and to control surging coal prices which doubled to more than $US300 a tonne in October amid the rationing and supply problems. Despite this and the temporary acceptance of some Australian shipments to ease the crisis, there are no expectations that China will relax its ban on imports of Australian coal in 2022. And Bloomberg reports that coal prices are surging as traders in Asia scramble to snatch up winter supply amid fears of delayed deliveries from Indonesia and a continuing global energy squeeze.

For Australia, the BlackRock-inspired investor strike is having a significant impact on future supply – and potentially on price. A December governmental report noted that many of the thirty-seven coal projects in Australia at the feasibility stage were delayed. There was a growing preference for expansion of brownfield sites – already utilised resources – over greenfield investments, and that there was ‘an expanding list of lenders/investors who have withdrawn from financing new thermal coal projects’.

While Australian coal’s long-term prospects may be uncertain, they are very positive in the short to mid-term, with metallurgical exports forecast to double from 2021 to hit $50 billion this financial year while surging prices for thermal coal will lift exports to $35 billion.

Maybe Larry Fink is not alone in the world in taking an each-way bet on emissions constraint.

There are suggestions that China may pull back on its (already relatively lax) international environmental commitments in order to bolster its domestic coal production even further due to ‘deep concerns about its energy security’.

But at least Premier Xi has no pretentions of purity.

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