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What Wall Street Really Means When It Talks About “Climate Risk”

Deciphering the jargon of white-collar gamblers

Laurence Fink (Michael Cohen/Getty Images for The New York Times)

In Kim Stanley Robinson’s recent climate change novel, New York 2140, New York City has been devastated by rising seas: The Atlantic Ocean has inundated Brooklyn and Queens, and lower Manhattan now lies in the shallows at high tide. Downtown real estate has become physically unstable and economically volatile. But as new construction technologies stabilize some structures, residents priced out of the dry quarters uptown are moving back to the soggy old neighborhood. A hedge-fund manager named Franklin, a main character, has developed a successful index to evaluate the investment risk of “intertidal” real estate, the cheap but unstable property on the flood-ravaged coasts.

It’s a brilliantly conceived vision of one likely outcome of the climate crisis: an Armageddon, but not for everyone. What if New York dies, but Wall Street survives? What if the ravages of climate change amount, for some, to just another bet?

BlackRock, the world’s largest money management firm, with over $6 trillion in assets, certainly intends to soldier on. Anticipating that climate change will provoke a “fundamental reshaping of finance,” BlackRock’s chairman, Laurence Fink, recently announced a new policy to make “sustainability” a central factor in evaluating investments. In a letter to investors published on the firm’s website, Fink wrote that “the investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets around the world.” The move has received mixed responses, both from the financial press and from climate activists. The New York Times’ Andrew Ross Sorkin wrote that such a move from a firm of BlackRock’s size “could reshape how corporate America does business,” while others were more circumspect. An investor in Barron’s observed skeptically that BlackRock is still the world’s largest investor in fossil fuels, with over $19 billion in Exxon stock alone, as well as large interests in Chevron, ConocoPhillips, and BP.

Some climate activists have cautiously welcomed BlackRock’s announcement, seeing it as the fruit of a long campaign to pressure the firm to divest from companies contributing to climate change and thereby bring greater pressure to bear on responsible corporations and governments., a website critical of the firm and produced by a coalition of environmental groups like the Sunrise Movement and the Sierra Club, had a mixed response to the news. “This announcement is a major shift for BlackRock,” its statement read, “which previously had failed to take meaningful action on climate, and is a very important step in the right direction as the world faces increasing risk from climate change.”

But it also tempered this praise by pointing out that besides its petroleum shares, BlackRock is heavily invested in deforestation-linked industries such as palm oil production, which has devastated southeast Asia’s rain forests, and in agribusiness giants like JBS, a major Brazilian beef producer. The firm’s pivot to focusing on “climate risk,” the statement on observed, is vague. As with any “pivot,” a change in stance is not necessarily a change in direction. Just ask any basketball player. And a promise to divest from “thermal coal,” for example, doesn’t specify what this phrase will apply to: mining companies alone or the electrical utilities that burn the fuel?

All of this raises the question: How can a firm like BlackRock bankroll the palm oil and petroleum industries while pursuing a sustainability policy? Is this simple hypocrisy, a public relations charade? Perhaps, but it’s more complicated than that. When Fink writes, “We are making sustainability integral to the way BlackRock manages risk,” he’s not lying. He just might not mean what you mean by “risk.”

Risk is a complicated word, meaning something very different in colloquial use than it does in finance. In everyday usage, it’s a synonym for “danger”—the possibility that something bad will happen to us if we take a particular action. Sometimes, you might run a risk in the hope that the return will justify the danger: eating one more doughnut, for example, or sledding down the biggest hill in the neighborhood. For the vast majority of humanity, though, the risk of climate change is something we simply want to avoid. There’s no upside at all to floods or crop failures.

But this isn’t what risk means in a financial sense. In this context, the Oxford English Dictionary explains, risk is “the possibility of financial loss or failure as a quantifiable factor in evaluating the potential profit in a commercial enterprise or investment.” For financiers, risk is not something to be avoided but something to be managed: You want to measure and assess it, not eliminate it. It’s central to BlackRock’s mission to help its investors “manage risk and achieve your investment goals,” as the climate letter to investors emphasizes in its very first sentence.

Fink uses “risk” in both senses, interchangeably. Climate change is the most important factor facing investors in the future, he writes, in part because of the “physical risk” associated with rising temperatures but also because of how corporations will weather the transition to a low-carbon economy. The risks to life and land posed by climate change will trigger new reallocations of capital: whether to offer mortgages and insurance in hurricane zones, rebuild shattered areas, invest in renewable energy sources or carbon-sequestration technologies, or to salvage and retool municipal infrastructure.

Managing the investment risk of climate change, in short, does not mean fighting climate change. It means making sure that your investment portfolio earns the highest returns despite climate change or even from climate change. That’s why, from an investment point of view, there’s no necessary contradiction in divesting from coal mines while investing in coal-fired power plants or in financing wind turbines and oil exploration.

The expense of oil exploration is an investment risk, and drilling in the Arctic is a climate risk. Arctic drilling by ConocoPhillips and Chevron is a climate risk that makes a petroleum investment less risky.

And then there’s “sustainability,” the bedrock of the firm’s new investment policy. It’s an alluring word, but a vague one. BlackRock’s letter to investors and CEOs announcing its new climate focus never explains what it means. Does sustainable mean, for example, “fossil fuel free”? ($18 billion says no.) And sustainable for whom—indigenous Brazilians, say, or JBS investors?

Sustainable development, as the phrase is typically used, means development that meets the needs of the present without compromising those of the future—a laudable goal but too general to reliably take to the bank. Here, the devil is very much in the details and specifically in the definition. “Sustainable” is a popular concept in consumer-oriented environmentalism and a concept embraced by energy firms, precisely because it is both uniformly positive and, by itself, totally noncommital. Nobody dislikes sustainability, and it is capacious enough to welcome all comers. It benefits from the fact that it is an inherently comparative term, not an absolute one. That is: To be “sustainable” really means only to be more sustainable than something else that is less sustainable. Driving a 2019 Buick might be more sustainable than driving your grandma’s Buick, but it’s not much of a climate policy.

Critics are right to be skeptical of BlackRock’s announcement and also right to claim victory. It’s a new mark of climate change awareness. That said, no one should expect climate justice to come from Wall Street. The apocalypse, after all, might just make an amazing investment opportunity.