The graffiti message from the group Avenir en feu (Future in Flames) at the Paris headquarters of the American asset manager Blackrock was pretty clear: "Blackrock Assassins.” In early February, dozens of young people stormed the offices in the city center to protest against the French government’s proposed pension reforms. They accused Blackrock, the world’s largest investor with a portfolio of over $7 trillion, of having pushed President Emmanuel Macron to pursue "environmentally destructive projects” that the company also stood to profit from. The spectacle ended only after a major police deployment.
For Blackrock founder and CEO Larry Fink, the violence by environmental activists during his visit was extremely bothersome, because the investor is currently seeking to insert himself at the helm of the green movement. Fink, a capitalist through and through, shocked the world’s most important corporate leaders recently with his annual letter. In it, he announced that companies that are doing too little by way of climate protection will be punished in the future by means of withholding funds or votes of no confidence at shareholder meetings.
At the World Economic Forum, the pinnacle of capitalism, Fink demonstratively wore a climate change-themed scarf around his neck. The strips of color woven in to the "Warming Stripes Scarf,” from blue to deep red, are intended to symbolize average temperatures from 1850 to 2018, with one stripe for each year.
A Sudden 180-Degree Shift?
In the past, Blackrock has never really shown much interest in environmental issues. On the contrary, at shareholder meetings, Fink’s people often voted against proposals to encourage companies to do more to to combat climate change.
Fink’s change of heart is as bizarre as it is significant. What began in 2018 with Greta Thunberg’s school strike in Stockholm has long since developed into a global climate movement, and Davos made it clear that boardrooms are listening. Global warming -- though currently overshadowed by coronavirus fears -- has become one of the most crucial questions now facing the economy.
As such Fink, the world's most financially powerful capitalist, and Thunberg, the most powerful representative of the climate protection movement, are forming an unlikely alliance that could permanently change the rules of the business world. Politicians, it would seem, are unable to do so: Major countries like the United States and Brazil are ignoring the Paris climate protection agreement, while the Europeans, though they have announced a "Green Deal,” are getting bogged down in the details.
What, though, will be the outcome of this unusual alliance between the market and morals? How much of it is just PR? And what steps are companies going to take to suddenly make themselves environmentally friendly and fair?
Growing Pressure from Activists
At German industrial giant Siemens, climate protection activists got closer to the company’s management than ever before in the run-up to the company’s most recent annual shareholders’ meeting in early February. Greenpeace set up a 30-meter-long ladder at Siemens headquarters in Munich and climbed onto the roof. They unfurled protest banners, pitched tents on the company’s rooftop terraces and blew white smoke into the air. It sent a strong symbol that powerful corporations and executives are now vulnerable to such attacks.
Climate campaigners had previously carried out similar protests at other companies. Members of the organization Ende Gelände, which is campaigning to stop the use of coal, built tree houses in the Hambach forest in western Germany in an effort to prevent the digging of a coal mine by German energy giant RWE. Members of the Extinction Rebellion movement, meanwhile, occupied the coal-fired power station Datteln 4 owned by RWE’s competitor Uniper. Then the Sand im Getriebe (Sand in the Gears) movement tried to block the IAA automobile trade fair in Frankfurt.
There’s no master plan for which companies the activists intend to attack next and coordination among the groups tends to be sporadic. But they’ve nevertheless succeeded in shifting the sentiment of society in their favor -- and large corporations seem to be coming around to their ideas.
This has become visible at the shareholder meetings of major German companies like pharmaceuticals giant Bayer, chemicals multi BASF, carmaker VW and insurer Allianz, where environmental and human rights activists have become regular guests. But whereas management and supervisory boards used to just smile and nod, they are today actively courting such groups.
At European travel conglomerate TUI, for example, an umbrella group of critical shareholders and the nature conservation organization NABU strongly criticized working conditions and the emissions of the company’s cruise ship fleet at the annual meeting on Feb. 11. Just a year or two ago, they would have had trouble finding an open ear at the company, but this year, TUI CEO Friedrich Joussen reacted even before the spokespeople for the critical groups could make their way to the microphone. "We urgently need new fuels that are not based on fossil fuels,” he told shareholders. TUI said it will announce further details at the end of this year as part of its new sustainability strategy.
Investors Are Demanding Sustainability
Executives are driven by fears of aggressive protests like the one that unfolded at Siemens. "Companies are not well prepared for campaigns by environmental activists," says Michael Diegelmann, CEO of the Cometis agency, which advises companies on how to deal with shareholders and the public. He says it has become more important than ever to "recognize and react to image damage faster.” Especially given that investors are applying increasing pressure.
By the end of 2018, some $30 trillion worldwide had been invested based on sustainability criteria, according to the Global Sustainable Investment Alliance, and the figure is rising. Countless investor initiatives have also been established, ranging from the Carbon Disclosure Project to Climate Action 100+. But the most visible sign of the change in heart is the complete turnaround made by Blackrock’s Fink.
Fink, though, hasn't yet been able to act on his newfound environmental awareness because his company's business model hinders him from doing so. Blackrock actively invests only a small part of the assets that are entrusted to it, with most of it flowing into index funds, so-called ETFs (exchange-traded funds) that precisely replicate price barometers such as the blue chip German DAX or the Dow Jones indices, which are blind to climate policy. The DAX and Dow Jones indexes also include utility companies that operate coal-fired power plants and companies from other CO2-intensive industries. Blackrock is unable to withdraw its money from these companies and it also doesn't have the know-how to assess sustainability.
As such, when seeking to leverage his company's financial power, Fink is forced to rely on external expertise on ESG issues. ESG is the formula established by the financial world in order to divide sustainability into three categories: environment, social and governance. Fink’s is betting on getting index providers like MSCI to scrub their lists of companies considered to have bad environmental records so that he can invest his money with a good conscience. But critics accuse Fink of merely passing the buck order to save his business model.
The effect, though, is the same: Index providers are among the beneficiaries of the boom in sustainability. "This is one of our major drivers of growth,” says Remy Brian, who heads the ESG department at MSCI. His people review around 13,500 companies using 35 different ESG rating criteria.
Bert Flossbach, an asset manager in Cologne, Germany, has doubts that this alone is enough to ensure that the money goes to the companies that are run in the most environmentally friendly and socially just way possible. He considers the flood of ESG products to be dangerous labeling fraud triggered by the optimism of major investors like Blackrock. "What Larry Fink is doing is green washing at its best,” says the founder of the asset management company Flossbach von Storch.
He says politicians can best combat climate change by setting effective framework conditions - by pricing CO2 consumption more effectively, for example. "But they’re not doing it out of fear of (protestors like) the yellow vests and are instead shunting responsibility to the financial industry.” He argues that the financial industry can help by steering capital flows in the right direction. But he warns that if investors raise the wrong expectations with ESG, they will only be creating the next equivalent of the diesel scandal in the German automobile industry: "consumer deception about sustainable investments on a grand scale.”
Flossbach recently set an example at Daimler. Until a year ago, the asset manager had been one of the automobile company’s largest shareholders, holding 1.8 percent of its stock. This autumn, though, Flossbach unloaded its shares because Daimler hadn’t met its ESG requirements.
The article you are reading originally appeared in German in issue 9/2020 (February 22nd, 2020) of DER SPIEGEL.
The E for the environment? Flossbach complains that Daimler had pursued a disastrous communications policy during the diesel affair and moved too late to adopt alternative drive systems. The S for social? He says that Daimler management has accumulated such massive pension burdens that it is now depriving the company necessary funds for investments that are urgently needed, and that this is happening at the expense of the future viability of the company, it’s owners and its employees. And the G for good corporate governance? "What Daimler management is doing is not sustainable governance,” the asset manager complains.
But the car companies can also provide a good example of how the interaction between politics and investors can get an entire industry on the right track. Automobile manufacturers, after all, pass the pressures they are facing on to their suppliers, thus creating a spiral of forced good deeds.
No one knows this better than Klaus Rosenfeld. A tall man with a somewhat disheveled head of hair, Rosenfeld worked as a banker before the financial crisis brought him to the German automotive supplier Schaeffer, which he now heads. The family-owned business has long been formulating its own sustainability goals, but concrete, substantial steps were few and far between. Rosenfeld wants to change that. He feels he has no choice.
"In the past year, the demands of customers, investors and a critical public for sustainable corporate management have changed significantly and focused strongly on climate change,” says Rosenfeld. Meanwhile, carmakers want to know the exact carbon footprint of the parts they purchase from Schaeffler. In response, the company’s 2019 sustainability report will for the first time include concrete figures for CO2 emissions. Moving forward, even bonuses paid to members of Schaeffler’s executive board will be based in part on whether certain internal targets for reducing CO2 emissions are achieved.
But compliance with other sustainability issues, such as working conditions and human rights, is more difficult to monitor. The German government has sought to address this issue with its "National Action Plan for Business and Human Rights," and attempt to take a closer look at the supply chains of German companies that prefer to manufacture their products where labor is cheap and environmental laws are lax. But the plans are facing a number of political hurdles.
Several ministries are bickering over whether the law is even needed, and the disagreement is anything but a party-line divide. The business lobby, meanwhile, is trying to take advantage of the dispute to derail the effort.
France is further along on this front. In 2017, it became the first country in the EU to pass a law holding companies liable for offenses committed by their suppliers. The initial draft regulation was watered down somewhat: It only applies to companies with more than 5,000 employees, for example, executives have no criminal liability and when making a claim, victims must prove beyond doubt that they have been affect.
Nevertheless, the law seems to be having an effect and initial lawsuits have been filed. Two of them target the French oil company Total, the first having been brought by environmental organizations and the French authorities. They accuse Total of not being sufficiently vigilant enough and of "green-washing,” claims Total denies.
The second suit is over a planned oil field project in Uganda and a 1,445-kilometer pipeline to Tanzania. Together with other NGOs, Friends of the Earth is accusing the corporation of environmental and human rights violations. They claim that close to 5,000 people have already been displaced from their land in Uganda without adequate compensation.
Total has sought to counter the claim with data from studies. The company claims that it consulted with 70,000 people in Uganda and Tanzania and that only 617 households have been affected. The company also says that compensation is being provided to residents in accordance with local law and the rules of the International Finance Corporation.
The Total case shows that responsibility today means more than a good slot in sustainability rankings, in which French companies fare relatively well, anyway.
So how do corporations determine which types of deals are still possible and whether or not they should accept an order?
Auditing for Sustainability
In Germany, insurance giant Allianz plays a kind of double role in this regard: As an insurer, it is the target of pressure by activists when it comes to some controversial projects. But as one of the world’s largest asset managers, it is also in a position to exert pressure itself. The insurance company has defined 13 sensitive business areas for which a sustainability audit is mandatory. They range from the agricultural and oil and gas industries to the sex sector. Sensitive cases are pushed up to the board of directors, where an ESG committee makes a decision.
In 2018, Allianz reviewed 631 individual cases in more detail. But it only moved to stop around one out of 10 transactions from going through.
Environmentalist groups attacked the insurance giant last year because it reportedly provided insurance to Brazilian mining company Vale. In January 2019, the tailings dam at an iron ore mine operated by Vale suffered a catastrophic failure. It was a classic case for the Allianz review process, which may have failed in this instance. The company has declined to comment on the incident and won’t even confirm whether it was involved as an insurer. Not exactly a commitment to transparency.
It’s also unclear what path Allianz intends to take to achieve its stated goal of CO2 neutrality by 2050. The company is expected to announce a clearer strategy in around a year’s time. So far, the company hasn’t even withdrawn from gas and oil investments.
However, the Munich-based company has ruled out any support for coal-based business models. "Nor would we finance or insure the infrastructure for a coal mine or a coa-firedl power plant if it is built primarily for this purpose,” explains Allianz sustainability manager Urs Bitterling. Such moves have made it possible for Allianz CEO Oliver Bäte to avoid the kind of disaster experienced by Siemens CEO Joe Kaeser, who suffered major image damage after his company supplied signaling technology to a coal mine in Australia.
But does that mean that Allianz will automatically forego investing in Siemens Energy, Siemens’ energy division, which is responsible for the coal business and is planning to make an initial public offering in the autumn?
Bitterling attempts to provide himself with a bit of wiggle room when answering. "In borderline cases, it’s extremely important that the company in question can show a clear path toward the climate goal,” he says.
A Test for Companies
The IPO of Siemens’ energy division is expected to serve as a test for whether investors can still be found for companies with climate-damaging business models. Almost half of the company’s revenues still originate from fossil fuel-related businesses like the construction or equipping of coal and gas power plants or oil production.
Fund managers focusing entirely on climate-friendly business models would need to steer clear of the new Siemens subsidiary altogether. Despite the investor’s new green bent, Blackrock, which owns 5 percent of Siemens, is likely to remain a major shareholder in Siemens Energy. With their index-based strategy, the Americans don’t really have a choice. But it will be difficult for Michael Sen, who has been designated the new head of Siemens Energy, to win over other important investors who want to withdraw from coal, oil and natural gas, like the Norwegian sovereign wealth fund.
Sen is fond of placing wind power at the forefront when presenting the new company. Speaking to employees, he raves about a green energy giant that will be able to offer customers everything they need to turn to renewable energies: wind power, green hydrogen and bridging technologies that will be necessary until a final phase-out of fossil fuels can be completed.
It’s a brave new world Sen is sketching out – one that would please investors and activists alike. There’s just one hitch: It doesn’t exist yet. Wind power currently accounts for only one-third of the company’s revenues. And the share of profits is significantly lower.