BlackRock Chairman and CEO Larry Fink’s decision to call out the warnings of climate change in his annual letter has changed Wall Street forever, CNBC’s Jim Cramer said Tuesday.
“From now on, a company that can’t prove it regards the Earth as a stakeholder is liable to get a lower-price-to-earnings multiple, because serious investors now are going to pay up for sustainability,” Cramer said on “Mad Money.” “That’s a very big deal.”
Fink, in a letter to CEOs released earlier Monday, argued a sizable redistribution of capital will happen “sooner than most anticipate” as investors come to terms with the risks posed by climate change.
BlackRock, which is the world’s biggest money manager with almost $7 trillion in assets under management, will also put “sustainability at the center of our investment approach,” Fink wrote.
That will include launching new investment products that screen for fossil fuels, as well as departing investments in fossil fuel-oriented companies, such as thermal coal producers, he wrote.
Cramer said these types of actions from BlackRock could lead to some “high-profile proxy fights” but most importantly it changes the calculus among investors.
“If companies don’t take action, one of the largest asset managers in the world will pay less for their earnings. Like it or not, sustainability now matters to the stock market,” he said. “And if you haven’t factored it in yet, the train is leaving the station.”
Cramer said he believes Fink’s call to action will help usher in an era where CEOs will be forced to answer questions from boards of directors about sustainability commitments. Cramer also suggested more companies will begin paying executives bonuses for their carbon-footprint reduction, like Clorox already does.
“Powerful investors like Fink will insist on knowing what a company’s plan is to address climate change,” Cramer said. “Fund managers will start to sell stocks of those companies that ignore these issues.”
Ultimately, Cramer said, Fink’s move is about giving companies “cover” to begin moving past policies that hurt the environment, even if such decisions carry short-term damage to earnings.
The practice of so-called ESG investing — considering environmental, social and governance issues when making investment decisions — has been an emerging theme on Wall Street as clients look to put their money into companies with causes and cultures that they can believe in.
Fink finally represents the champion on Wall Street the movement needed, Cramer said.
The effects of climate change are likely to be far-reaching, touching all corners of life, from where people can live to the availability of food and worker productivity.
If the world’s greenhouse gas emissions proceed at their current levels, the atmosphere is expected to warm up by 1.5˚C in about 20 years. Warming starting at 2˚C may lead to an international food crisis in coming years, according to a recent report from the U.N.’s scientific panel on climate change.
Researchers from the International Monetary Fund and the University of Cambridge also recently warned that persistent increases to global temperatures could reduce world real GDP per capita by 7.22% by 2100, if no major policy steps are taken.
“If there’s even a 50% chance that the dire predictions of climate scientists are true, and I think that they are, well, it’s going to be very bad for business,” Cramer said. “And if capitalism can’t regulate itself on this issue, you better believe governments around the world will eventually do it for capitalism.”