In his 2020 annual letter to CEOs, Laurence Fink, CEO and Chair of BlackRock, the world’s largest asset manager, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” What’s more, he made it clear that companies needed to step up their games when it came to sustainability disclosure. (See this PubCo post.) At the Northwestern Law Securities Regulation Institute this week, former SEC Chair Mary Schapiro said that, at companies where she was on the board, Fink’s statement had “an enormous impact last year.” Fink has just released his 2021 letter to CEOs, in which he asks companies to disclose a “plan for how their business model will be compatible with a net zero economy.” Will this year’s letter have the same impact?
Fink begins his letter with the inevitable elephant in the room—the COVID-19 pandemic and its impact on, well, everything. That impact, he recognizes, has been “highly uneven,” with some industries flourishing and others suffering, leading to severe unemployment, “small businesses shuttering daily, and families around the world struggling to pay rent and buy food.” The pandemic, he observes, has also “accelerated deeper trends, from the growing retirement crisis to systemic inequalities. Several months into the year, the pandemic collided with a wave of historic protests for racial justice in the United States and around the world. And more recently, it has exacerbated the political turmoil in the U.S. This month in the U.S., we saw political alienation—fueled by lies and political opportunism—erupt into violence.”
But he recognizes some signs of hope, such as dazzling scientific innovation, corporate responses to calls for racial equity, and remarkably, significant efforts by business to “confront climate risk.” Remarkably because, when the disruptive effect of the pandemic was first realized in March, conventional wisdom said that the crisis was all-consuming and “would divert attention from climate. But just the opposite took place,” he said, with a speedier reallocation of capital to sustainable investments than he had originally anticipated. Why? In Fink’s view, “the pandemic has presented such an existential crisis—such a stark reminder of our fragility—that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response.”
Fink continues to believe that climate risk is investment risk and that we are now looking at an accelerating transition to sustainable investment, making climate transition “a historic investment opportunity.” In his view, to achieve a net zero economy—“one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC”—the entire economy must be transformed. Every company will be “profoundly affected by the transition,” but those companies that have articulated strategies and plans to achieve that transition “will distinguish themselves with their stakeholders.”
To that end, investors need “consistent, high-quality, and material public information” and analysis to assess how well companies are prepared for the risks and the transition. Last year, Fink advocated that companies report using the frameworks of the Task Force on Climate-related Financial Disclosures (TCFD) (see this PubCo post) and the Sustainability Accounting Standards Board (SASB) (see this PubCo post), and saw a “363% increase in SASB disclosures and more than 1,700 organizations expressing support for the TCFD.” While BlackRock continues to endorse these two frameworks, Fink indicated support for “a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns.”
Fink’s big ask of companies for this year presents a significant challenge on climate: he wants companies “to disclose a plan for how their business model will be compatible with a net zero economy” and “to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.” As the Chair and CEO of the world’s largest asset manager, Fink has undeniable clout. But how well companies respond to this challenge remains to be seen. Some companies may be already on their way to providing this type of disclosure. For others, however, it could be a tough slog and involve a longer term process that they can only begin to undertake this year.
In its letter to clients, BlackRock indicates its intent to use stewardship to ensure that its portfolio companies disclose the business plan discussed above and that they “are mitigating climate risk and considering the opportunities presented by the net zero transition.” It will also use its stewardship role to increase “the role of votes on shareholder proposals in our stewardship efforts around sustainability.” According to the NYT’s DealBook, last year, BlackRock “voted against 69 companies and against 64 directors for climate-related reasons, and it put 191 companies ‘on watch’.” BlackRock also intends to apply a “heightened scrutiny” framework to establish a “focus universe” of holdings that are particularly risky as a result of “high carbon intensity today,” “insufficient preparation for the net zero transition” and “low reception to our investment stewardship engagement.” In the absence of progress and engagement, BlackRock “will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns. Conversely, we believe companies that distinguish themselves in terms of their emissions trajectory, transition preparedness and governance will often represent an opportunity for our clients.”
In conclusion, Fink turns back to his 2018 call for stakeholder capitalism—his request that each company articulate its “purpose” and how it benefits all stakeholders, which requires that the company consider its role in the community, its management of its environmental impact, its efforts to create a diverse workforce, its ability to adapt to technological change and take advantage of new opportunities, its retraining programs for employees in an increasingly automated world and its efforts to help prepare workers for retirement (see this PubCo post). It turns out that, not only do “purposeful companies” with better ESG profiles, outperform their peers, they also enjoy a “sustainability premium,” a performance premium based on stakeholder trust and connection that enables them to more effectively “understand and respond to the changes happening in the world” and to better attract customers and talent. That is, providing value to stakeholders will also allow companies to “compete and deliver long-term, durable profits for shareholders.”
Moreover, he contends, the current moment—whether it be the focus on racial inequity and injustice or the economic and political crisis—demands that companies be responsive to all stakeholders. Even climate change inflicts its damage inequitably. Accordingly, Fink asks that disclosures in company sustainability reports about “talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region.” To address the challenge of the pandemic, and the prevailing “tremendous economic pain and inequality,” he concludes, “we need companies to embrace a form of capitalism that recognizes and serves all their stakeholders.”
