The much anticipated annual letter from BlackRock CEO Larry Fink was released last Tuesday, January 14. While past letters have made it clear that the world’s largest asset manager envisions a socially and environmentally responsible role for business, the 2020 BlackRock letter to CEOs demonstrated unprecedented urgency around the climate crisis. Fink wrote that BlackRock will be “making sustainability integral to portfolio construction” and made specific demands for transparency from the companies in which the firm is invested.
“Climate change has become a defining factor in companies’ long-term prospects,” Fink wrote in the letter’s opening paragraphs. “Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis. Companies, investors, and governments must prepare for a significant reallocation of capital.”
Fink framed the steps he proposed as integral to fiduciary responsibility, given the long-term risks posed by climate change—an approach some have long pushed asset managers to adopt.
But perhaps most striking was Fink’s announcement that BlackRock’s voting power will be deployed to enforce these demands. The firm, he said, “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
The Measurement Question
What does it mean to make “sufficient progress” in these areas? A problem widely noted among investors, including Larry Fink himself, is the lack of a single widespread standard for measuring impact. With the caveat that “BlackRock itself is not yet where we want to be,” Fink outlined BlackRock’s adoption of the Sustainability Accounting Standards Board (SASB) standards for reporting sustainability information and the Task Force on Climate-related Financial Disclosures (TCFD) for evaluating and reporting climate-related risks.
“We recognize that reporting to these standards requires significant time, analysis, and effort,” Fink added, before making his key demand of companies in which BlackRock is invested: to publish disclosures “in line with industry-specific SASB guidelines . . . or a similar set of data in a way that is relevant to your particular business” as well as climate-related risks “in line with the TCFD’s recommendations.”
BlackRock’s public championing of these frameworks will likely help scale their adoption. What is less certain is whether the transparency will have a catalytic effect on capital shifts, or become yet another unread report. Fink could only speak for BlackRock, but his message was clear: “We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.”
The Role of Regulation
A significant open question is the “scale and scope” of future government action on climate change. “This challenge cannot be solved without a coordinated, international response from governments, aligned with the goals of the Paris Agreement,” Fink wrote, highlighting BlackRock’s partnership with the governments of France and Germany through the Climate Finance Partnership, a public-private partnership for climate-resilient infrastructure investment.
But, amid exhortations that “every government, company, and shareholder must confront climate change,” Fink sounded a note of caution about the pace of change that investors can expect. In what may have been a response to criticism about BlackRock’s continued investment in fossil fuels, Fink wrote that “[w]e need to be mindful of the economic, scientific, social and political realities of the energy transition. Governments and the private sector must work together to pursue a transition that is both fair and just—we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world.”
So far, the letter has attracted attention from many investors and environmentalists, both those who praise the letter and others who remain skeptical of BlackRock’s commitment to its words. What remains to be seen is whether the sunlight prescription that Fink proposes will be a sufficient disinfectant for a world still powered by unsustainable energy. “Ultimately, purpose is the engine of long-term profitability,” he wrote. Let us hope he is right.