Blackrock: The future is ESG — Larry Fink’s Letter to CEOs
Summary
Environmental, social and governance topics will shape future investments.
The market continues to accelerate towards sustainable investments. This needs to be backed by data and risk management which is strongly demanded by investors. Blackrock asks CEOs to take environmental concerns serious to enable long-term growth. But they should not forget about the “S” — social aspect of ESG.
A tradition with importance
Laurence Fink is the CEO and chairman of BlackRock. Since 2012 he issues a letter to their clients CEOs. This letter is publicly available on the company’s website. Therefore, it reaches far beyond the circle of BlackRock clients and investors. Given the power of BlackRock on the financial market and politics, this letter can be considered not just as any online piece of text. It is a letter that can create impact and momentum as it reaches out to people with influence and power.
Handle with care
If you count the words in Larry Fink’s letter that relate to environmental, social and governance issues, you notice a sharp increase over the past two years . Not only due to his letters he is known for his active stand towards the importance of ESG. Sure, BlackRock can be criticized for diverse actions that support non-sustainable business practices. Being a major shareholder in most of the biggest coal mining companies could be considered a hoax. Therefore, a letter issued by its CEO needs to be put into context and treated with care. But rest the case for now and see which insights the letter has on offer.
2020 insights
Due to the pandemic, 2020 has been a turbulent year, that has transformed all our lifes. Not only have the consequences been severe but they were also uneven. Some sectors suffer record losses, while others skyrocket. Also some countries have been hit harder than others. The pandemic is also particularly hard for small business and families that struggle to pay their monthly checks. The last year accelerated inequalities and retirement problems. These are only two trends that run into the opposite of what we desire based on the sustainable development goals.
However, not only was the pandemic an accelerator for undesirable outcomes but also for positive ones. In 2020 many businesses have made a move to implement more sustainable business practices. Also BlackRock’s customers prioritize sustainability.
Climate risks are investment risks.
Sober view on the environmental crisis
Essays on climate change often express hope, sometimes with pathetic wording. Larry Fink also hopes for a more sustainable future. He does this though in the fashion of investors, trying to approach it from a rational standpoint and sober arguments: Ignoring known risks undermines investments. Global warming is a known risk. If companies ignore the risk by global warming, their business becomes morerisky. Also BlackRock’s portfolio would get more risky. Financial theory is all about risk and return. Investors look for the highest returns while keeping the risks low. Therefore, it is in BlackRock’s interest to take a stand for sustainability and protect their own profits. In short, climate risks are investment risks.
Numbers of hope
Despite the problems we face, sustainable investment surged in the recent years. BlackRock lays down the numbers to show that things accelerated in 2020. There is a 96% global increase of investments in sustainable assets by ETFs and mutual funds. Additionally, plenty of financial products entered the market that claim sustainability. The climate crisis is also an investment opportunity with positive returns: 81% of sustainable indices outperformed benchmark indices in 2020. Companies with higher ESG ratings outperformed others.
Fuel for momentum
These numbers seem promising for sustainable finance. Nevertheless, the BlackRock letter contains a positive outlook for the upcoming years due to some of the following arguments. According to Larry Fink, companies earn trust of investors, employees, clients and other stakeholders by acting sustainably. Business performance likely suffers without this trust.
More data becomes available on a firm’s sustainability aspects and tools evolve that leverage this data to support transparency. Larry Fink knows that ESG compliance can be an administrative burden. But also the ESG taxonomy evolves along the way and will become clearer on how to report. Implementing sustainable measures will get easier with clear-cut taxonomies.
A stable society has an economic value on its own.
Do not forget about the “S”
Next to climate concerns, there are other concerns within ESG worth mentioning. The attack on the US capitol and what it tells about society shows the relevance of the “S” in ESG. Long-term growth needs social and political stability. Unfortunately, inequality increased during the pandemic as it was historically the case for other economic crises. But even before, the trend within social inequality has been alarming. However, a healthy and stable society has an economic value on its own. Larry Fink highlights that ESG does not stand for three separate concepts but for a highly intertwined framework. There might be a bias towards the “E” in ESG, but it renders worthless when investors loose focus on societal inequality. As business activities are a significant component of society, let us use this as a learning for future business activities.
From fragility to stability
The pandemic created a fragile situation. Larry Finks letter might be seen as a piece of well-constructed corporate communication. In the end it is up to the CEOs to prioritize ESG topics. At least it is a text that can have a positive impact on whoever reads it. Finally, it always comes down to individuals to aim for change. In any way it should be in everyone’s interest to do their best to move from a fragile situation to a stable and resilient future. This could be the bottom line and inspirational note of Larry Larry Fink’s letter.
Originally published at http://www.towardssustainablefinance.com on February 17, 2021.
