GILES RAFFERTY, Corporate Communication and Media Advisor

Restating that climate risk is investment risk, Larry Fink, the Founder, Chairman and CEO of Blackrock, the world’s biggest and arguably most powerful investor, is calling for companies to share their plans for the transition to a net zero economy in his annual letter to CEOs.

Mr Fink started his series of ‘Dear CEO’ letters in the wake of the GFC. They are designed to highlight the issues he sees as being pivotal to creating enduring, sustainable value for all stakeholders. Blackrock controls almost US$9 trillion dollars so what Mr. Fink sees as important is worth looking at.

A Tectonic Shift in Capital Allocation

In January 2020, prior to the coronavirus pandemic, the Blackrock boss predicted markets would start to price climate risk into the value of securities, sparking a fundamental reallocation of capital. Once COVID-19 took hold conventional thinking was the crisis would divert attention from climate risk to the existential threat of the virus.

In fact, Mr. Fink notes just the opposite happened. From January to November 2020 investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019. The predicted reallocation of capital was, if anything, accelerating in the face of the pandemic.

The Net Zero Transition

The changes in investor behaviour are being reflected in various policy responses to climate change around the world. In 2020 the EU, China, Japan, and South Korea all made commitments to achieve net zero emissions. Blackrock’s view is the drive towards net zero emissions will continue to build momentums in 2021 with dramatic implications for the global economy.

Mr Fink predicts there will be no company that is not be profoundly affected by the transition to a net zero economy – one that emits no more carbon dioxide than it removes from the atmosphere by 2050. The investment boss claims companies with a clear strategy for this transition will benefit while laggards will see their business and valuations suffer.  Mr Fink added that while the transition will inevitably be complex and difficult, it is essential to building a more resilient economy that benefits more people.

I have great optimism about the future of capitalism and the future health of the economy – not in spite of the energy transition, but because of it.” Larry Fink, Chairman and CEO Blackrock, January 2020

Data and Disclosure Matter

The problem for investors who are looking to prepare their portfolios for the transition to a net zero economy is the absence of a single standard by which to assess sustainability risks. Blackrock seeks to address this by asking companies to report to Task Force on Climate-related Financial Disclosures (TCFD) standards alongside the Sustainability Accounting Standards Board (SASB) standards, which covers a broader set of material sustainability factors.

Given Blackrock’s view that energy transition will be central to every company’s growth prospects, it is asking companies to disclose a plan for how their business model will be compatible with a net zero economy – one where global warming is limited to well below 2ºC and there are net zero greenhouse gas emissions by 2050.  The investment house is asking companies to disclose how this plan is incorporated into their long-term strategies and will be reviewed by the Board.

In addition, Mr Fink is calling on private companies to adopt TCFD reporting and issuers of public debt to disclose how they are tackling climate risks. The Blackrock boss has also challenged pandemic stressed Governments to undertake massive climate infrastructure projects that will need creative public-private partnerships with better ESG disclosure to attract capital.

Blackrock is practicing what it preaches. The company is carbon neutral and has committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.

Stakeholder Capitalism Drives Better Returns

Over the course of 2020, Mr. Fink notes how purposeful companies, with better environmental, social and governance (ESG) profiles, have outperformed their peers and enjoyed a “sustainability premium”.  The investment chief says it is clear that being connected to stakeholders – establishing trust with them and acting with purpose – enables a company to understand and respond to the changes happening in the world, while those that don’t find it harder to attract customers and talent, especially as young people increasingly expect companies to reflect their values.

Within this context Mr. Fink identifies racial justice as a challenge that cannot be solved without leadership from companies, claiming a company that does not seek to benefit from the full spectrum of human talent is weaker for it. Blackrock’s expectation is companies have a talent strategy that allows them to draw on the fullest set of talent possible.

We ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region” Larry Fink, Chairman and CEO Blackrock, January 2020

Mr Fink takes heart from the many companies that are embracing the demands of greater transparency, greater accountability to stakeholders, and better preparation for climate change. Although the Blackrock boss does point out business leaders and boards will need to show even greater courage and commitment to their stakeholders and move even faster if they are to create more jobs, more prosperity and more inclusivity. Mr. Fink concludes his letter by expressing great confidence in the ability of businesses to move to a more inclusive capitalism that builds a brighter and more prosperous future for the world.