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Larry Fink’s bold climate goal – hot air or new normal?

Charlie Hodkinson-Ashford

It’s the most wonderful time of the year! Larry Fink, Chairman and CEO of BlackRock, has published his annual letter. As always, there are actually two letters – one to CEOs from Fink, and one to clients from the whole Executive Committee.

BlackRock is the world’s biggest asset manager, and a top shareholder in most of the world’s largest public companies. Like it or not, BlackRock wields a huge amount of power and influence, both in markets (“I didn’t know Larry Fink had been made God,” said billionaire Sam Zell in response to one of Fink’s previous letters) and in politics (BlackRock alum Brian Deese was recently named director of President Biden’s National Economic Council, prompting howls from activists and a surprising defense from environmentalist Bill McKibben).

Each year, Larry Fink’s letters spark a debate over the responsible use of that power. Either way, they have had an undeniable impact on corporate action and disclosure.

Here are the key highlights from this year’s letters:

  • Durability is the name of the game – “durable value,” “durable long-term returns” and “durable profits”. The pandemic has accelerated investors’ awareness of environmental risks. “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”
  • BlackRock is “asking companies to disclose a plan for how their business model will be compatible with a net zero economy”, including “how this plan is incorporated into your long-term strategy and reviewed by your board of directors”.
  • BlackRock “strongly supports” a single, global ESG reporting framework and has endorsed the IFRS proposal on standardization. But “while the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting”. Since asking companies to disclose against these standards last year, it has seen “a 363% increase in SASB disclosures and more than 1,700 organizations expressing support for the TCFD”
  • It’s not just about climate. Fink specifically calls out the “S” of ESG. In particular, companies should “have a talent strategy that allows them to draw on the fullest set of talent possible. As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region”.
  • BlackRock is making new commitments for its funds, including launching a new “temperature alignment metric for our public equity and bond funds, where sufficient data is available” (data availability is growing in this area, with CDP, MSCI and S&P Global Trucost among those who have launched temperature-linked datasets in the past year).
  • Further commitments include “launching investment products with explicit temperature alignment goals” and “announcing an interim target on the proportion of our assets under management that will be aligned to net zero in 2030”. BlackRock will also undertake greater scrutiny of climate risk in its actively managed portfolios and “increase the role of votes on shareholder proposals in our stewardship efforts around sustainability” (an area BlackRock has consistently been criticized on).
  • Customization is the area to watch – in November, BlackRock acquired Aperio, a specialist in customized portfolios or so-called “direct indexing”, a kind of hybrid of passive and active investing which is widely seen as the next big disruptor in the industry. This offers new opportunities for ESG integration – “customization allows investors to express their preferences not only around net zero, but also to embed values into their portfolios more deeply”. It also offers BlackRock a way to deal with its “passive problem” – two-thirds of its assets are allocated to index-tracking funds, which it cannot simply choose to invest in more sustainable companies, but it can encourage its clients to do so by providing these options.

So, what’s the verdict? Greenwash or not far enough? The NY Times perhaps says it best: “Many of BlackRock’s rivals suggest that Mr. Fink’s letters are simply good marketing, meant to insulate the firm from greater scrutiny. They may have that effect. But far more profoundly, Mr. Fink’s letters have consistently helped change the topic of conversation in corporate boardrooms.”

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