With the recent publication of Larry Fink’s letter to CEOs and the BlackRock ExCo’s letter to clients, the asset manager has affirmed its leading voice within the growing topic of sustainable investment. Both letters were underpinned by a new investment approach that integrates sustainability to a new level. The clear message is that this isn’t just about saving the world, certainly not in a political point-scoring sense, but about the fund’s unchanged priority – returns, given its role as a fiduciary.
The reality is that organisations, be it an unlisted fund or a multi-national company, can no longer effectively compete for capital in today’s market if they’re not effectively communicating their sustainability credentials.
While in the past there may have been a degree of market cynicism about the compatibility of returns and sustainability, BlackRock’s narrative and new direction demonstrates how central sustainability has become in the decisions of both investors and investment strategists.
As BlackRock highlighted, this isn’t (just) because investors are feeling the heat of their moral conscience, but because of the growing realisation that these factors can, and do, impact long-term value, and long-term returns on investment. Linking high ESG (Environmental, Social and Governance)-risk industries (like thermal coal) with lower return profiles isn’t new, but Fink goes further to conflate climate and investment risk – “investors are increasingly… recognizing that climate risk is investment risk.”
Funds around the world will no doubt be having similar conversations with their investors, but the significance of the world’s largest asset manager stating that climate change is “almost invariably the top issue that clients around the world raise” and that an increasing number of them are “looking to reallocate their capital into sustainable strategies” is huge.
Using a unique platform to drive change
Larry Fink’s letter to CEOs was direct, frank and needed, and an excellent demonstration of how leaders like him can, and should, act as statesmen on critical issues like climate change. Indeed, within the letter the firm is even elevated to nation-state level, with a declaration that it has “joined forces with France, Germany and global foundations.”
The call to action is clear, and putting corporates, and their own leaders, in the spotlight will be a welcome move by many of those frustrated by a lack of tangible action on climate change. It brings pressure to meet enhanced ESG demands, and then importantly to communicate them in a way that is transparent, measurable, consistent, and ideally standardised.
Stepping up to the challenge
Given BlackRock’s scale and influence, its newly defined position on sustainability and relating actions will play a big role in helping to bring sustainable investing into the mainstream. While this is already happening, it’s becoming increasingly clear that whether or not companies step up to the challenge will have big consequences for their ability to compete for global capital and liquidity.
Credentials and disclosure
With new levels of accountability for sustainability credentials (in the form of votes against directors), as well as more tools for investors to allocate capital and liquidity to stronger ESG-performing companies, company directors and management are under a new level of pressure to improve their ESG efforts.
They then need to do a lot more to meaningfully disclose a comprehensive range of sustainability-linked factors. Fink highlights a few in his letter – climate change preparedness, diversity, supply chain sustainability, data protection. Given the spectrum of stakeholders and broadening understanding of what sustainability actually means, this is just a small handful.
A lot has been discussed about the need for standardised disclosure, and markets will only get closer to achieving this through action from relevant institutions (e.g. BlackRock’s request for companies to publish information aligned with the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures) and, perhaps more importantly, pressure from end investors.
Disclosure also needs to go beyond an annual reporting cycle, with evidence of how these factors are integrated within strategy and risk management being communicated continually and consistently – website micropages, fresh video content, online Q&A events, social media, infographics, factsheets, speeches, and media engagement to name just a few platforms.
Engagement and reputation
One of Fink’s strongest statements is that “purpose is the engine of long-term profitability”. This will ring true to anyone that appreciates the foundations of corporate affairs – that there is a direct link between a company’s ability to deliver returns and their ability to define what they stand for, and ensure they act towards this goal in every aspect of their business model.
From an engagement perspective, even more interesting is the elevation of the importance of engagement – and another direct link made between a company’s “responsiveness to stakeholders” and ability to attract investment (and therefore their cost of capital). It’s this that underpins strategic communications as a key business imperative.
These letters were published as Davos 2020 prepared to kick off, with a theme of “Stakeholders for a Cohesive and Sustainable World”. Of course a stakeholder approach isn’t new, and 181 leading organisations signed up to a globally recognised “Purpose of Corporation” last year, which itself formalised the role of a corporation to serve a broad range of stakeholders not just shareholders.
Stakeholders therefore need to be identified and understood, and while a central mission statement or purpose needs to be reflected across core messages, the information they want, and need, to hear (and how) will vary, given a diverse range of objectives, priorities and concerns.
A new bar for the world of asset management
A few commentators have referred to BlackRock’s move as “laying down the gauntlet” for the rest of the industry. It certainly has set the bar for fund managers all over the world, putting pressure on them to define, or improve, integrate and communicate their own sustainability narrative.
While the business rationale for sustainable investing may well be growing in acceptance, there are still areas such as impact investing where there are perceptions of an inconsistency between the search for yield and objective of delivering social good. BlackRock itself has made a recent move into this area, building its profile as an investment strategy, but challenges remain and there is still a lot of work to be done.