The Investment Climate
Every year since the financial crisis of 2008-09, Laurence Fink, the founder and CEO of BlackRock, has written a letter to CEO’s. In this letter, the leader of the world’s largest asset manager outlines the priorities which his organization would like to see in the companies in which they invest. It’s a call to action, a request backed by the strength of almost $9 trillion in investor funds, seeking quality companies in which to invest. Last year, Mr. Fink made headlines by announcing that his firm would be incorporating environmental sustainability as an essential factor in evaluating all their investments. He announced that companies which failed to consider climate risk in their long-term plans would not be candidates for inclusion in his firm’s portfolios, which include the iShares family of Exchange Traded Funds. He made it clear that “climate risk is investment risk,” and that his company has a fiduciary obligation to consider all investment risks, including those arising from a changing climate.
In his 2021 letter Mr. Fink goes even further, calling on CEO’s to ensure that their companies create and disclose a board-reviewed plan for making their businesses compatible with a net-zero economy – one that emits no more CO2 than it removes from the atmosphere – by 2050. This goal is congruent with the Paris Agreement, which aims to contain global warming to less than 2 degrees C above pre-industrial averages. Mr. Fink acknowledges that this will not be easy, requiring a decrease of 8-10% per year in emissions due to human activity. He notes that there is no business model that will be unaffected by this expected transition, and reasons that the most successful companies will be those who embrace the necessity to plan, innovate and evolve to meet the net-zero challenge.
BlackRock’s request is likely to be persuasive. They have implemented a “heightened scrutiny model” for holdings that pose significant climate risk. They plan to monitor and eliminate bad climate actors from their active portfolios. At the same time, iShares continues to launch investment vehicles with explicit climate goals to attract investors concerned with sustainability. These “ESG” portfolios specifically measure a company’s performance in terms of environmental, social and governance factors which enhance sustainability.
Mr. Fink’s letter may be challenging news for firms that have failed to address climate risk, but the overall tone is very positive. He makes the case for regarding the transition to a net-zero economy as an opportunity for companies as well as governments to collaborate on creative and thoughtful solutions to meet the challenge. He points out that ESG principles are good for business: In a year when many predicted that the financial crisis would cause companies to abandon sustainable principles to focus on the bottom line, we actually saw the stocks of companies with better ESG profiles perform better than their more traditional peers. According to Mr. Fink, 81% of a global selection of sustainable indices outperformed their parent benchmarks in 2020.
Notably, Mr. Fink also asserts that our issues with racial justice in this country require leadership from our corporate sector. He calls for companies to improve diversity, equity and inclusion, and to include those metrics in their disclosures to demonstrate how they will be improving their “talent strategy,” making sure the best people are hired to solve the pressing problems of climate change.
Why is this important to you as an investor? Because an improved focus on sustainability creates more opportunity for both positive societal impact and rewarding investment outcomes. More and more companies are aligning their disclosure reporting with the Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD), which set the standards for collecting companies’ sustainability information. Why does that matter? Because what gets measured gets managed. If we as investors prefer to buy funds holding the stocks or bonds of sustainable companies, more businesses will have incentive to measure and improve their sustainability.
You can read Laurence Fink’s letter to CEO’s here: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
If you’d like to discuss sustainable investing further, please contact us. We have a full suite of updated ESG portfolios that can be tailored to suit your situation. You can read more about ESG investments here: https://empowermentfinance.com/services-sustainable-investing.html
