Investor Perspective on ESG: BlackRock’s annual letter to CEOs, 2021 edition

BlackRock’s CEO, Larry Fink, writes an annual letter to the CEOs of public companies. BlackRock is an asset manager, managing the portfolios of many institutional investors (an institutional investor is, for example, a pension fund). As an asset manager, BlackRock has a responsibility to its clients to manage their money responsibly. Mr. Fink has been writing these annual letters since the Great Recession. In 2020, he raised environmental sustainability as a key investment goal for BlackRock. His January 2021 letter continues to beat that drum.

 Mr. Fink’s viewpoint is that climate change in the form of droughts, severe flooding, hurricanes and wildfires has a direct financial impact on many publicly traded companies. For some companies, this means taking significant losses due to changing regulatory frameworks, natural resource scarcity, falling costs of alternative energy and other similar issues that create “stranded assets” (assets that are prematurely devalued or turned into a liability). For other companies, this means tremendous opportunity for growth in addressing climate change issues head-on.

 Mr. Fink points out in his letter that, even in the midst of a global pandemic, mutual fund and EFT investors increased their sustainable asset investments globally by almost 100% over the prior year. He believes that this is only the beginning, and that climate-focused investment will provide an historic opportunity for investors, especially because indexed investments focused on sustainability have brought sustainable investment to the masses.

Key take-aways from BlackRock’s 2021 letter to CEOs:

1.   Reporting Climate Risks is Essential

While the opportunity for sustainable investment is at an all-time high, there is a need for companies to disclose their climate risks and sustainability initiatives in a manner that is consistent across the board in order to provide investors with information useful to them in making investment decisions.

Like the FASB for financial accounting standards, there is a Sustainability Accounting Standards Board (SASB). SASB sets reporting metrics across various industries. In addition to SASB, BlackRock endorses the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. These standards aid investors in understanding material risks facing companies and how those companies are mitigating such risks.

2.   Net Zero Disclosures

“Net zero” is the concept that we create no more greenhouse gas that what is removed from the atmosphere. The goal with net zero is to slow global warming. Over 127 countries have committed to work toward net zero. The countries committed to net zero will continue to grow, and therefore BlackRock believes it is essential for publicly traded companies to disclose how their business will remain relevant and profitable in a net zero economy. In addition, BlackRock believes disclosures should also be made by governments issuing public debt.

3.   Equity and Inclusion is a Critical Part of ESG

Companies emphasizing ESG outperform similar companies with little or no focus on ESG. Not only should companies be concerned with disclosing environmental risks, they should also disclose their talent acquisition strategy that outlines a long-term strategy to improve diversity, equity, and inclusion throughout their companies.

Companies and investors should also recognize that low-income communities and developing nations are disproportionately impacted by the worst impacts of climate change, and they are economically fragile, so changes such as net zero must be executed carefully so as not to further burden these communities.

BlackRock has taken a lead on the investor side in advocating ESG disclosures. And it’s not just talk. Most recently, in May it backed hedge fund Engine 1’s candidates for the Exxon board of directors, as these proposed directors (3 of which won board seats) were focused on climate issues and clean energy strategy. BlackRock is the second largest shareholder of Exxon stock.

 If you would like to read Larry Fink’s 2021 letter to CEOs: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

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