BlackRock's CEO Larry Fink published his annual CEO letter this week. It makes bold assertions about BlackRock's moves towards sustainability and I've gotten so many questions about the letter that I figured I'd write up my thoughts all in one place.

Big Picture Thoughts

First, I appreciate Fink's leadership here. Of course, this announcement is not as early or as assertive as I would like; experts have been sounding the alarm about climate change since I was a kid and I'm almost 40. But BlackRock is a huge company so any move they make reverberates throughout the industry, so I am grateful for Fink talking about the intersection of climate change and finance.

I've seen a lot of media and industry folks waxing poetic about how BlackRock is changing the game with the announcement, and I hope they are right. I recall a similar reaction to his 2018 letter about how corporations need "A Sense of Purpose," and though BlackRock has made some sustainability updates since then, they haven't been the game-changers people predicted two years ago. This year’s letter appears to have more measurable promises, so I remain optimistic. This is a detailed post and the part I think is most important is almost at the end (item number 6 in the numbered list), so skip ahead if you don’t have time.

Let’s Read The Letter and Get Into The Details

YOUTH CLIMATE STRIKE, SEPTEMBER 2019 SAN FRANCISCO

A Reckoning on Climate Change

The focus of Larry Fink's letter to corporate CEOs is climate change and the impacts it will have on the financials of companies. This is something the SRI community has been talking about for decades, so why is BlackRock making this front and center this year? Because of youth protests. In his second paragraph, Fink references the youth led climate strikes of last September. This is a big deal. Kids are leading protests, and protests are influencing corporate and market behavior. Well done kids! I was at the SF strike, at the behest of my 4th grader, and found it remarkable how the youth were making connections between capitalism and climate change, focusing in on executives of fossil fuel companies making money at the expense of their generation.

Fink goes on to elaborate the physical, social, and economic risks of climate change. He takes an example from the risks to fixed income:

“Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?”

If you heard me speak at Inside Fixed Income, you know I covered this very relatable and important topic.

Fink mentions that BlackRock’s investor clients bring up climate change as a concern more often than any other issue, and says what the SRI community has been saying for decades.

“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

I hope he is right in his prediction and that the “near future” is years, not more decades.

SKIPPING SCHOOL TO GO TO THE CLIMATE STRIKE

Transparency & Corporate Reporting

Fink mentions the investing related sustainability initiatives (more on that below), and makes the case to corporate CEOs that each company must address “sustainability risks” and have transparent disclosures, or jeopardize their investability.

He notes the need for more widespread and standardized adoption of sustainability data (I agree!) and looks to SASB to set the standard. This nod to SASB, the Sustainability Accounting Standards Board, is well deserved; it’s an organization that plays an often under-recognized structural role in getting companies and investors on the same page about sustainable data and materiality. Fink also asks all companies to disclose their climate related risks per TCFD (Task Force on Climate-related Financial Disclosures) guidelines.

He closes his letter to CEOs with another nod to youth leadership and the coming generational transformation, and with a couple of sentences that I so desperately hope he follows through on, that I could have written them myself:

“But the goal cannot be transparency for transparency’s sake. Disclosure should be a means to achieving a more sustainable and inclusive capitalism.”

Now, let’s have a look at the client/ investor letter!

EYES ON FOSSIL FUEL CEOS AT THE YOUTH CLIMATE STRIKE

Here’s Where It Gets Interesting

The CEO letter links to the investor letter from the Executive Committee, which includes Fink, as well as 12 other white men, 3 men of color, 3 white women, and precisely 0 women of color. (Yes, I am ALWAYS thinking about diversity and inclusion, and YES, it matters very much to this letter. Communities of color are the first and worst affected by climate change. How can we really expect to address climate change effectively if the decision making table doesn’t include those most severely impacted?)

“Because sustainable investment options have the potential to offer clients better outcomes, we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.”

Interestingly, the letter opens by emphasizing BlackRock’s role as a fiduciary, and how they see navigating the coming climate-change related financial impacts as part of the fiduciary responsibility. Could this be in response to reports of the SEC’s increased scrutiny of ESG and SRI offerings? Probably. Is it also accurate that planning for the effects of climate change is the prudent thing for a fiduciary to do? Absolutely. Both can be true at once. Here the committee makes a big promise:

KNOW YOUR EARLY 2000’S NELLY REFERENCES!

Promises Promises

Below are some of the ways BlackRock execs say they’ll make sustainability their new investing standard, and my take on how measurable results will be. My notes are not comprehensive; the letter is long and available for you to read in full.

BlackRock will make sustainability the standard offering. They leave a lot of wiggle room here. “wherever possible,” “consistent with client preferences,” and “executed over time.” These are necessary modifiers but the vagueness makes it hard to measure progress.
ESG versions of Asset Allocation and Target Date Funds coming. Big yay from me here! Low cost and target date funds are avenues many retail consumers use and may allow for more ESG options in 401Ks and other limited-fund-line-up retirement plans. No specified time for rollout though. And for the index funds (most of BlackRock’s assets), items 3 and 4 below won’t apply.

3. Active fund managers will be held accountable for managing ESG risk by the end of this year. This is big, and measurable. (Active funds are about a third of BlackRock’s assets.)

4. Divesting from coal. This is only for active strategies, but is still a huge divestment. It’s measurable and has a time frame. “As a result, we are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.”

5. Lots of new products from ESG Funds to green cash management vehicles to private impact investing.

6. Proxy voting priorities, transparency, and explanations. For me, this is the most interesting component and the one I’ll be keeping a close eye on. BlackRock’s public voting record on environmental disclosure shareholder resolutions has been (to put it kindly) unimpressive to date. Their representatives argue that BlackRock engages with company management but does so privately, behind the scenes, and that the public just doesn’t see the work they do. That has felt like an unacceptable answer for years, so I am thrilled to see the executives promise to disclose proxy votes quarterly, explain their decisions on high-profile votes, and disclose engagement topics for each company. I hope other fund companies follow BlackRock’s leadership. The letter notes that BlackRock joined Climate Action 100+; this is notable since BlackRock voted against all of the US proposals that investor coalition backed in 2019. Joining Climate Action 100+ could indicate a real shift in leadership and I look forward to seeing the first 2020 votes!

Final Thoughts

Thinking about both letters, I am optimistic that this is a turning point for mainstream finance. The 2020 letters have more environmental promises and measurable assertions than prior letters. While I will always push investment companies and decision makers to take bolder action, I appreciate Fink’s leadership in this area. The next generation is ready to lead and I am glad that industry leaders like Fink are listening and acting.

“DO THE RIGHT THING GRON-UPS!” (THAT’S MY SON, WITH HIS SWEET AND HOPEFUL SIGN, AT THE CLIMATE STRIKE LAST SEPTEMBER.)

"Do The Right Thing Grown-Ups" My Thoughts on Larry Fink's BlackRock 2020 CEO Letter