Larry Fink says accelerate. He needs to say it much louder
Thu, 02/04/2021 – 00:01
Reprinted from GreenFin Weekly, a free weekly newsletter. Subscribe here.
Larry Fink seems impatient. His 2021 letter to CEOs mentions “accelerate” eight times. He has rightly earned praise for speaking up on climate, investment and economic transition. The size of the climate challenge and how science is tracking the worst-case scenario means we cannot wait years for change to happen.
We need Fink to say “accelerate” much louder.
His letter is money-weighted opinion, colossal in institutional investment and business circles (if not quite God-like). BlackRock is so large and systemically important that in March the U.S. Federal Reserve asked it to help calm markets roiled by the pandemic economic crisis.
BlackRock’s sustainability activity leads its investment megafirm cohort of Vanguard, Fidelity and State Street Global Advisors, which together manage 20 percent of global publicly listed securities, an aggregate $20 trillion assets under management at the end of last year. The past year of Zoom isolation and real economy unemployment was a good one for the financial sector. BlackRock added net inflows of $391 billion in 2020 and compensation increased by $571 million, or 13 percent.
Fink’s signal is not loud enough, especially for those in the back.
With $8.68 trillion in assets under management talking, BlackRock is a magnet for applause, acrimony and envy. NGOs, practitioners and talking heads delivered hot takes in the hours after his letter hit the Internet. The firm’s critics pointed out the vague deadlines in both active and passive portfolios, and chided BlackRock’s relatively modest engagement and proxy voting activity, which supported only 54 percent of environmental and social proposals in 2020.
The Science Based Targets initiative makes clear that greenhouse gas (GHG) pollution must halve by 2030. For investors, the acceleration question is: What are the companies in your portfolio doing in 2021 to cut pollution by 10 to 15 percent this year? Every dollar not spent in new ways to cut GHG and to stop the voracious linear economy is investing in future stranded assets. As Greta Thunberg so pithily observed at #DigitalDavos, instead of corporate blather about “hypothetical targets and net-zero loopholes,” we need every cent going in a new direction as we crawl out of the pandemic economic crisis.
Fink’s letter does yeoman work covering a raft of important topics in investment, strategy and sustainability: fighting climate pollution, combating racism and finding a way out of the economic crisis through stakeholder capitalism. He wants us to embrace the opportunity of climate change and investing; climate risk is investment risk. TFCD and SASB reporting on ESG are driving a data revolution toward customized indexes and track a path to net-zero by 2050. “[C]ompanies driven by purpose will thrive moving forward” and stakeholder capitalism helped define winners during the pandemic that earned their license to operate, he’s written in past letters.
But Fink’s signal is not loud enough, especially for those in the back. How so?
First, asking for company ESG data is entry-level stuff in 2021. All investors with a pulse or bitrate want more data: cheaper, granular, faster. But reporting numbers is less important than the performance score. In 2021, how a company performs on all factors — including ESG factors — on a strategy executed within its rapidly shrinking carbon footprint, not just reporting data, should determine investment decisions. That decision for active equities may be to buy, hold or sell. Poor ESG performance inevitably will result in the heat of stakeholder engagement and shareholder votes.
Second, moving slowly, even in the right direction, is failure. The existential threat of the climate crisis is real, as Fink argues. Failing to cut exposure to brown sectors and vote out boards at laggard companies invites predatory delay.
Every investor knows their “sell discipline” (when they must exit a losing stock position, even when it’s painful) is as critical as their most brilliantly researched “buy” recommendation. BlackRock already has switched some of its clients’ assets into ESG-integrated funds as a default. That’s excellent progress. How much longer does it make sense to offer “brown” or conventional options if the investment thesis is that change is needed, now?
Importantly, this message empowers those CEOs trying to head in a new direction, such as those at oil majors Equinor and BP, in partnership with Ørsted, which last month won the largest U.S. offshore wind energy contract. Remember the mess at NRG in 2017? Moving fast in the new direction does not happen without sharp edges and ambitious investments, including climate finance for negative carbon technologies.
Finally, there is a wrinkle in the messaging on making capitalism work better, for both humans and nature. Fink points out that he is a capitalist, not an environmentalist, while arguing for the stakeholder capitalism model. But stakeholder capitalism starts with nature: ever try to run a head office, data center or mine without clean water? Every investment has ESG factors implicit because ALL investments happen on our one habitable planet, relying on humans to make/buy/do stuff, and the rules of law to govern systems and protect minority investors.
BlackRock was founded in 1988, when the planet’s CO2 concentration was 352 parts per million (ppm), roughly 60 ppm lower than today. It was the same year James Hansen gave testimony to U.S. lawmakers that industrial-scale pollution for profit was warming the planet. Hansen was right. GHG don’t just “miraculously” go away the way a disgraced politician once claimed coronavirus would. They lurk and change the whole climate system over centuries.
Larry Fink deserves better counsel on what the future of finance looks like within planetary boundaries.
This is not to criticize Fink or his latest letter. BlackRock is massive, and it’s moving faster than its peers. It’s to encourage him to do what he asks of his portfolio companies: accelerate. More like a speedy Tesla, not a plodding Cadillac. Markets are shifting faster than Fink realizes or is willing to say. They have to. His letter notes, “Indexes like the S&P 500 or the MSCI World … are currently on trajectories substantially over 3 degrees C” of warming. But the CEO of insurance giant AXA says 4 degrees C is “uninsurable.” We’ll need to accelerate in a new direction.
Two decades after Larry Fink and seven colleagues launched BlackRock, REM, “America’s greatest band,” dropped an album that is direct, crisp and enthusiastically loud, “Accelerate.” On the title track, Michael Stipe belts out: “I’ve got to follow another direction… Our hope has never felt so great… Accelerate!”
Larry Fink must similarly find his alt-rock voice on his very big stage to demand better, faster ESG performance, drastic cuts to GHG pollution every year toward 2030, and climate-positive business models that will win in the new stakeholder capitalism economy. Go!
Fink’s signal is not loud enough, especially for those in the back.
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