A year ago this month, BlackRock chief Laurence D. Fink wrote a letter to the world's CEOs with an urgent message: Climate change will be "a defining factor in companies' long-term prospects." Underscoring his point, he added, "We are on the edge of a fundamental reshaping of finance."
Coming from arguably the world's most powerful investor — BlackRock controls nearly US$9 trillion (NZ$12.4 trillion), making it far and away the largest such firm — this letter landed with seismic force in boardrooms across the globe. In the weeks that followed, Microsoft announced a plan to be carbon-negative by 2030, Salesforce pledged to conserve or restore 100 million trees over the next decade and even Delta Air Lines announced a $1 billion effort to be carbon-neutral in 10 years.
Still, sceptics argued that Fink's support for the reform-minded ESG movement — which stands for environmental, social and governance — was a marketing gimmick that companies would back in an economic boom but shun in a crisis. If corporate America had to pick between cutting sustainability programs or dividends for investors, the thinking went, sustainability programs would be the first to go.
Then the COVID-19 pandemic arrived and something unusual happened: ESG didn't collapse; it accelerated. In particular, the emphasis on climate change became an even greater focus within companies and among investors, who piled into the stocks of sustainable companies en masse — driving up the values of companies like Tesla and doubling the money invested in sustainability-oriented mutual funds. This gave fuel to Fink's thesis: Green investing is profitable.
That's why Fink's latest annual letter to corporate leaders — which he is sending out Tuesday, and which was obtained by The New York Times — will once again grab attention. And this year, with an even more ambitious blueprint for businesses that BlackRock invests in, it may have an even bigger impact.
Fink is now calling on all companies "to disclose a plan for how their business model will be compatible with a net-zero economy," which he defines as limiting global warming to no more than 2 degrees Celsius above preindustrial averages and eliminating net greenhouse gas emissions by 2050.
"We expect you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors," he wrote.
When Fink makes what sounds like a request, in truth, it is much more than that. BlackRock's size gives it enormous influence: Fink can seek to oust directors of companies that he doesn't believe are heeding his call and he can dump the shares of companies owned by the firm's actively managed funds. Last year, the firm voted against 69 companies and against 64 directors for climate-related reasons, while putting 191 companies "on watch."
Of course, the firm is unable to sell the shares of companies in passive indexes like those that track the S&P 500 (which remain a huge portion of its assets under management). But increasingly, BlackRock is creating sustainability-oriented index funds that have discretion in selecting which companies to include or exclude.
To that point, Fink said in his letter that his firm planned to adjust its investment process for its actively managed funds, adopting what he is calling a "heightened-scrutiny model" for climate risk that included "flagging holdings for potential exit."
He also said that the firm planned to publish "a temperature alignment metric for our public equity and bond funds, where sufficient data is available" and that it would start new products "with explicit temperature alignment goals, including products aligned to a net-zero pathway."
This could have the same effect for investors as a calorie count on a menu for diners, a nudge toward making more informed choices. In the future, big public pension funds and other investors could have firms like BlackRock create custom indexes for them based on such data. On Monday, New York City's pension fund said it would divest $4 billion in fossil fuel-linked assets in its portfolios.
These sorts of actions won't sacrifice investment performance, Fink said. Sustainable funds outperformed the market last year, he noted, especially during the worst moments of the pandemic downturn.
"The more your firms are seen to embrace the climate transition and the opportunities it brings, the more the market will reward your firms with higher valuations," he wrote in the letter to CEOs.
Fink's call for greater transparency on climate risks isn't happening in a vacuum. In the past year, as his letter points out, the European Union, China, Japan and South Korea all made commitments toward a net-zero future. And following President Joe Biden's inauguration, his recent executive order to rejoin the Paris Climate Agreement and plan to unveil a climate initiative Wednesday that includes banning new oil and gas drilling on federal land, it appears that governments could soon force the issue of corporate climate risk disclosures.
"I urge companies to move quickly to issue them rather than waiting for regulators to impose them," Fink wrote about companies disclosing their net-zero plans.
And his disclosure push isn't just for public companies.
"If we want these disclosures to be truly effective — if we want to see true societal change — they should be embraced by large private companies as well," he added. "We believe that issuers of public debt also should be disclosing how they are addressing climate-related risks."
Already, several organizations are trying to create a uniform standard for climate disclosure. A group called the Task Force on Climate-Related Financial Disclosures is jockeying with the Sustainability Accounting Standards Board to become the global standard, while a group within the World Economic Forum led by Bank of America chief Brian Moynihan is announcing its own disclosure standard for ESG on Tuesday. Fink, rightly, says there should be only one standard, and he has put his support behind the Task Force.
In truth, despite the best intention of companies to reduce their carbon footprints, many rely on buying what are known as carbon offsets. This might entail, for example, a company paying to protect a forest that is about to be chopped down as a way to offset its own emissions. The problem is that the carbon-offset market remains sketchy, with few legitimate auditing programs that track whether that forest was really in jeopardy.
Fink acknowledged that there was still work to be done on developing and auditing the right measures to use in gauging climate commitments.
Fink is hardly without critics. Environmentalists say that he is isn't doing enough and that BlackRock should divest from all fossil-fuel companies. The activist groups Reclaim Finance and Urgewald published a report this month showing that the firm still held $85 billion in assets connected to coal.
"BlackRock has a major problem with its passively managed investments, which make it widely exposed to coal assets likely to become stranded," the report said.
BlackRock, for its part, has said that it can't sell stocks that are part of indexes and that it has tried to work behind the scenes with coal companies to encourage them to adopt cleaner technologies.
In his latest letter, Fink said he was encouraging companies to think about the climate in the context of other initiatives serving a broader set of stakeholders.
"Questions of racial justice, economic inequality or community engagement are often classed as an 'S' issue in ESG conversations," he wrote. "But it is misguided to draw such stark lines between these categories. For example, climate change is already having a disproportionate impact on low-income communities around the world — is that an E or an S issue?"
Many of BlackRock's rivals suggest that Fink's letters are simply good marketing, meant to insulate the firm from greater scrutiny. They may have that effect.
But far more profoundly, Fink's letters have consistently helped change the topic of conversation in corporate boardrooms.
Written by: Andrew Ross Sorkin
Photographs by: Damon Winter
© 2021 THE NEW YORK TIMES