BlackRock’s Larry Fink has pointed the cannon of global capital at the climate crisis. Armed with BlackRock’s more than $8 trillion in assets under management, Mr. Fink’s annual letter to global CEOs has become the most public marker for corporate directors to understand what investment capital expects. This week’s letter doubles down on his 2020 missive, again focused primarily on how companies are working to address climate change.
The 2021 letter calls for universal adoption of climate disclosure metrics across all public and private companies with commitments to move toward a net-zero economy. Mr. Fink makes a compelling case that global investment capital sees tremendous potential in that transition and that companies with strong net-zero commitments and disclosure will attract more capital and, in many cases, perform better.
Notably, Mr. Fink’s focus on climate centers the evolution of ESG investing based on the best data-driven footing. Unlike other aspects of ESG, such as human capital management, where data-driven analysis is still in early stages, there is a depth of data and processes, along with clear external objectives, that provide a more precise framework for companies to consider when it comes to climate change. In addition, under the Biden administration, the SEC is expected to again focus on ESG disclosure, and the president has made climate change one of his four top priorities, installing advocates across a wide swath of government agencies while giving them broad mandates to pursue emissions-reducing regulations. All of this is likely to accelerate regulation.
For corporate leaders, here are a few quick recommendations based on Mr. Fink’s letter:
- Speak with one voice on climate – Every company stakeholder is focused on climate change. Employees expect companies to address it. Political leaders are demanding corporate engagement. Investors want better disclosure. Companies must create one climate story – rooted in action rather than lip service – that can be reflected throughout all communications for political, investor and internal audiences.
- Identify information meaningful to managing the business and disclose it in a consistent manner – Companies are currently confronted with an alphabet soup of ratings, raters and frameworks that often leads to inaction. With the recent merger of SASB and IIRC and Mr. Fink’s continued endorsement of SASB and TCFD, there is finally some coalescing around these frameworks. Indeed, using SASB and TCFD frameworks may be the best templates to begin the process with the goal of building upon the data over time.
- Make ESG part of regular IR disclosure – Mr. Fink often is seen as speaking for “passive” capital, but his 2021 letter makes a compelling argument that all forms of capital from debt to equity expect a clear conversation on ESG topics. Companies are responding, but their ESG discussions still too often sit outside of regular investor relations. ESG should be incorporated more consistently into investor relations including investor meetings, earnings and transaction announcements.
- Expect more pressure on the proxy – With many of BlackRock’s holdings in index funds, portfolio managers cannot “vote with their feet” through buy and sell decisions, making the proxy ballot their main voice (in addition to Mr. Fink’s pen). BlackRock has already voted against dozens of companies and directors for climate-related reasons, and Mr. Fink’s latest letter makes it clear that the trend will continue. (While you’re taking a fresh look at the proxy, consider also disclosure related to human capital and political contributions – two areas we also expect to see greater scrutiny this proxy season.)
While few companies have adopted absolute net-zero strategies like Mr. Fink is advocating, many have spent the past several years increasingly focused on taking steps to curb emissions and it may only be a matter of time before they start moving toward the “full Fink.” After all, companies are facing demands for radical action on climate change from younger generations – the customers, employees, business partners and, yes, shareholders of tomorrow. Thus, the pressure is only going to continue to increase and they’d be wise to get ahead of it now before they fall behind.