Stakeholder capitalism is a driving force behind ESG, says Larry Fink
Stakeholder capitalism is a driving force behind ESG, says Larry Fink
A great organization can be characterized by its ability to create value and operate on a clear purpose as well as inspire trust for and engage with its stakeholders, summarized BlackRock CEO Larry Fink in his annual letter to CEOs. Building beneficial relationships between companies and the employees, customers, suppliers, and communities is what defines healthy capitalism.
As we enter into 2022, Fink states that stakeholder capitalism will be a powerful force in propelling the ESG (Environmental, Social, Governance) agenda forward. “It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long term,” states Fink.
Consistent profitability will remain the market's measure of success, yet a company's ability to innovate, adapt to change, and embrace the acceleration of technology will define its ability to prosper in the long run. Stakeholders will drive this transition over the coming years and play a major role in addressing critical concerns like climate change and employee wellbeing within companies.
Climate change isn’t just an environmental issue; it’s a capitalist issue too
In 2015, world leaders gathered in Paris to discuss climate challenges and negotiate a climate agreement under the auspices of the United Nations (UN). The Paris Agreement aims to keep global average temperature rise to 1.5°C over pre-industrial levels, a goal that scientists and vulnerable populations increasingly believe the world cannot afford to fail.
Despite the pledge from 193 countries to significantly and collectively reduce greenhouse gas emissions, scientists reported at COP26 in 2021 that the Earth is on track to warm by nearly 2.5°C, exceeding the world's common climate goal by a full degree. The net zero target will fast become unattainable without substantial legislative changes and a significant transition away from fossil fuels.
While the world waits for regulatory authorities to agree on reporting standardization and requirements, organizations like BlackRock, which has over $10 trillion in assets, have used their power to advocate for measures that may slow climate change and persuade businesses to reach net zero emissions. While environmental activists and red-state lawmakers have both criticized BlackRock for different reasons, Fink made the company’s stance clear: “We focus on sustainability not because we're environmentalists, but because we are capitalists and fiduciaries to our clients.”
Fink believes the shift to a decarbonized economy is inevitable and businesses that don’t plan for a carbon-free future risk being left behind. Because of these risks, BlackRock is using its shareholder weight to drive change from within rather than divest from entire sectors. Fink sees BlackRock as a "foresighted" partner in the fight against carbon emissions and plans to ask companies to share targets for emissions reductions and to disclose their efforts to mitigate risk from climate change.
Why? Fink believes “the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime.”
The COVID-19 pandemic’s impact on social trust
The COVID-19 pandemic transformed the world practically overnight in 2020. The way people work, consume, and socialize has fundamentally and permanently changed, requiring businesses to quickly adapt to their new surroundings. In particular, the relationship between a firm, its employees, and society is being redefined.
The pandemic has weakened trust in conventional institutions and fostered antagonism between businesses, consumers, and employees in many Western societies. Companies have been in the news for their poor handling of safety issues or large layoffs, both of which have harmed their brand reputation. Companies are also dealing with a new phenomenon known as the Great Resignation, in which a record number of employees are quitting.
In his letter, Fink writes that “no relationship has been changed more by the pandemic than the one between employers and employees.” Interestingly, today’s employees are increasingly looking to their employer as the most trusted, competent, and ethical source of information. In turn, companies that refuse to adjust to the demands and needs of employees such as better pay, flexible schedules, and great support for mental health put not only themselves at risk, but society at large. “Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory,” states Fink.
Employers are “an essential feature of effective capitalism,” says Fink, ultimately creating a more prosperous economy and greater shareholder profits. Ensuring the economy stays strong begins with companies that are willing to adapt to a new paradigm of work. Fink says that “companies not adjusting to this new reality and responding to their workers do so at their own peril.”
To survive, companies must embrace change and work together with employees to navigate this new world of work.
A driving force behind ESG: Corporate governance
While environmental and social issues receive a lot of attention in the ESG space, corporate governance is one of the most essential drivers of change. Fairness, the ability to treat stakeholders at all levels equitably and reasonably, transparency, and ensuring that significant stakeholders are engaging in order to position the business for the best possible outcome are some of the major corporate governance issues.
In his letter, Fink argues for stakeholder capitalism, stating that corporations should serve the interests of the entire community, including employees, suppliers, and customers, rather than just shareholders. Fink believes, “every investor deserves the right to be heard.”
As a result, BlackRock is attempting to give its clients a voice in how proxy votes are cast at the companies in which their money is invested. This option is now available to a select group of institutional clients, including pension funds that support 60 million people.
“We are committed to a future where every investor - even individual investors - can have the option to participate in the proxy voting process if they choose,” said Fink.
Fink believes that paying attention to all stakeholders, not just return-obsessed shareholders, is critical to a company's success. According to Fink, keeping employees, customers, and suppliers motivated and inspired is critical to ensuring that those participants continue to deliver returns to shareholders and ultimately ensure long-term corporate prosperity.
Intentional stewardship is the key to success
Fink ends with this clear statement, “Our conviction at BlackRock is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders.”
Long-term success, Fink says, requires putting your company's purpose at the heart of your interactions with your stakeholders. And helping employees understand and connect with that purpose can build a community of staunch advocates. Ultimately, the transparent and thoughtful stewardship of all stakeholders can help unlock the positive power of capitalism for everyone and deliver durable returns for shareholders.