Reflections on Larry Fink’s vision of an ESG-focused world
Reflections on Larry Fink’s vision of an ESG-focused world
BlackRock CEO Larry Fink’s recent annual letter to CEOs is a vital reminder to companies of the importance of sustainably focused investing and the impact of a net zero economy. In the wake of an unprecedented year, one that faced a global pandemic, mounting environmental disasters, and harrowing social outcries, it’s become clear that ESG (Environmental, Social, Governance) will play a pivotal, foundational role in the long-term success of companies everywhere.
Fink’s letter cites that from January through November 2020 investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase from 2019. The letter also states that during 2020, 81% of a globally representative selection of sustainable indexes outperformed their parent benchmarks.
And it’s not only broad-market ESG indexes that are outperforming their counterparts. Within all industries, from construction to health care to petroleum, companies with strong ESG profiles continue to perform better than their peers. Fink refers to this as a “tectonic shift”, one he believes will continue to accelerate.
Environmental changes are a must
Fink believes climate transition presents a historic investment opportunity. In his letter he states,
“In the past year, people have seen the mounting physical toll of climate change in fires, droughts, flooding and hurricanes. They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner. No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”
The Biden Administration’s recommitment to the Paris Agreement enforces a net zero environmental demand that will transform the entire economy. The agreement requires that companies emit no more carbon dioxide than they remove from the atmosphere by 2050. This scientifically established threshold will keep global warming below the pre-industrial average of 2°C.
This mandate requires companies to create new business models and develop long-term strategies to meet the net zero goal. In doing so, Fink believes companies that succeed will set themselves apart from their peers, inspire stakeholder confidence and ultimately see their company valuations grow.
The social impact of 2020
While environmental challenges take center stage, last year shed light on systemic social injustices and pain still deeply embedded within our economy and country. Fink characterizes these challenges perfectly when he writes, “We are at a moment of tremendous economic pain. We are also at a historic crossroads on the path to racial justice – one that cannot be solved without leadership from companies. A company that does not seek to benefit from the full spectrum of human talent is weaker for it – less likely to hire the best talent, less likely to reflect the needs of its customers and the communities where it operates, and less likely to outperform.”
Fink encouraged companies to develop long-term talent strategies that fully reflect a commitment to diversity, equity, and inclusion. However, social issues involve so much more than talent management; a company’s labor practices, product safety, community outreach, and data security all carry significant weight and influence shareholder investments and consumer decisions alike.
Topics like racial justice, gender inequality, and economic disparity are often classed as an “S” issue in ESG conversations. While some of these categories can overlap between E, S, and G, Fink emphasizes that improved data and disclosures are paramount to understanding the interdependence between environmental, social, and governance issues.
Data & disclosure matter
Transparent communication and strategic goal tracking can only occur when stakeholders have access to reliable, material, high-caliber public data and disclosures. Recognizing that the disclosure process can be overwhelming given its complexity and the various reporting options available, Fink encouraged both private and public companies to adopt ESG reporting standards as soon as possible.
Fink stated, “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.” BlackRock also supports moving to a single global reporting standard and continues to endorse TCFD- and SASB-aligned reporting.
However, companies can’t carry all the responsibility for climate and social change. Fink also recognized that country leadership plays a critical role and said governments “need to undertake massive climate infrastructure projects, both to protect against physical risk and to deliver clean energy. These challenges will require creative public-private partnerships to finance them, as well as better disclosures to attract capital.”
Advice to heed
With nearly $9 trillion in assets under management, Fink’s letters have driven the conversation inside corporate America’s boardrooms for years. The advice is clear and simple. Fink says, “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”
We at Goby echo Fink’s sentiment in full and can testify to the positive growth and momentum we’ve seen ESG strategies deliver to companies. When we launched Goby over a decade ago, the idea of an ESG-driven corporate environment was more of a dream. Today, as humanity grapples with a devastating pandemic, systemic social inequities, and global warming, I’m proud to lead a company with the mission of creating the world's leading ESG platform. Our team is committed and proud to work with organizations from all industries toward a more sustainable future.