Being Intentional
The BlackRock Edition: What BlackRock's annual letter means for Sustainability leaders, 2021 sustainability theme salience, how does BlackRock's CSR report measure up?
Welcome, everyone. Thanks for taking the time out of your day to read Being Intentional, Motive’s newsletter focused on understanding the world of Sustainability and ESG.
This week, Larry Fink, CEO of BlackRock, published his annual letter to BlackRock clients, portfolio companies, and the public at large. In the world of sustainability and ESG, Fink’s letters have become must-reads because of the firm’s perspective on sustainability as an investment thesis…and because the firm commands nearly 10 trillion USD in assets under management.
It can be argued these letters have greatly shaped the general public’s perception of ESG, and certainly that of all companies. Whether you agree or disagree with Larry Fink, it’s difficult to ignore the importance of any firm controlling that much capital.
Of everything to consider in Larry Fink’s 2022 letter (and we will consider quite a bit of it in this newsletter), a line that really hits home with us at Motive is this: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” We’ve said it before (many times) and will keep saying it (many, many more times): Sustainability is business strategy.
In terms of actionable details, this year’s letter is important in that it sheds light on BlackRock’s move to:
Enhance client proxy voting across BlackRock’s portfolio companies. Investor relations meet stakeholder engagement--all companies should be preparing for greater scrutiny and more active engagement on all fronts.
Enhance calls for portfolio companies to synchronize their reporting with the Task Force on Climate-related Financial Disclosures (TCFD). Climate risk is a bottom-line issue and BlackRock is demanding the information it needs to better treat it as such.
Perhaps less actionable in the near-term but yet foundational to the long-term, Larry Fink’s letters also push the discussion on two critical and hotly contested, fronts: Materiality and Stakeholder Capitalism. We explore each of these below.
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What We Are Seeing
Larry Fink’s annual letters have a way of focusing investors’ and corporate executives’ minds, at least for a short spell of time. This is very helpful as one of the biggest challenges in sustainability and ESG is determining which issues are material to performance--or to put it another way, which issues investors and managers should be focusing their efforts and attention on.
Larry Fink does provide a great perspective into materiality, but for obvious reasons, his annual letters cannot be relied upon as an objective analysis of all things material. As head of the largest investment firm in the world, he brings a particular worldview to bear, one which may not be fully inclusive of all issues of interest to all stakeholders.
But all stakeholders, ourselves included, have a tendency to believe that the issues we each care about are the most important of all, and should be equally important to all other stakeholders as well. This is precisely why the task of determining and defining materiality is so challenging. Sustainability and ESG professionals are expected to act on the most material issues…but what is “most” material when all issues are defended as being material?
Recently, we thought back to what we believed were the most important issues in 2021. Surprising ourselves, we couldn’t agree on a list of top issues. For the more eco-centric among us, issues like water, deforestation, and climate action were sure to be at the top. For the more community-centric, issues like diversity and inclusion and gender equality were more highly promoted. But it turns out none of us were right. We all fell to the confirmation bias of looking at the world through the lens of what we cared about.
To see which issues are of greater interest, we curated a list of 118 topics which were arranged into 20 themes generally consistent with the 17 Sustainable Development Goals (along with three themes that just didn’t quite fit with the existing SDG framework). We searched over 70,000 news media outlets for mentions of these topics throughout 2021 and reported the relative salience of each theme--here, salience refers to how popular the topics within one theme are compared to all other themes. Here’s how each theme faired in 2021, across over 183M news articles in total:
Once we remove our ideological blinders, this distribution starts to make sense. Of course, Health & Well-Being is a main theme--we are currently living through a pandemic! This shouldn’t be surprising, yet none of us listed Health as a key theme prior to viewing the data simply because we were all still working from our personal lens which we each cultivated for years before COVID was ever known.
This distribution is a reminder that determining which topics are material and which are not is not straightforward. We will all defend the importance of the issues we hold dear while at the same time ignoring our confirmation bias. My daily news feed is crammed with climate issues, but my daily news feed--and likely neither yours--is representative of the global distribution of concerns. Even Larry Fink’s recent letter focused on the themes of Employment Relations, Innovation, and Climate which are all certainly important issues, but yet not among the top-three in the analysis above.
Materiality is a difficult concept to act on--sustainability and ESG professionals will perpetually battle with confounding influences (and Larry Fink and BlackRock are very large influences herein!), but an occasional review of empirical evidence can help us all counter our own biases…as well as those of others.
There will always be an element of subjectivity in determining what is material, and this is something sustainability and ESG professionals need to come to terms with, but this doesn't mean that determining what is and is not material needs to feel like throwing darts at a wall.
Business of Sustainability
Larry Fink, (did we mention he is the head of the world’s largest investment management firm?) has released his Annual Letter to CEOs, and in it, he provides a sharp reply to any critics who thought he may have overstepped in his last year’s letter.
Larry Fink began his tradition of an Annual Letter to CEOs in 2012. These engagements were (and remain) opportunities for all CEOs to gain insight into the concerns and interests of the head of the world’s now-largest investment management firm. For CEOs with an eye to capital markets, they were not to be missed (...and now can’t be missed as they are promoted as paid advertising).
Earlier letters largely focused on issues of corporate governance, infrastructure, and general risks related to a changing societal interest in environmental impact. These earlier letters never received the public media attention that the more recent ones do, but CEOs nonetheless took note.
Research [Link] shows that companies of which BlackRock was a significant shareholder were quick to update corporate disclosures relating to the concerns brought to light in Larry Fink’s letters, much quicker in fact than companies for which BlackRock only had a minor shareholding or none at all. Which makes sense really, in the name of harmonious investor relations, why not quickly address issues which have been highlighted as potentially contentious by one of your largest shareholders?
It was in 2021 that the annual letters really made a splash. This was the letter in which Larry Fink highlighted a need for a ‘tectonic shift toward net-zero’. Previous letters had mentioned climate and environmental risks and sustainability in general, but this was the first to so boldly signal that a transition was afoot and that BlackRock would be positioning itself aggressively therein.
Environmentalists the world over were jubilant yet much of the established financial industry was shocked. Did Larry Fink step too far? Was he acting beyond any reasonable limits of fiduciary duty? Is this the end of capitalism? It’s not that he was the first to openly signal for the transition to a net-zero economy, but he was the first titan of capitalism to do so. Al Gore has been promoting this transition for over a decade, but he moves celebrity cache whereas Larry Fink moves nearly $10 trillion USD.
And now enter the 2022 Annual Letter to CEOs. This year’s entry re-affirms that a market transition is happening and that BlackRock is still jockeying to position itself at the head of what’s to come, but, and there should be absolutely no doubt in this, the transition is in fact powered by capitalism. In fact, it’s in the letter’s title: “The Power of Capitalism”.
This year’s letter settles any doubts markets may have had. BlackRock is steadfast in its perspective of economic transitions and heightened materiality of all things sustainability. The letter also makes clear that BlackRock is not becoming an activist of some sort but rather a more active owner--it’s not about doing the right thing, it's about doing the right things that ensure continued profits (or ‘durable profits’ as Larry Fink calls them with great care to not use the term ‘sustainable profits’ for fear sparking any further misunderstandings).
The letter from 2021 may have made the biggest splash, but it is this year’s letter that will make the biggest impact. It is this year’s letter in which Larry Fink explains how the unexpected statements made in 2021 were not made out of concern for the environment but rather out of concern for profit. It is this year’s letter that the logic becomes clear: net-zero and sustainability is not a transition of capitalism but rather a transition by capitalism…and BlackRock, or any of its portfolio companies, should not be willing to miss out on any of the profits therein.
Critics of Larry Fink’s 2021 letter were quick to fall back on Friedman’s exaltation that ‘the business of business is business’, and in 2022 Larry Fink is replying that the ‘business of business is business…and business depends on stakeholders’.
Stakeholder capitalism is here; sustainability is business strategy.
CSR Spotlight
Read BlackRock’s Sustainability Reports Here
Given the theme of this newsletter edition, and BlackRock’s own recent extolling of corporate executives to do more and be better, we thought it fitting to take a look at BlackRock’s own sustainability and ESG reporting.
What We Liked:
The Dual Nature of Responsibility: As the world’s largest investment management firm, BlackRock is a company unto itself as well as an active shareholder in seemingly every other company out there, and it is clear that it understands its dual nature of responsibility. It is acting on sustainability within its own organization while also acting on sustainability in other organizations through its investment stewardship.
Clear Focus: Sustainability and ESG improvement campaigns, policies, and programs--for itself and toward companies of which it remains a shareholder--are targeted and focused. Actions are motivated by clear objectives, which is great, however, it is not always clear how these objectives are determined, which is not so great.
Reporting and Transparency: The Sustainability portion of the BlackRock website provides a lot of material and insight, including archived reports and disclosures. Access to information is always appreciated.
What We Would Like to See:
Better Information Hierarchy: This one was tricky for us. Often reading through one document we would think that something was missing, only to find it later in the third or fourth report we moved onto--or information we expected in one area was instead in a ‘Letter to CEOs’ somewhere else. We spent a lot of time going through everything we could and we are sure there is still material we missed. Revising the information hierarchy of the reporting, and the UX of the website could go a long way in improving accessibility.
Deeper Insight Into Investment Stewardship: BlackRock is the world’s largest investment management firm and it does a good job in presenting its perspective and policies on investment stewardship. However, we would like to see more transparency around the outcomes of this stewardship. It’s great to provide countless different sustainability- or ESG-themed ETFs, but what is the median board diversity, water management, or emissions profiles of companies included across all of these ETFs? How do these metrics compare to a general benchmark, perhaps the S&P 500? There is simply too much greenwashing in the ESG ETF landscape right now to not be providing this type of information. Maybe this information was available, but after many hours of analysis, we still had not come across it (see our previous point about information hierarchy).
What We Are Saying
Blog Post: Welcome to ESG Reporting
The explosion of interest in ESG and Sustainability is pushing more companies to start, or improve, their ESG reporting. We are certainly proponents of more, and better, ESG reporting, and have analyzed countless examples of some of the best and the worst reporting. We try not to provide blanket recommendations across all companies as these would be so lacking in detail as to be inactionable. With that in mind, however, there are two key recommendations that do apply across all companies and sectors:
Beware of unit conversions: ESG is a practice in measurement and unit conversions are one of the most common sources of errors.
When in doubt, disclose: No company is penalized for disclosing more, but many are for disclosing too little.