February 18, 2021
Many investors and companies are reacting to the present enthusiasm for ESG investing with questions such as: “Which ESG KPIs should I report on? Which frameworks should I use? Does ESG investing create better returns?”
Larry Fink—Chair and CEO of BlackRock, the world’s largest asset manager—recently published his annual letters to CEOs and clients, providing valuable perspective on these questions. Many ESG and sustainability professionals are eagerly applying the guidance. But it is vital to recognize that the letters go far beyond these proximate questions to deliver a clear message to the market: ESG KPIs aren’t enough—it’s time for investors and companies to lead with ambition, transformation, and action for a sustainable world.
BlackRock Continues to Prioritize ESG…
The Fink letters spotlight many important developments and trends on ESG:
- Sustainable investing is good investing. Fink highlights that in 2020 “81 percent of a globally-representative selection of sustainable indexes outperformed their parent benchmarks.” He goes on to note that within industries, “companies with better ESG profiles are performing better than their peers, enjoying a ‘sustainability premium.’”
- ESG and climate are part of the firms’ fundamental approaches to investment management and risk management. BlackRock touts that in 2020 the firm integrated ESG considerations into 100 percent of its active and advisory strategies. BlackRock also launched Aladdin Climate to integrate assess environmental risks as part of its portfolio and risk management platform.
- Companies should report in alignment with global standards, especially TCFD and SASB. Fink notes that since his 2020 letter, the field has seen “a 363 percent increase in SASB disclosures and more than 1,700 organizations expressing support for the TCFD.” Fink also expresses strong support for a consolidated global standard, exhorting companies to report against SASB and TCFD until such a standard is determined.
- Climate, racial justice, and economic inequality are top priorities—along with the intersection of those issues. BlackRock emphasizes climate action, transparency, and the relevance of “net zero” targets. The firm additionally emphasized the relationship among these topics, with climate change “already having a disproportionate impact on low-income communities around the world.”
It’s also essential to note that BlackRock isn’t alone in calling for such advancements on ESG. For example, in January State Street Global Advisors CEO Cyrus Taraporevala published his annual missive to Boards with a similar emphasis on ESG. Together the two firms manage more than US$12 trillion in assets. A vast set of asset managers have also committed to support SASB, TCFD, and other initiatives.
…and Calls for Business Transformation
Beyond the ESG topics of the day, Fink’s letter pushes the conversation about sustainability and ESG investing to address the broad societal and environmental challenges facing the world.
On climate, his letter specifically emphasizes BlackRock’s requests for “companies to disclose a plan for how their business model will be compatible with a net zero economy” and “to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.”
And on stakeholder engagement, Fink warns:
Companies ignore stakeholders at their peril—companies that do not earn this trust will find it harder and harder to attract customers and talent, especially as young people increasingly expect companies to reflect their values. 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.
These comments illustrate the imperative to respond to a changing world, to drive transformation, and to think big. Just adding a few ESG metrics and bumping your ESG scores will not be enough.
ESG Shareholder Capitalism is Not Stakeholder Capitalism
Humanity presently faces a staggering set of challenges. In response, we at BSR see many investors and corporations developing ESG strategies that focus on ESG policies, gathering and reporting ESG KPIs, and initiating targeted ESG programs. These efforts constitute important progress, and we are proud to work with many members and stakeholders on such initiatives.
At the same time, we must be clear about what lies ahead: taking the same old system and adding a few ESG KPIs is not a meaningful solution to global challenges, investor objectives, or corporate imperatives. Incrementalism won’t be enough.
Put another way, as we seek to make the transition from “shareholder capitalism” to “stakeholder capitalism,” we must ensure we don’t get stuck at “ESG shareholder capitalism”—a system that perpetuates the catastrophe of short-termism, social harms, and environmental degradation, but with better scores on ESG ratings.
Recognizing this imperative—and the insights from BlackRock and State Street—is why BSR continues to build on its nearly thirty-year history on the vanguard of sustainability with efforts centered on initiatives such as futures thinking and scenario analysis; business resilience; climate transformation; diversity, equity, and inclusion; stakeholder engagement; human rights impacts; and sustainability reporting and transparency. We’ve seen how important it is for companies to:
- Develop resilient business strategies that consider a broad range of stakeholders and impacts—not just the interests of short-term investors
- Make strong ESG ratings performance the outcome of a sustainability strategy—not the driver of it
- Set ambitious targets and marshal the organization to achieve them
- Use scenarios to imagine, prepare for, and influence the future of business
- Collaborate with peers, stakeholders, and policymakers to support shared solutions and aligned incentives
- Speak out and demonstrate leadership, knowing that those who are silent face scrutiny, and those who fail to back up their words face reproach
Transformation happens quickly. Around 15 years ago, the iPhone didn’t exist, financial markets were in a frenzy for mortgage-backed securities, oil prices were more than 30 percent higher than today, and the U.S. was on a 50-year streak of shopping mall construction. A lot has changed, and business has had to transform in response. We should not dismiss the astonishing swiftness and power of global transition.
The coming years will bring such transition as the world grapples with fundamental social and environmental disruption. Companies and their leaders need to articulate ambitious transformation plans to navigate and participate in the push from “shareholder capitalism,” past “ESG shareholder capitalism,” and toward a just, sustainable, and thriving world.
To all corporate leaders: your stakeholders are waiting to hear your plans and—as BlackRock just made clear—your investors are, too.
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