Read Between the Lines and Beyond the Acronym – Fink Says ESG Still Matters
5 Takeaways from Larry Fink’s 2023 Annual Letter
A first glance at (or ctrl+F search of) Larry Fink’s Annual Chairman’s Letter to Investors will not turn up one single explicit reference to “ESG.” Could this signal that the investment giant is moving away from its strong sustainability stewardship principles? Not a chance. A closer look at the document—which combines the annual CEO letter and the letters to investors—reveals multiple references to Environmental, Social, and Governance components throughout. Fink remains dedicated as ever to the importance of integrating material ESG considerations as part of a robust company mission, purpose, strategy, and overall success plan, even if his latest communication doesn’t use the acronym once.
What is immediately evident in this year’s message is that tough media and pressure from a few state Attorneys General isn’t having much of an effect on the strength of the company. Fink notes that, despite the noise against the company, “While most of our peers saw net outflows in 2022, clients entrusted BlackRock to manage nearly $400 billion in long-term net new assets – including $230 billion in the U.S. alone.” Not only do the inflows illustrate the faith investors place in the company, they also reduce the anti-ESG backlash of states divesting from BlackRock’s retirement funds to a non-issue with seemingly little to no impact on BlackRock’s ability to attract new assets to manage.
If you missed it, here are all the ways in which ESG themes surface in Fink’s 2023 letter, along with implications for companies’ ESG strategies going forward.
1. The S: Social Components of a Strong Investment
Somewhat surprisingly, Fink brings up a primary pillar of Social, employee culture, early in his letter. He makes it clear that the firm views human capital management as having a significant impact on a company’s productivity and success. Conceding that the pandemic has changed the way we work, he doubles down on the importance of human connections and the impact positive employee relationships have on the resiliency of a business. Fink is calling on CEOs to rebuild employee relationships “to forge the cultural bonds a company needs to succeed.”
He seems to tiptoe around using the word diversity, but he does make it clear that this is an important tenet at BlackRock. Speaking of his own firm, he states, “We have a diverse leadership team, but they are all united by their commitment to working together to serve our clients.”
2. The E: Climate Risk Is Investment Risk
BlackRock continues to see climate risk as investment risk and Fink leaves no doubt that BlackRock will remain committed to considering the impact on our planet in the firm’s own portfolio analysis. He writes, “[BlackRock’s] job is to think through and model different scenarios to understand implications for our clients’ portfolio.” If the ‘different scenario’ analysis sounds familiar, it’s because this language closely follows the climate scenario analysis recommended as part of completing the TCFD framework, which not-so-coincidentally is the same framework that forms the basis for the SEC Climate Disclosure rule and that BlackRock consistently endorses.
Fink cites an example of how climate change is already affecting insurance pricing and availability, which in turn is affecting the U.S. housing market. To emphasize the point that the government needs to step in with appropriate laws and regulations, he offers the example of the state of Florida where flood insurance policies are underwritten by the government and cost billions of dollars. Interestingly, Florida has been one of the states with proposed legislation designed to “protect Floridians from the woke” ESG movement.
But Fink is very intentional about defining the part his firm plays in the bigger picture as well as expressing his expectations for the involvement of others. Fink states, “It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy, and we don’t know the ultimate path and timing of the transition. Government policy, technological innovation, and consumer preferences will ultimately determine the pace and scale of decarbonization.” It’s clear BlackRock is urging regulatory bodies to take a larger responsibility in the climate transition trajectory.
3. The G: The Power of Proxy Choice
Choice is a strong theme throughout the letter. Fink believes fully in the power of choice in proxy voting as well as the choices offered to clients to reach their investment goals by leveraging the different tools and funds available from BlackRock, most notably, the Voting Choice platform. The takeaway from this recurring theme is twofold: One, it offers a defense against the perception that BlackRock offers one-size-fits-all investment strategies. And two, it makes a push for empowering more investors through Voting Choice. Looking at BlackRock’s 2023 Stewardship priorities, “Climate and natural capital” and “Company impacts on people” are two of the five engagement priorities, which stand out as two themes in Fink’s letter. This year, BlackRock nearly doubled its stewardship team and, as such, companies should be ready to address these topics.
4. The Bottom Line: Fiduciary Duty to Clients Comes First
While Fink notably does not mention ESG per se in this year’s letter, he doesn’t let the elephant in the room go unaddressed. BlackRock has been perhaps the most significant target for the ‘Anti-ESG’ movement due in part to Fink’s high-profile opinions on stakeholder capitalism and the importance of certain issues such as climate change risk and human capital management. Fink outlines a succinct response to this argument, saying “There are many people with opinions about how we should manage our clients’ money. But the money doesn’t belong to these people. It’s not ours either. It belongs to our clients, and our responsibility and our duty is to them.”
What ESG messages are your stakeholder communications sending?
As Fink’s letter demonstrates, there are many ways to address the importance of ESG with a wide range of stakeholders. However you choose to frame up the topics, consistency and clarity matter. Investment narratives that integrate material ESG topics and clearly articulate their role in corporate mission and strategy will drive investor and stakeholder confidence. If you’re looking to get the nuances right and ensure your investor communications are as effective as they need to be, let’s talk. We can partner with you to translate your ESG efforts into a comprehensive communications strategy that works for your business, makes your priorities clear, and speaks directly to your stakeholders’ interests and concerns.Back To Blog