Larry Fink: Prepare for a net-zero transition that is just, equitable, and protects livelihoods

Anna Triponel

January 25, 2021

It’s that time of the year again. BlackRock’s Larry Fink has sent his eagerly-anticipated annual letter to the CEOs of the companies in which BlackRock invests. As Chairman and CEO of the world’s largest asset manager with $8.67 trillion in assets under management as of the end of 2020, Fink’s annual letter has become a major signal for the way the winds are blowing in the investment landscape. Themes for this year include: the transition to net zero, the importance of data and transparency, and how the COVID-19 pandemic is forcing companies to reassess the urgency of climate change. Fink puts companies on guard: “there is no company whose business model won’t be profoundly affected by the transition to a net zero economy”, with a “successful transition” being “one that is just, equitable, and protects people’s livelihoods.”

Over the last several years, Fink’s letters have been doubling down on the roles and responsibilities of investors and companies to effect positive social and environmental change—beyond growing their own wealth:

  • In 2018, companies were asked to define a strategic framework for long-term value creation;
  • In 2019, the letter announced that “profits are in no way inconsistent with purpose”;
  • And in 2020, CEOs were charged with integrating climate risk as a matter of fiduciary and societal duty.

Mr. Fink’s 2021 letter continues in this vein, with a clear focus on preparing companies for the “tectonic shift” ahead, i.e. the climate transition. Fink further focuses on the deep changes being driven by the COVID-19 pandemic and what the future of climate-conscious capitalism must look like in order to survive.

Below are the biggest themes from this year’s letter and some of the points that jumped out at us the most (some emphasis added).

“A Tectonic Shift Accelerates”

  • “In January of last year, I wrote that climate risk is investment risk. I said then that as markets started to price climate risk into the value of securities, it would spark a fundamental reallocation of capital. Then the pandemic took hold – and in March, the conventional wisdom was the crisis would divert attention from climate. But just the opposite took place, and the reallocation of capital accelerated even faster than I anticipated.”
  • “From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019. I believe that this is the beginning of a long but rapidly accelerating transition– one that will unfold over many years and reshape asset prices of every type. We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
  • “Alongside the shift in investor behavior, we have seen a landmark year in the policy response to climate change. In 2020, the EU, China, Japan, and South Korea all made historic commitments to achieve net zero emissions. With the U.S. commitment last week to rejoin the Paris Agreement, 127 governments – responsible for more than 60% of global emissions – are considering or already implementing commitments to net zero. Momentum continues to build, and in 2021 it will accelerate – with dramatic implications for the global economy.”

“The Opportunity of the Net Zero Transition”

  • “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy – one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC.”
  • “It’s important to recognize that net zero demands a transformation of the entire economy.[…] The economy today remains highly dependent on fossil fuels, as is reflected in the carbon intensity of large indexes like the S&P 500 or the MSCI World, which are currently on trajectories substantially over 3ºC.”
  • “That means a successful transition – one that is just, equitable, and protects people’s livelihoods – will require both technological innovation and planning over decades. And it can only be accomplished with leadership, coordination, and support at every level of government, working in partnership with the private sector to maximize prosperity. Vulnerable communities and developing nations, many of them already exposed to the worst physical impacts of climate change, can least afford the economic shocks of a poorly implemented transition. We must implement it in a way that delivers the urgent change that is needed without worsening this dual burden.”
  • “While the transition will inevitably be complex and difficult, it is essential to building a more resilient economy that benefits more people. I have great optimism about the future of capitalism and the future health of the economy – not in spite of the energy transition, but because of it.”

“Why Data and Disclosure Matter”

  • “TCFD [Task Force on Climate-related Financial Disclosures] reports are the global standard for helping investors understand the most material climate-related risks that companies face, and how companies are managing them. Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.”

“BlackRock’s Net Zero Commitment”

  • “The world is moving to net zero, and BlackRock believes that our clients are best served by being at the forefront of that transition. […] We are taking a number of steps to help investors prepare their portfolios for a net zero world, including capturing opportunities created by the net zero transition.”
  • “We are outlining these actions in greater detail in a letterwe sent today to our clients. They include: publishing a temperature alignment metric for our public equity and bond funds, where sufficient data is available; incorporating climate considerations into our capital markets assumptions; implementing a “heightened-scrutiny model” in our active portfolios as a framework for managing holdings that pose significant climate risk (including flagging holdings for potential exit); launching investment products with explicit temperature alignment goals, including products aligned to a net zero pathway; and using stewardship to ensure that the companies our clients are invested in are both mitigating climate risk and considering the opportunities presented by the net zero transition.”

“Sustainability and Deeper Connections to Stakeholders Drives Better Returns”

  • “It is clear that being connected to stakeholders – establishing trust with them and acting with purpose – enables a company to understand and respond to the changes happening in the world. 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.”
  • “I cannot recall a time where it has been more important for companies to respond to the needs of their stakeholders. 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.”
  • “Questions of racial justice, economic inequality, or community engagement are often classed as an “S” issue in ESG conversations. But it is misguided to draw such stark lines between these categories. For example, climate change is already having a disproportionate impact on low-income communities around the world – is that an E or an S issue? What matters is less the category we place these questions in, but the information we have to understand them and how they interact with each other. Improved data and disclosures will help us better understand the deep interdependence between environmental and social issues.”

You can read the full letter here: BlackRock, Larry Fink’s 2021 Letter to CEOs (January 2021)

“I believe that the pandemic has presented such an existential crisis – such a stark reminder of our fragility – that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response.”                        

Larry Fink, Chairman and CEO, BlackRock, 2021 Letter to CEOs

“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.”            

Larry Fink, Chairman and CEO, BlackRock, 2021 Letter to CEOs

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