Sustainable Investing is about profits, not taking a stand

Leslie Norton, Morningstar's editorial director, sustainability, shares insights on Larry Fink's 2022 note.
By Morningstar |  24-01-22 | 

In recent years, the annual letter to CEOs from influential BlackRock chief executive Larry Fink has become closely watched for Fink's views on sustainable investing. With BlackRock now managing roughly $10 trillion on behalf of investors around the world, Fink’s advocacy of sustainable investing has had broad ripples.

Fink’s emphasis, however, is narrower than that of other advocates of sustainable investing; it’s on so-called stakeholder capitalism. This is a tenet of sustainable investing in which employees, suppliers, customers, communities, and the environment are given equal consideration to shareholders. Fink views stakeholder capitalism as critical to a company’s long-term future.

Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke’. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.

BlackRock needs to see companies “evolve and grow so that they generate attractive returns for decades to come,” Fink wrote.

That includes traditional energy companies, he wrote. Even as he advocated a faster transition to renewable energy, he waded into a controversial subject on Wall Street, saying that divestment--a blanket policy of not investing in certain kinds of companies-- is not a sound investment strategy, a view contrary to that of many veteran investors focused on sustainability.

We are committed to a future where every investor--even individual investors--can have the option to participate in the proxy voting process if they choose.

Fink highlighted that BlackRock may allow individual investors the ability to vote on shareholder proposals. These are proposals affecting a company’s behavior that are made by shareholders and voted on at the company’s annual meeting. Beginning this year, large investors in its index portfolios can choose to cast their own votes on a range of shareholder proposals. In the past, BlackRock and other passive fund managers, such as State Street and Vanguard, which have dominated the market, have been widely criticized for regularly voting with management on shareholder proposals and only weakly supporting resolutions addressing environmental and social concerns.

While opening up votes to individual investors is “aspirational” at this point, “I do think he’s encouraging investors to care about [sustainability] issues because of their relevance and materiality” to corporate profits, said Joe Keefe, president of Impax Asset Management, a prominent investor in sustainability, in reaction to Fink’s letter. “How a company treats stakeholders will have a lot to do with how it performs over the longer term. This is about what’s good for business, what’s good for investors, and what’s good for shareholders.”

Alyssa Stankiewicz, ESG analyst at Morningstar, said, “My hope is this emphasis on thinking holistically about a company’s long-term purpose and value, on long-term strategic planning, leads investors and companies to shift their time horizon away from the short-termism of recent decades. Climate change is shifting the global landscape, so if companies are going to deliver long-term value, they can't ignore their impact on climate any longer.”

Fink’s letter coincides with a new study by Edelman, which reported that a majority of respondents believe business executives are "purposely trying to mislead people by saying things they know are false or gross exaggerations." Many consumers, particularly in the United States, believe that sustainable investing is a politicized issue.

Stating a company’s positions isn’t simply a “woke” exercise but part of its long-term success, particularly with employees and other communities, Fink wrote. In the past, BlackRock has called for a company to state its social purpose as part of its corporate citizenship.

Employees regard employers as “trusted, competent, and ethical” sources of information, Fink wrote. “The stakeholders your company relies upon to deliver profits for shareholders need to hear directly from you--to be engaged and inspired by you. They don’t want to hear us, as CEOs, opine on every issue of the day, but they do need to know where we stand on the societal issues intrinsic to our companies’ long-term success.

Such communities “will be more likely to support you in difficult moments if they have a clear understanding of your strategy and what is behind it.”

As worker shortages balloon during the Great Resignation, Fink drew a connection between employee retention and long-term success.

“Workers demanding more from their employers is an essential feature of effective capitalism. It drives prosperity and creates a more competitive landscape for talent, pushing companies to create better, more innovative environments for their employees--actions that will help them achieve greater profits for their shareholders.” That means CEOs must prioritize themes like “racial equity, childcare, and mental health” and “be thoughtful about how they use their voice and connect on social issues important to their employees.”

We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing.

Fink warned companies to move quickly on their energy transition. “Few things will impact capital allocation decisions--and thereby the long-term value of your company--more than how effectively you navigate the global energy transition in the years ahead,” he wrote. Indeed, “the next 1,000 unicorns”--privately held startups valued at more than $1 billion--will probably be startups that help the world decarbonize, he said.

The shift toward sustainable investing, which now has $4 trillion in assets, “is still accelerating,” he wrote. Fink pushed companies to set short-, medium-, and long-term targets for greenhouse gas reductions and plans to meet them, as well as report on their progress.

So what is everyone saying?

Fink’s letter drew criticism from environmental groups, who accused the BlackRock CEO of doing little to divest from heavy emitters that it holds for clients in its index funds or to push the world faster toward net-zero carbon emissions. In a statement, Ben Cushing, Fossil-Free Finance campaign manager with the Sierra Club, said “Fink is insisting on continuing to prop up dirty fuels like fracked gas and peddling the outdated and dangerous view that gas has a place in the energy transition, despite the scientific consensus that we need to stop expanding fossil fuels immediately. Will this be yet another missed opportunity for BlackRock or will it finally hold polluters and laggards accountable?”

Jon Hale, head of sustainability research for the Americas for Morningstar, said Fink “makes a good case for why CEOs need to speak out on issues that affect their stakeholders but fails to mention specific issues, like CEO support for democracy and for stronger climate policies. And on climate, I was disappointed that Fink saw fit to tout the ongoing importance of natural gas as a transition fuel, as momentum builds to stop financing new fossil fuel supply in order to get to net-zero [emissions] faster.”

Nevertheless, BlackRock’s letter will be influential with companies and other investors, and the hope is that they will adopt the policies that environmentalists promote. “They’re a massive presence in the finance industry. It is welcome to have them committing and making these very declarative statements about how appropriate these considerations are in the investment process,” says Bryan McGannon, director of policy and programs at US SIF, the trade group for the sustainable-investment industry.

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