At the beginning of every year, BlackRock CEO Larry Fink writes a public letter to corporate CEOs about sustainable growth and environmental, social and governance (ESG) issues. Unsurprisingly, this year’s letter from the world’s largest asset management firm was eagerly awaited, as it’s the first to address ESG several months into a global pandemic.
What are investors looking for right now from companies and their boards related to capital management, long-term strategy, purpose and climate change? Given the all-encompassing and evolving nature of the COVID-19 crisis, what should boards know and do in terms of creating enduring, sustainable value for all stakeholders?
Our insights follow, drawing from the letter itself and from a recent Diligent webinar on the climate agenda featuring His Royal Highness The Prince of Wales; Jenny Johnson, President and CEO, Franklin Templeton; Mike Wirth, Chairman and CEO, Chevron; Carmine Di Sibio, Global Chairman and CEO, EY; and Betsy Atkins, a board member with Wynn Resorts, Volvo Cars, and SL Green Realty.
1. COVID-19 Has Not Pushed Climate to the Back Burner
Fink’s 2021 letter swiftly acknowledges the pandemic’s magnitude. COVID-19 “enveloped the entire globe and changed it permanently. It has both exacted a horrific human toll and transformed the way we live—the way we work, learn, access medicine, and much more.”
Does this mean that COVID-19 has overshadowed climate in the minds of investors?
To the contrary, according to Fink. He’s seen the acceleration of a “tectonic shift” in the reallocation of capital, he declared, and backed this up with statistics. Across the globe:
- Investors in mutual funds and ETFs invested $288 billion in sustainable assets from January to November 2020, a 96% increase over the whole of 2019
- 81% of sustainable indexes outperformed their parent benchmarks in 2020
- Outperformance by sustainable funds was even more pronounced during the first quarter downturn
- From the automotive sector to banking to oil and gas, companies with better ESG profiles are performing better than their peers
“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,” Fink wrote.
2. The Net-Zero Era Is Here
A net-zero economy is one in which the amount of carbon dioxide emitted into the atmosphere is equal to or less than the amount removed. The concept is core to the Paris Agreement and its goal: to contain global warming to “well below 2 degrees above pre-industrial averages” by 2100.
It’s an ambitious vision, to say the least. To reach this metric, the world will need to achieve net-zero by 2050. And this net-zero milestone will require human-produced emissions to decline by 8 to 10% every year in the interim.
Even amid the considerable challenges of COVID-19, the Paris Agreement has remained a top global priority. Last year, the EU, China, Japan and South Korea signed on. In 2021, one of U.S. President Joe Biden’s first actions upon taking office was to recommit the United States to the agreement. This means 127 governments worldwide are considering or already implementing commitments to net-zero.
The world’s leaders recognize that climate action is a team sport, and board members would be wise to follow suit.
“There is no company whose business model won’t be profoundly affected by the transition to a net-zero economy,” Fink wrote, underscoring the importance of a well-articulated long-term strategy and plan for giving investors confidence that a company can navigate this global transformation.
“Companies that are not quickly preparing themselves will see their businesses and valuations suffer, as these same stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming,” Fink warned.
In fact, BlackRock itself is “walking the walk” with net-zero goal for its own operations and several planned measures to help its investors develop climate-aligned portfolios. This includes the launch of investment products with explicit temperature alignment goals, such as products following a net-zero pathway.
3. Data and Disclosure Matter More Than Ever
Grasping concepts like net-zero, and overseeing company efforts to strategize and plan, is just the beginning. Today’s directors need to share their knowledge with their stakeholders, especially investors who need to understand how the company is prepared for climate change’s physical threats and the economic transition to net-zero.
This heightened transparency is the latest in an incremental series of expectations by the investment community. In 2020, BlackRock asked companies to report in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board. This year, net-zero joins these disclosures:
- How is the company’s business model compatible with a net-zero economy?
- How is this plan incorporated into long-term strategy?
- How is it being reviewed by your board of directors?
Are these disclosures required? No. Are they recommended? Absolutely.
“Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them,” Fink wrote.
I don’t think that any asset manager of the future is going to be able to be credible without being able to say they’ve taken these risks into consideration.
– Jenny Johnson, President and CEO, Franklin Templeton
4. Climate Is an Innovation Opportunity
Boards must also remember that crisis can be a catalyst for innovation. “A successful transition—one that is just, equitable, and protects people’s livelihoods—will require both technological innovation and planning over decades,” Fink wrote.
Chevron Chairman and CEO Mike Wirth shared in our webinar how COVID-19 has accelerated the use of digital technologies at Chevron, from augmented reality to virtual reality and beyond. Climate undoubtedly will open up similar opportunities for the companies and boards who have innovation on their radar.
5. Sustainability Drives Deeper Shareholder Connections and Better Returns
In Diligent’s recent webinar, His Royal Highness The Prince of Wales reminded listeners that much of the global GDP is controlled by consumers and that demand for sustainability-allied companies, investments, products, and services is rising exponentially.
Fink reiterated the need to listen to stakeholders and connected this imperative to the bottom line.
“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.”
This year’s Larry Fink letter leaves no doubt: Now is the time for your board to move the needle on net-zero and climate reporting. Consider climate change education for all directors and appointing a chief sustainability officer, as EY Global Chairman and CEO Carmine Di Sibio advised in our webinar. And stay tuned for more guidance from Diligent on this vital area of board oversight.