Climate Risk Is Investment Risk (BlackRock’s ESG Mission)

Tom Scrivana

Last Updated: 12/31/2021

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BlackRock’s ESG Mission

The CEO of BlackRock, Larry Fink, believes that climate risk is investment risk. BlackRock’s ESG-inspired mission is to become the global leader in sustainability.

BlackRock recently sent out a call to action to corporations and CEOs asking for greater transparency around environmental, social, and governance issues. BlackRock is leading the way for sustainable and ESG investing!

What Is BlackRock?

First things first, BlackRock is an investment management company. But it’s not just any investment management company. It is the world’s largest asset management company with 8.7 trillion dollars under management.

So when you hear people talking about institutional investors and the big guys, BlackRock is one of those big guys…

BlackRock’s Fiduciary Responsibility

BlackRock has been pretty vocal about the need for increased attention around ESG and sustainability issues in the corporate world. They’ve also made their reasoning for this pretty clear. They are an asset management company with a fiduciary responsibility to their clients. Most of the money they manage is for retirement.

This means that BlackRock must have a long-term investment strategy in mind. They believe they would be doing a disservice to their clients if they simply ignored ESG issues.

This is from BlackRock’s letter to CEOs:

“The trust our clients place in us, and our role as the link between our clients and the companies they invest in, gives us a great responsibility to advocate on their behalf.

This is why I write to you each year, seeking to highlight issues that are pivotal to creating durable value – issues such as capital management, long-term strategy, purpose, and climate change. We have long believed that our clients, as shareholders in your company, will benefit if you can create enduring, sustainable value for all of your stakeholders.”

According to their latest letter to shareholders, one of BlackRock’s key goals is to become the global leader in sustainable investing. They’ve set this goal because they believe it is important for their long-term success and because they feel this is a responsibility they owe to their clients.

The Sustainable Investing Movement

In my last article, I spoke about the increased flow of money into ESG and sustainable investments. You can find that here!

According to US SIF, there is now 17.1 trillion US dollars under management using sustainable investing strategies. I know I’ve shared this data before but I’m sharing it again because I think this is just such an important point.

One in every three dollars under professional management is now invested using sustainable investing strategies.

BlackRock believes this is only the beginning. Here is what they have to say about the topic:

“We believe there is a fundamental point that is often overlooked with sustainable investing. There will likely be a long transition unfolding over years and decades, driven by investment flows, that will reshape all asset prices. Because these flows are in their early stages, we believe that the full consequences of a shift to sustainable investing are not yet in market prices – and a return advantage can be gained during this transition.”

To add to this, BlackRock has also seen the Covid pandemic accelerate the reallocation of money towards sustainable investments.

Investors are beginning to place more importance on sustainability. BlackRock believes this will force companies and boards to consider their impacts on the world. Failure to adapt to increased demand for sustainability will have a significant negative impact on the long-term future of companies.

The Net Zero Goal

BlackRock and Larry Fink talk about the importance of net zero. Countries around the world have begun making commitments to net zero economies.

The goal of net zero is to remove more carbon dioxide from the atmosphere than one releases by 2050. This goal is based on the strategy laid out in the Paris Agreement. The Paris Agreement calls for the reduction of the global average temperature rise to 2 degrees Celsius or below.

This is no small goal and BlackRock believes that companies that rise to meet this challenge are going to be in much stronger positions than companies that choose to bury their heads in the sand.

Corporate Transparency

The current problem with setting sustainability-related goals is that there is often a lack of data to show how companies are doing on ESG matters.

BlackRock is asking companies for more disclosure around sustainability metrics.

“Assessing sustainability risks requires that investors have access to consistent, high-quality, and material public information. This is why last year, we asked all companies to report in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), which covers a broader set of material sustainability factors.”

BlackRock is also asking companies to disclose a plan for how their businesses will be compatible with a net zero economy. BlackRock believes that better sustainability disclosures are in companies’ and investors’ best interests.

BlackRock also talks about diversity disclosures as well:

“While issues of race and ethnicity vary greatly across the world, we expect companies in all countries to have a talent strategy that allows them to draw on the fullest set of talent possible. As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region. We hold ourselves to this same standard.”

Since BlackRock has begun making these requests there has been a 363% increase in Sustainability Accounting Standards Board disclosures and over 1,700 organizations have expressed support for the Task Force on Climate-Related Disclosures. This is definitely progress but there is still a lot of work to be done.

Criticism & Backlash

BlackRock has had a lot of backlash for its very vocal support of ESG and sustainable investing. I’ve seen several interviews where Larry Fink was not only criticized for his stance on ESG investing but was made out to be a bit crazy for expressing that environmental, social, and governance issues should even be a topic for companies and boards.

Remember that BlackRock is managing other people’s money. It has a fiduciary responsibility to all of its clients. People are criticizing BlackRock for trying to act in the best interest of the people it manages money for.

And when you really get down to it, BlackRock isn’t asking for anything all that ridiculous. It’s simply requesting more transparency and disclosures around corporate sustainability, diversity, and other ESG metrics so investors can make better decisions.

ESG Investing Means Better Returns

You already know my thoughts on ESG investing and financial performance. I believe that companies that rate the highest on ESG measures are stronger companies and better performers overall.

Well, I’m not the only one. This is what BlackRock has to say about ESG investing as it relates to financial performance:

“Over the course of 2020, we have seen how purposeful companies, with better environmental, social, and governance (ESG) profiles, have outperformed their peers. During 2020, 81% of a globally-representative selection of sustainable indexes outperformed their parent benchmarks. This outperformance was even more pronounced during the first quarter downturn, another instance of sustainable funds’ resilience that we have seen in prior downturns.”

BlackRock believes that ESG investing leads to better financial performance.

Again, “climate risk is investment risk”. The largest asset management company in the world believes that ESG investing is important not just for financial performance but for improving our world.

What are your thoughts about BlackRock and Larry Fink’s stance on sustainable and ESG investing? Let us know in the comments below!

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