This year, in place of his usual annual CEO and investor letters, BlackRock CEO Larry Fink has released a single letter to investors. Mr Fink explains that this is because:
'As we start 2023, it is clear to me that all of our stakeholders – BlackRock shareholders, clients, employees, partners, the communities where we operate, and the companies in which our clients are invested – are facing so many of the same issues.'
The letter offers insights into Mr Fink's perspective on some of the key immediate and longer-term risks and opportunities facing investors and the broader economy, BlackRock's role in navigating these risks and BlackRock's approach to doing so.
Our key takeaways are below.
BlackRock's role as a fiduciary
A key theme running through the letter is the nature (and limits) of BlackRock's role as a fiduciary. Mr Fink emphasises that BlackRock is bound by its 'fiduciary duty…to serve each and every client by seeking the best risk-adjusted returns within the investment guidelines they set for us'.
This necessarily entails, Mr Fink writes, catering to a diverse range of views/preferences. Mr Fink writes:
'Choice has never been more important to BlackRock than it is today because we have never served a broader and more diverse set of clients. We see opinions diverging across regions – including the US and Europe – and even within regions – especially in the US. That divergence creates challenges for a truly global asset manager like BlackRock. But I believe that in this environment the diversity of our offerings, our global perspective and insights, and our approach of always putting our clients’ preferences at the center of our work remain powerful competitive advantages'.
Consistent with this point, Mr Fink underlines that though BlackRock considers it helpful to speak out on issues/risks that are 'important' to client's investments (as BlackRock considers it is important for all CEOs to do), he does not consider it to be BlackRock's role to dictate policy, or 'to engineer a particular outcome in the economy'.
Mr Fink points to what he describes as BlackRock's 'industry-leading results' as a 'strong endorsement by our clients' of this approach.
The Climate Transition is one of a number of issues with potential to impact returns
As flagged, the letter offers insights into BlackRock's perspective on a number of global challenges which Mr Fink considers are likely to impact client returns, including climate-related risks such as the energy transition.
Though Mr Fink does not directly reference or respond to recent 'anti-woke' critiques that have been levelled at what some critics perceive as BlackRock's advocacy of sustainable investing, the letter does clarify BlackRock's position on a number of points.
BlackRock continues to view climate risk as investment risk
The letter makes clear that Mr Fink's view that climate risk is investment risk is unchanged. Mr Fink states:
'For years now, we have viewed climate risk as an investment risk. That’s still the case. Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world…In fact, it’s hard to find a part of our ecology – or our economy – that’s not affected. Finance is not immune to these changes. We’re already seeing rising insurance costs in response to shifting weather patterns'.
Consistent with BlackRock's fiduciary duty, BlackRock continues to strive to ensure clients are informed about potential impacts of transition risk
Mr Fink makes clear that BlackRock's focus continues to be on ensuring that clients (who wish to know) are informed of the potential impacts of transition risk on their portfolios and on offering all clients a choice of options based on their preferences. Mr Fink writes:
'The transition to a low-carbon economy is top of mind for many of our clients. Our clients have a range of investment objectives and perspectives. We have clients who want to invest in ways that seek to align with a particular transition path or to accelerate that transition. We have clients who choose not to. We offer choice to help clients reach their investment goals, and we manage their assets consistent with their objectives and guidelines.
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 decarbonisation. Our job is to think through and model different scenarios to understand implications for our clients’ portfolios'
Mr Fink adds that 'better data is essential' in this context, and that this has been the motivation behind BlackRock's advocacy of enhanced disclosure, including disclosure transition plans. In doing so, Mr Fink again emphasised that
'As minority shareholders, it’s not our place to be telling companies what to do. My letters to CEOs are written with a single goal: to ensure companies are going to generate durable, long-term investment returns for our clients'.
Fossil fuels will continue to have a role during the transition
Mr Fink considers that there will continue to be a role for fossil fuels (eg natural gas) during in the energy transition and the letter confirms that BlackRock has no plans to cease investing in these projects. Mr Fink writes that Blackrock is:
'working with energy companies globally that are essential in meeting societies’ energy needs. To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas, with steps taken to mitigate methane emissions, will remain important sources of energy for many years ahead. BlackRock is also investing, on behalf of our clients, in responsibly-managed natural gas pipelines'.
Some of the 'most attractive investment opportunities' in coming years, will be 'in the transition finance space'
Mr Fink observes:
'I wrote last year that the next 1,000 unicorns won’t be search engines or social media companies. Many of them will be sustainable, scalable innovators – startups that help the world decarbonise and make the energy transition affordable for all consumers. I still believe that. For clients who choose, we’re connecting them with these investment opportunities'.
Other risks/opportunities
Rising inflation
The letter also offers Mr Fink's perspective on rising inflation and the immediate and (potential) longer-term flow-on effects. Commenting directly on the recent bank failures in the US, Mr Fink queries whether it presages a larger issue.
Mr Fink writes:
'This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch. Two smaller banks failed in the past week as well. It’s too early to know how widespread the damage is. The regulatory response has so far been swift, and decisive actions have helped stave off contagion risks. But markets remain on edge. Will asset-liability mismatches be the second domino to fall?
…We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming'.
In light of this, Mr Fink opines that 'stricter capital standards for banks' are likely to be introduced, while banks are likely to 'pull back on credit'.
Looking further ahead, Mr Fink opines that rising inflation, and the likely imposition of higher rates to combat it, will test the strength of US financial system and financial systems more broadly.
This he suggests, offers an opportunity for the private sector to play a larger role. Mr Fink writes:
'After years of global growth being driven by record high government spending and record low rates, the world now needs the private sector to grow economies and elevate the living standards of people around the globe. We need leaders in both government and corporations to recognise this imperative and work together to unleash the potential of the private sector'.
The shift towards 'greater protectionism'
Mr Fink opines that changes in the global landscape – eg Russia's invasion of Ukraine, Brexit, 'upheaval in the Middle East', 'political polarisation in the US' and the impacts of prolonged COVID-isolation – have fuelled a 'backlash against globalisation' which is likely to 'keep inflation elevated for longer'.
Likewise, Mr Fink observes that recent events, and in particular Russia's invasion of Ukraine, have 'dramatically reshaped supply chains' and brought questions of national and economic security into sharp focus.
Mr Fink considers that the shift to 'greater protectionism' – 'trading off efficiency and lower costs' in exchange for increased 'resilience and national security' – again, represents an opportunity for certain nations. Mr Fink writes:
'I believe that North America could be one of the biggest global beneficiaries. We have a large and diverse labour force. We have abundant natural resources, with the potential for both energy and food security. Public policy is helping to keep chip manufacturing in the US, and the latest innovations in AI have become a new preoccupation. Other national winners will emerge as well'.
Digital assets
On digital assets, Mr Fink writes that:
'For the asset management industry, we believe the operational potential of some of the underlying technologies in the digital assets space could have exciting applications. In particular, the tokenisation of asset classes offers the prospect of driving efficiencies in capital markets, shortening value chains, and improving cost and access for investors. At BlackRock we continue to explore the digital assets ecosystem, especially areas most relevant to our clients such as permissioned blockchains and tokenization of stocks and bonds'.
Mr Fink also makes clear that:
'While the industry is maturing, there are clearly elevated risks and a need for regulation in this market. BlackRock is committed to operational excellence, and we plan to apply the same standards and controls to digital assets that we do across our business'.
Retirement outcomes
The letter also touches on what Mr Fink terms a global 'silent crisis' – retirement outcomes. Mr Fink observes that:
'Lower market-return expectations, higher housing and healthcare costs for retirees, and the shifting of retirement risks to individuals have all made it more challenging than ever to support increased longevity'.
Mr Fink considers that addressing this 'crisis' requires lifting productivity, understanding the barriers to investing for retirement and ultimately 'transform[ing] how people plan for retirement'.
'To help future retirees, we need to understand what’s driving financial decision-making in different markets and how to become a trusted partner to those who are trying to plan for their long-term needs.
People only invest if they believe in the future and believe in the integrity of financial and regulatory institutions; otherwise they keep their money under the mattress or make risky financial moves in the hope of overnight riches….A lack of hope, particularly as we head into a period of uncertainty and economic malaise – if not a full-blown recession – might be one of the biggest barriers to turning savers into long-term investors….
In the same way that the internet enabled streaming to transform the music industry, society needs to transform how people plan for retirement. We need to do that in a way that’s tailored to the unique needs of each local market, culture, and regulatory system. There is no global solution to this crisis. BlackRock is working in many markets around the world to lower barriers to investing by creating choices that make market access frictionless and affordable wherever our clients are'.
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