Larry Fink's annual letter 2021: Tell us how you are moving to net-zero

7 minute read  27.01.2021 Kate Hilder, Mark Standen

A key message in the letter is the urgent need for investors to have access to both better information about how companies are preparing and planning for the physical risks associated with climate change and their plans for adapting to the global economy's transition to net-zero by 2050. 


Key takeouts


  • No pandemic pause on climate: Rather than being deprioritised, 2020 saw the focus on climate risk by investors, policy makers and other stakeholders sharpen.   
  • Top investor concern: Climate change is now top of mind for clients – 'No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day' Mr Fink writes.

  • Faster than anticipated: The anticipated 'tectonic shift' in the allocation of capital as markets start to price climate risk into the value of securities, gained significant momentum in 2020 (despite the pandemic). 

  • Stepping up disclosure expectations: BlackRock is asking companies to not only report in line with the TCFD/SASB requirements but to disclose a plan outlining how their business model is 'compatible with a net zero economy' (assuming this will occur by 2050).  BlackRock's expectation is that the disclosure around this will include an explanation of how the plan is incorporated into the company's long-term strategy and be 'reviewed' by the board of directors. 

  • Companies urged to take a proactive approach: The letter expresses strong support for moving to a single global disclosure standard and urges companies to 'move quickly to issue them rather than waiting for regulators to impose them'

  • New initiatives: BlackRock announced a range of initiatives designed to assist investors to better assess both the opportunities and the risks associated with the transition to net-zero including (among others): a) stepping up stewardship activities; b) providing investors with 'better' information around the transition pathways of their portfolios (eg announcing an interim target on the proportion of BlackRock's assets under management that will be aligned to net zero in 2030); c) integrating climate considerations (eg carbon emissions intensity) into capital market assumptions; d) implementing a 'heightened-scrutiny model' into its active portfolios to provide 'framework for managing holdings that pose significant climate risk (including flagging holdings for potential exit)'; and e) launching new investment products with 'explicit temperature alignment goals, including products aligned to a net zero pathway'.  

BlackRock Inc has released its chairman and CEO Larry Fink’s 2021 annual letter to CEOs. The necessity of securing better information about the steps companies are implementing to plan for and manage the physical risks associated with a changing climate and how they plan to adapt to a net-zero economy is the theme.

No pandemic pause on climate: The pandemic has accelerated existing trends

Mr Fink writes that 2020 saw an acceleration of deeper existing trends, including the rapid acceleration of the 'tectonic shift' in the allocation of capital as markets started to price climate risk into the value of securities (despite the pandemic).For example, he writes that over the period January to November 2020, investment in sustainable assets through mutual funds and ETFs increased 96% on 2019 levels. 

This was facilitated, he writes, through the growing availability and affordability of sustainable investment options – a trend that is only set to gain momentum.

'Better technology and data are enabling asset managers to offer customized index portfolios to a much broader group of people – another capability once reserved for the largest investors. As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further. And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock.

2020 he comments, was also a 'landmark year' in terms of the global policy response to climate change and again, he anticipates that this is set to increase 'with dramatic implications for the global economy'.

Mr Fink attributes the rapidity of the shift in attitude/actions on climate risk in part to the pandemic.

'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'.

'No issue ranks higher than climate change on our clients' list of priorities'

Mr Fink writes that climate risk, which he has previously flagged as a key issue for clients, is now top of mind – an issue they ask about 'nearly every day'.He writes,.

'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'

The focus of BlackRock's (separate) annual letter to clients (released at the same time as Mr Fink's annual letter to CEOs) is on outlining the measures BlackRock is implementing to assist investors to take advantage of the opportunities afforded by the shift to a net zero economy.

Achieving a 'just transition' to a net-zero economy entails opportunity as well as risks 

Mr Fink writes that the transition to a net zero economy will demand a whole-of-economy transformation – a massive undertaking given the world's current level of dependence on fossil fuels.

Achieving a just transition, which he describes as 'one that is just, equitable, and protects people’s livelihoods' will necessarily entail technological innovation, long-term planning and a high level of cooperation and coordination between governments and the private sector.

This, BlackRock considers, gives rise to opportunity as well as risks.

Companies that have planned and adjusted for the transition eg by developing and disclosing a long-term strategy and plan to navigate the transition, he writes will likely fare better than those that fail to do so. Moreover, the letter suggests that companies that 'are not quickly preparing themselves will see their businesses and valuations suffer' as stakeholders lose confidence in their ability to adapt. 

More broadly, Mr Fink suggests that the transition will ultimately lead to a more resilient and inclusive economy.He writes, 

'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'.

Stepping up the focus on improved disclosure

A key message in the letter is the urgent need for investors to have access to better information about how the companies in which they are investing are preparing for both the physical risks associated with climate change and for the global economy's transition to net-zero.

In 2020, BlackRock asked all companies to report in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) standards and the letter welcomes the extent to which companies responded – for example, Mr Fink notes that there was a 363% increase in SASB disclosures.

In 2021, BlackRock is stepping up its expectations by asking companies to disclose a plan outlining how their business model is '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'.BlackRock's expectation is that the disclosure around this will include an explanation of how the plan is incorporated into the company's long-term strategy and 'reviewed' by the board of directors.

Companies urged to take a proactive approach to rolling out a global disclosure standard

The letter expresses strong support for moving to a single global disclosure standard on the basis it will both benefit companies (by making disclosure less cumbersome) and investors (by enabling themto more easily make more informed decisions about how to achieve durable long-term returns). 
Mr Fink urged companies to 'move quickly to issue them rather than waiting for regulators to impose them' in light of this.

TCFD/SASB aligned reporting should be more widely implemented

Until a global standard has been developed, BlackRock will continue to endorse Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) aligned reporting.The letter calls for TCFD/SASB aligned disclosure to be more widely embraced.

'I believe TCFD should not just be adopted by public companies. If we want these disclosures to be truly effective – if we want to see true societal change – they should be embraced by large private companies as well.Further, it is not just companies that face climate-related risk. For example, we believe that issuers of public debt also should be disclosing how they are addressing climate-related risks'. 

Better information, he considers will help facilitate the necessary investment (including government investment in climate infrastructure projects) to both to protect against physical risk and to deliver clean energy. 

Preparing now for a 'net zero world' – BlackRock's planned actions

Mr Fink writes that 'the world is moving to net zero, and BlackRock believes that our clients are best served by being at the forefront of that transition'. 
Accordingly, BlackRock is taking steps intended to assist investors toprepare their portfolios for 'a net zero world'.These actions fall into three broad categories: 1) measurement and transparency, 2) investment management, and 3) investment stewardship

Measurement and transparency: Providing investors with 'better' information around the transition pathways of their portfolios: By the end of 2021, (subject to sufficiently reliable data) BlackRock is aiming to:

  • Publish a temperature alignment metric for all public equity and bond funds
  • Publish the temperature alignment of major market indexes
  • Publish the proportion of BlackRock's assets under management that are currently aligned to net zero
  • Announce an interim target on the proportion of BlackRock's assets under management that will be aligned to net zero in 2030

BlackRock will also develop additional technology to assist investors to more easily understand temperature alignment and climate risk within their portfolio.Over time,this technology will 'allow investors to calculate security- and portfolio-level "climate-adjusted" values, track a portfolio’s trajectory towards net zero, and better identify climate risks and opportunities'. 

Investment Management: BlackRock's planned actions include:

  • integrating climate considerations (eg carbon emissions intensity) into its Capital Market Assumptions this year 
  • implementing a 'heightened-scrutiny model' in its active portfolios to provide 'framework for managing holdings that pose significant climate risk (including flagging holdings for potential exit)'.BlackRock states that it will establish a "focus universe" of holdings that present a particularly significant climate-related risk, and where it sees no improvement, vote against management for index portfolio-held shares, and 'flag these holdings for potential exit in our discretionary active portfolios'. 
  • launching new investment products with 'explicit temperature alignment goals, including products aligned to a net zero pathway' in 2021.In addition, BlackRock will launch 'broad-market, low-carbon transition strategies that can be easily substituted for market cap weighted index exposures'. 

Investment Stewardship: BlackRock will also step up its efforts to ensure that companies are both mitigating climate risk and considering the opportunities presented by the net zero transition.This will include: asking all accompanies to disclose a business plan consistent with achieving net zero global greenhouse gas emissions by 2050; stepping up engagement efforts by expanding the list of carbon-intensive focus companies from 440 to 1000, and deploying a new approach to shareholder proposals.

[Note: BlackRock's planned stewardship activities, including its new approach to shareholder proposals is outlined in some detail in BlackRock's updated global principles and voting guidelines for 2021]

'Purposeful' companies outperform their peers

Mr Fink observes that over the course of 2020, broad-market ESG indexes outperformed their counterparts and individual 'purposeful companies' (ie companies with 'better' ESG profiles), outperformed their peers.

Mr Fink attributes this outperformance to the strong connection and trust 'purposeful companies' are able to build with their stakeholders which he considers, enables these companies, to respond rapidly to change and to ensure their decisions and actions are aligned with the interests of stakeholders.Mr Fink observes,

'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'.

Diversity

The letter briefly touches on the importance of diversity.Mr Fink writes that lack of diversity within organisations is a weakness in that it indicates that the company is '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'.

On this basis, BlackRock expectation is that companies have a talent strategy that enables them to 'draw on the fullest set of talent possible'.More particularly, BlackRock expects that sustainability reports include disclosures on talent strategy that 'fully reflect your long-term plans to improve diversity, equity, and inclusion, as appropriate by region'.

BlackRock undertakes to hold itself to the same standard. 

Building a 'more inclusive capitalism'

The letter closes with an observation that a number of companies are already moving to address the challenges outlined in the letter and are well placed to support the COVID-19 economic and social recovery.Their efforts, he said are already building a 'more inclusive capitalism' that recognises and serves the needs of all stakeholders.

'As we move forward from the pandemic, facing tremendous economic pain and inequality, we need companies to embrace a form of capitalism that recognizes and serves all their stakeholders…The world is still in crisis and will be for some time. We face a great challenge ahead. The companies that embrace this challenge – that seek to build long-term value for their stakeholders – will help deliver long-term returns to shareholders and build a brighter and more prosperous future for the world'.

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