The annual letter to CEOs from Larry Fink, Chairman and CEO of BlackRock, acts as a barometer in the responsible capitalism debate. Over the years, these letters provide progressive insight into investor thinking and can almost be seen as a chart of progress towards a more inclusive view of capitalism and purpose-led business.
This year’s letter predicts a fundamental reshaping of finance, brought about by climate change. And it calls for companies to enhance their sustainability and climate disclosures – and act this year to adopt the standards of the Sustainability Accounting Standards Board (SASB) and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
It also sets out BlackRock’s plan to make sustainability the firm’s investment standard: alongside the introduction of enhanced approaches to analysis and investment, Larry Fink also promises to be more active in voting and to divest from companies that generate more than 25% of their revenue from thermal coal1.
Larry Fink’s observation on system change echoes the view of the governor of the Bank of England, Mark Carney, on the risks of climate change to capital markets: ‘Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset.’2 In fact, because markets respond to future risks, Larry Fink predicts capital reallocation sooner than many will anticipate. The scale and relevance of these risks to business has been highlighted once again in the World Economic Forum’s Global Risk Report 2020, also recently published – where climate action failure alongside biodiversity loss, extreme weather and natural disasters, are seen as the top risks.
It is therefore not surprising that BlackRock has joined Climate Action 100+ and is moving towards sustainable investment practices. This is a powerful development, given the size and scale of BlackRock. Investor actions such as this do have the power to drive market behaviours (another good recent example is Japan’s GPIF’s stance on short selling).
But I also think it is significant that Larry Fink highlights the opportunities for growth and for green finance. He does this in a way that connects the response to climate change to the purpose of the business for long-term value creation: ‘Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.’
In pursuit of this goal, I think the letter’s call for systemic reporting on ESG and climate change can achieve substantial leverage. BlackRock asks its clients – by year-end – to adopt both the SASB standards and to make disclosures based on the recommendations of TCFD. I welcome this direction, and its reason: to help ascertain whether companies are ‘properly managing and overseeing ESG and climate risks within their business and adequately planning for the future’.
With my corporate reporting hat on, Larry Fink’s letter shows that taking an ‘investor lens’ for reporting on these wider factors is appropriate: it can help drive capital to sustainable enterprise and encourage business to embrace more fully its role in delivering shared prosperity and equitable growth. The rationale underpinning this linkage is neatly summarised in the consultation paper issued at the World Economic Forum on common metrics, prepared in collaboration with Deloitte and others: ‘By measuring and reporting on aspects of prosperity more holistically, companies and their stakeholders can become better informed to protect and enhance assets that contribute to long-term value creation and to society and the SDGs, even when there is not yet a direct link to financial performance’. This statement makes the strong case for connecting wider ESG reporting to financial impact and performance, in the interests of the pursuit of business that embraces purpose and profits together.
However, in welcoming the call from BlackRock, I believe we need to move further and create a system change in standard setting. There is now a large proliferation of voluntary standards, codes, tools and methodologies, developed with genuine intention to provide solutions as to how business works in the context of people and planet. But the number of competing offerings is hindering comparability between reporting organisations and leading to complexity in reporting and greenwashing in the system. It also acts as an excuse for those who prefer to remain opaque or not to report anything. The only way of resolving this is to create global standards for non-financial information, building on the best of what we already have. Moving to standards allows consensus to be achieved among market participants (for example, companies, investors, policy makers, regulators and civil society). This direction was acknowledged as an objective in the WEF paper on common metrics.
How to achieve this, given the urgency of achieving what Larry Fink sets out, will be the subject of my next blog. I shall refer in this to the paper on interconnected standard setting, published in December 2019 by Accountancy Europe.
View our website on climate change, which includes learning videos produced in collaboration with the ICAEW.
Follow this link to read our ‘Closer Look’ publication on climate change and reporting
1Details are set out by BlackRock in a letter to clients.