3 Key Takeaways from Larry Fink’s 2022 Letter to CEOs
This week, BlackRock released its annual Letter to CEOs by Larry Fink, CEO of BlackRock. As of December 31, 2021, BlackRock had $10 trillion assets under management. It is the largest investor in the world, and publicly began speaking of the firm’s own sustainability program in 2017. Beginning in 2018, the firm’s annual letter, penned by CEO, Larry Fink, started to mention sustainability and human capital issues, and in recent years he has outlined expectations for ESG actions and disclosures. The institution’s influence on companies, the SEC, and other financial institutions – both because of its massive active base and its outspoken CEO, cannot be understated.
In this year’s letter, Fink focused on the phrase stakeholder capitalism, which refers to the relationship between a company and its employees, customers, suppliers, and communities, and how it can drive long-term value for shareholders by aligning the priorities of all stakeholder groups.
How does Blackrock’s focus on stakeholder capitalism impact your company’s ESG strategy? Below are the primary takeaways from the letter. For each, consider what your company is already doing and what additional initiatives you should consider incorporating within your ESG program this year.
The Path to Global Net Zero
Fink believes divestment from carbon intensive industries will not get the world to net zero. He seems to move away from divestment as a strategy, and towards “radical transformations in business models” which include engagement and innovation as the best tools for decarbonization. (Not surprisingly, this statement received the most public criticism thus far.)
Governments are already establishing new sustainability policies, regulations, and disclosure requirements across markets. This formalizes climate risk as investment risk and paves the way for BlackRock to ask all its portfolio companies to report aligned with Task Force on Climate-Related Financial Disclosures (TCFD). The request is consistent with what we have heard from the SEC, who has revealed the agency is using TCFD as a guide to create mandated climate disclosures for companies.
Disclosures aligned with TCFD are the best way to communicate that a company is preparing for the future. TCFD-aligned disclosures include an assessment of risks and opportunities as the world transitions to a low carbon economy, as well as short-, medium-, and long-term emissions targets. Fink notes that failure to align with TCFD could signal that a company is lagging behind its peers and may be vulnerable to disruptions from regulators and to limited access to capital.
Takeaway: If you have not already started the processes of aligning with TCFD, you should in 2022.
Employee Power Is Growing
The letter also points to the pandemic for redefining the relationship between businesses, customers, and employees. Turnover and wages are rising, giving employees more flexibility, pay, and power over a company’s direction and strategy. The heightened need to retain employees is also driving conversations around issues such as racial equity, childcare, and mental health. Fink specifically states, “Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory.” This creates a competitive environment for talent and forces employers to do better, leading to higher returns for shareholders.
Through both monetary and non-monetary benefits and programs, BlackRock believes employers can increase their team’s happiness, productivity, and loyalty. These can decrease a company’s recruitment, rehiring, and retraining costs. Non-monetary tools companies can use to increase retention include training and development, mentoring, community engagement, and diversity and inclusion programs. Creating an inclusive culture where all employees feel valued and safe can improve operational results, as empirical research has shown that diverse teams are more innovative than their homogeneous peers.
Takeaway: Employee turnover impacts corporate culture and the bottom line. Each company should establish a purpose that employees are connected to and develop initiatives and policies to support stronger employee retainment.
Giving Proxy Voting Power to the People
The stewardship team at BlackRock is now the largest in the industry. BlackRock looks to companies to provide progress updates, both during proxy season and throughout the rest of the year, to demonstrate each company is moving down the right path and supporting a longer-term strategy.
But it’s obvious the firm no longer wants to wield that much voting power in any given annual election. BlackRock is hoping to pass the voting power along to the institutions and individuals whose money it manages. Accordingly, they are now implementing processes that give clients the choice to participate in the proxy voting process recommending how votes are cast or to allow BlackRock to vote on their behalf.
Takeaway: Give clear and accessible progress updates. Make sure your proxy statement and ESG materials clearly articulate exactly what you are doing and how you are progressing along your ESG journey. And be ready to engage more broadly with a larger set of institutional investors.
This year, Fink’s letter had a wider ESG focus. There was a greater emphasis on all stakeholders and aligning their increasing demands. As you review the takeaways next to your ESG plans for 2022, determine what items should be added to your agenda. Contact us and learn how ESG Infinite can help you develop new and improved ESG disclosures that will speak to all stakeholders.