A few days ago, Larry Fink, Founder, Chairman and CEO of BlackRock, sent his 2020 letter to corporate CEOs. Once again, his understanding of what success in modern capitalism requires aligns with our Principles for Business. His prescriptions also align with the recent statements on stakeholder capitalism from the Business Roundtable and World Economic Forum.
Mr. Fink said the goal of his management of funds entrusted to his company is to achieve “long term value.”
This year, he focused his concern on how climate change will impact the costs of capitalism and the valuation of firms. He wrote:
“Climate change has become a defining factor in companies’ long-term prospects. Implications of physical climate risk is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.
Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?”
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“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs and demand across the entire economy.”
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“As we approach a period of significant capital reallocation, companies have a responsibility – and an economic imperative – to give shareholders a clear picture of their preparedness.”
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“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
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“Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors.”
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“In a letter to our clients today, BlackRock announced a number of initiatives to place sustainability at the center of our investment approach, including: making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.”
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“The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short-term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.”
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“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
We are pleased to have Larry Fink’s analysis so supportive of our work.