Annual letter to CEOs focuses on climate change

In his annual letter to CEOs, BlackRock CEO Larry Fink indicated that the world’s largest investment manager is getting serious about climate change.

“Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” wrote Mr. Fink, “and with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

BlackRock’s letter laid out several climate-related challenges that could impact the investing world over the coming years:

“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?”

Other uncertainties outlined in the letter include determining the scale and scope of government action on climate change, the speed of the long-term transition to a low-carbon economy and gauging the world’s ability to overcome the technological hurdles involved in that energy transition.

Taking action…

Beyond just discussing the risks of climate change, Mr. Fink describes concrete action BlackRock is taking in its portfolios, 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.”

As ESG Today reported earlier, Blackrock has recently joined Climate Action 100+, a network of investment managers dedicated to promote cleaner practices among large corporations.

… and a call to action

BlackRock’s letter concludes with a call to action from CEOs on broader ESG issues, warning that companies that take a near-sighted view of maximizing profits at the expense of sustainable business practices run the risk of long-term irrelevance:

“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.”

BlackRock’s key message to CEOs is that “Ultimately, purpose is the engine of long-term profitability.