In his recent annual letter, BlackRock's Larry Fink delivered a bold message to global companies: do better, or expect consequences. "To prosper over time," he elaborates, "every company must not only deliver financial performance, but also show how it makes a positive contribution to society." To his skeptics, Fink's words are nothing more than hollow promises. But, with $6 trillion of assets under management, this is a firm too large, and a promise too great, to let it slide by as lip service.
So, we ask the following question: If Fink is really going to deliver on his promise of holding companies to account, what actions would we expect to see? What levers does BlackRock have at its disposal, and how could it pull them?
Hands May Be Bound, but There's Wiggle Room
Certainly, there are limits to what BlackRock can do, especially as the majority of its global assets are held in passive funds (those that track an index, as opposed to those that rely on a manager's judgement to select specific securities, known as active funds). About two-thirds of BlackRock's assets under management are passively-managed.
Nevertheless, there are still levers BlackRock can pull to follow through on its commitment and begin to realize Fink's vision:
Phase out offensive index funds and exchange traded funds (ETFs): BlackRock can't sell off environmentally- or socially-objectionable securities within existing index funds, nor can it drastically change its index offerings overnight. But it can start phasing out the most offensive indices. These include those generally associated with negative impacts on society, like oil and gas production, certain extractive industries, and weapons manufacturing.
Start making changes to actively-managed funds : Actively-managed funds account for the majority of BlackRock's U.S. product offerings, but currently, a mere 1.5 percent of its active U.S. mutual funds (and 2.1 percent of all its U.S. funds) explicitly incorporate sustainability as part of the investment strategy (see figure below). BlackRock can bring this figure much higher. To do this, it can apply negative screens to existing funds, eliminating companies' securities that lack a clear path to long-term, sustainable growth—a strategy Fink himself proposed. Alternatively, it can actively integrate ESG into investment decisions when constructing and managing these funds. In practice, this may include overweighting holdings in companies that have the strongest sustainability or social performance, and underweighting those with the weakest.
Incorporate ESG factors into all products, including passively-managed ones : As capital markets evolve, and companies themselves start to become more sustainable due to pressure from actors like BlackRock, we can expect BlackRock's passive products, even ETFs, to trend more sustainably. Eventually, BlackRock can incorporate ESG factors into all products, mainstreaming sustainability within the firm and beyond.
Demand, and act, on better disclosures from companies : Fink mentioned shareholder engagement as a means to promote sustainability. Already, BlackRock has supported the Financial Stability Board's Task Force for Climate-related Financial Disclosures (TCFD), promoting consistent and clear climate-related disclosure such as a firm's vulnerability to increased pricing of carbon emissions or changes in precipitation patterns. If BlackRock is serious about its commitment to sustainability, it should continue to use its power to ensure better disclosure from all companies, along the lines of the TCFD recommendations. This includes supporting shareholder resolutions for improved climate disclosure; its record in this regard has been inconsistent, despite notable wins. This is a critical area given that unreliable disclosure data has been a major barrier to sustainable investing. In turn, with improved corporate disclosure it should conduct more effective engagement with companies that seem least prepared to address climate risks or take advantage of new opportunities such as supportive policy incentives or shifts in consumer preferences.
Disclose climate risks in its own offerings: The TCFD recommendations apply to all financial actors, including asset managers. BlackRock should therefore embrace the reporting recommendations for institutional investors, disclosing its own exposure to climate-related risks and opportunities in its annual financial filings. BlackRock can further demonstrate bolstered commitment by consistently communicating the sustainability of its funds; the firm already does this for its impact-oriented funds, but similar language is missing from its broader product offerings. Specifically, BlackRock should include a sustainability section in every prospectus, clearly describing whether and how it incorporates environmental, social, and governance risks and opportunities into each product.
Coordinate engagement with other asset owners and managers : One specific and immediate action would be to join the Climate Action 100+, a group of investors engaging the world's biggest polluters, which would indicate a step further toward walking the talk.
Be the Change You Want to See
Some readers may wonder why we're even discussing BlackRock. After all, the firm has been called out in the past for holding large shares in companies antithetical to Fink's expressed ideals for sustainable growth, including large fossil fuel companies that impede the transition to a low carbon economy and violate human rights and palm oil producers that drive deforestation and land grabs in the tropics. Given this record, the firm clearly does not sit at the forefront of social good or sustainability.
But these facts don't invalidate its aspirations for change. The first step in any reform program is admitting to a problem and committing to change—and it's a big step. BlackRock has also presented a vision for the future, a critical piece for moving forward. And importantly, a player with the size and influence of BlackRock can be a real agent for change.
Also, BlackRock's public commitment demonstrates that sustainable investing is making its way into the mainstream. These market shifts have largely been driven by the growing recognition that sustainability impacts the bottom line, alongside the intergenerational shift of wealth to millennials – a cohort known to be more socially minded than previous generations. Today's investors not only want to protect their assets from risk, they want to do right by the world. Asset managers, too, recognize new material risks, and are starting to respond to these demands. BlackRock's continued support of this shift is encouraging.
Whether the letter truly marks a milestone in the evolution of capital markets remains to be seen. Until then, there are very clear things BlackRock can do today and in the near future to deliver on its promises; these steps will be widely watched as signs of whether the company is serious about being the change it wants to see.