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E-MailPaul A. Davies is partner, Michael D. Green is counsel, and James Bee is an associate at Latham & Watkins LLP. This post is based on their Latham memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).
On 17 January 2022, Larry Fink, the founder and chief executive of BlackRock, published his annual Letter to CEOs (the Letter), titled “The Power of Capitalism”. The Letter focuses on the importance of sustainability issues to companies from a financial perspective, and seeks to highlight the economic benefits of stakeholder capitalism.
Fink’s 2020 and 2021 Letters to CEOs also drew attention to sustainability issues, noting that climate change had “become a defining factor in companies’ long-term prospects”. Given BlackRock’s status as the world’s largest asset manager by assets under management, such public statements have been and will continue to be noted by leaders of public companies throughout the US and globally.
This post examines key focus areas of the Letter.
Capital’s Shift to Sustainability
Drawing on the growth of the sustainable finance markets, the Letter notes that sustainable investments globally have now reached over US$4 trillion, and the actions and ambitions of economic actors towards decarbonisation have increased markedly over the past two years. Fink said he expects this growth in sustainable economic activity to continue at pace, stating that “every company and every industry will be transformed by the transition to a net zero world. The question is, will [companies] lead, or will [they] follow?”
Net Zero Transition Risks and Opportunities
The Letter notes that the energy transition can both positively and negatively impact companies, which is why strategy and resilience to transition risks are identified as key drivers of long-term economic potential. The Letter asks what leaders of public companies are currently doing and will do to “disrupt” their business, and whether, as industries are transformed by the transition, their businesses will go the way of the “phoenix” and reinvent themselves for long-term success, or go the way of the dodo. To support this question, the Letter predicts that “the next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonise and make the energy transition affordable for all consumers”, and adds that established companies should endeavour to do likewise.
The Letter acknowledges that the pace of the energy transition will be very different in developed and developing countries, a reflection of the Paris Agreement, which highlights the “common but differentiated responsibilities” of nations around the globe. The Letter notes, however, that “all markets will require unprecedented investment in decarbonisation technology”, and that investment in green technologies should be fostered to ensure that they become scalable and affordable.
Responsibilities of Governments
The Letter focuses on the work that companies, particularly public companies, can and should do to prepare for the energy transition, but it also stresses that whilst “capitalism has the power to shape society and act as a powerful catalyst for change…businesses can’t do this alone” and that national governments and public sector organisations must play a key role. The Letter states that governments need to “provide clear pathways and a consistent taxonomy for sustainability policy, regulation and disclosure across markets”. Global efforts in this regard include certain aspects of the EU Green Taxonomy going into effect at the start of 2022, and the International Sustainability Standards Board undertaking work in relation to developing a set of globally recognised corporate environmental, social, and governance (ESG) reporting standards.
Corporate Purpose
In the current global environment, the Letter observes that businesses have the opportunity and obligation to lead on “societal issues intrinsic to companies’ long-term success”. Identifying that CEOs now have a greater platform than at any other time in history, the Letter states that “[i]t’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. [Their] Company’s purpose is its north star in this tumultuous environment”.
The overarching message of the Letter is that BlackRock’s focus on sustainability is a recognition that sustainability issues (and companies’ readiness for the transition to net zero in particular) play and will continue to play a fundamental role in the long-term economic outlook of companies. Summing up, the Letter states that “companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities, and their shareholders”. The impact of the Letter, and whether it will serve to continue to magnify the attention placed on stakeholder capitalism in 2022, will be interesting to monitor as the year progresses. Clearly, such issues are already of paramount importance for the world’s largest asset manager.
