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Investor ESG: What You Need To Know About Fink’s Quiet Earthquake

Submitted by: Peter Truesdale

Posted: Feb 19, 2016 – 06:00 AM EST

Tags: csr, sustainability, sri, finance


Larry Fink is Chief Executive of BlackRock.  BlackRock’s portfolio weighs in at a cool US $4.6 trillion.  So when he speaks it’s wise to listen.  He has spoken.  And what he has said, in a letter to top US and European CEOs, is the single most significant intervention ever made by an investor on CSR issues.

Business Insider managed to obtain a copy of this private letter and post it on-line.  It is a much more detailed, punchier version of a blog Fink posted last year.  The fact that a second letter was needed at all suggests Fink didn’t believe the message had been received and acted upon.

The letter is complete and well-crafted.  It deserves a read from beginning to end. 

To help busy CSR/sustainability professionals here are my five top take-aways.

1 The owners’ needs must be paramount

What? Eh? What’s all this about the owners.  You said you were going to tell us about what CSR professionals need to know!

I did.

I am.

Or rather, Mr Fink is.

The most radical point is that Mr Fink takes as his starting point the investors.  The people who own the company.  He argues his case for corporate long-termism from the interests of the shareholders:

“…long-term growth remains an issue of paramount importance for BlackRock’s clients, most of whom are saving for retirement and other long-term goals, as well as for the entire global economy.”

As a fifty-seven year old saving to provide for retirement that makes sense to me.  I am not too interested in short term gain.  I am interested in being able to finance vacations in retirement (and, I fear, ludicrously excessive care-home fees!).

Fink unintentionally highlights a major functional failure of CSR and sustainability professionals.  The endless focus on stakeholder-groups (for which read – anybody except those who own the company) has ignored the cardinal fact.  The people with the biggest investment in companies operating sustainably are the owners themselves.

It is time for the sustainability community to put that at the top of the play-list.

2 Nothing happens without a framework

I think Mr Fink may have a sense of humour.

Certainly I almost laughed out-loud when I read:

“We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation.”

When he wrote “asking” I am pretty sure he meant tell!

He builds on this saying that boards have a “critical role to play in strategic planning”.  Indeed, he expects CEOs to affirm their boards have reviewed the plans. (The second laugh I got out of this is when he says that BlackRock’s corporate governance team will check the board has reviewed the plan.)

A further build relates to reporting.  Here it is in his own words:

Annual shareholder letters and other communications to shareholders are too often backwards-looking and don’t do enough to articulate management’s vision and plans for the future. This perspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth.”

No direct reference here to corporate responsibility. 

Yet surely this is a charter for exciting sustainability reporting kneaded in to the Annual Report.  Out with dreary recitations of past actions supported by anaemic case studies; in with business- aligned reporting on how the company is meeting and thriving on change. 

Fink speaks here of the need for suitable financial metrics.  It seems to me that this weakens his case.  Robust measures are needed.  However, non-financial measures are necessary to complement the financial numbers.

Fink admits this later in the letter when he says:

“Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts.

At companies where ESG issues are handled well, they are often a signal of operational excellence. BlackRock has been undertaking a multi-year effort to integrate ESG considerations into our investment processes, and we expect companies to have strategies to manage these issues.”

We are back to the point about the neglected shareholders.  The message for sustainability professionals is: don’t just have a sustainability programmes.  Show and measure how your programme creates long-term value for shareholders and wider society.

3 Executive pay must support long-term growth

This is implicit throughout but only directly referenced when he says: “Components of long-term compensation should be linked to [long-term growth] metrics.”

Endorsement here for companies like AkzoNobel and United Utilities that have DJSI score performance embedded in their remuneration policies.

4 Tax matters

As Corporate Citizenship predicted, corporate tax has become a centre of stage issue.

From a UK perspective the stage most of the time seems to be the House of Commons Public Accounts Committee.  Here citizens are treated to a succession of highly paid but media-inept CEOs.  They find themselves unable to recall what their salary is.  They open their eyes in blank surprise at the idea that a click to purchase made in the UK ought to generate UK sales tax.  They really can’t remember how many subsidiaries they have in the British Virgin Islands.

This is an amusing side show.  Mr Fink has something more substantial to contribute.

He makes the point that tax policy ought to incentivise long-term behaviour.  Currently it fails to do so.  Mr Fink makes a suggestion of his own about US-capital gains tax.  It’s a fair bet that he’d be happy to see companies he invests him doing the same.

The truth is that until companies follow the example of Rio Tinto with its detailed country-by-country and tax-by-tax reporting they will not be able to.  It is instructive that at the same time as it made its first detailed tax report Rio Tinto felt free to set out its own robust opinions about corporate tax regimes.

5 Make it real

One can’t but think that the themes of this letter are ones that Mr Fink and his acolytes will return to again and again.  And to be fair, BlackRock has been addressing some of the sustainability-specific issues via its website, e.g. carbon.

Corporate sustainability functions could do worse than make Fink’s letter the centre of their annual away day.  So: no paint-balling in the woods, no writing on flip charts the five biggest successes of 2015, no :”if our company was an animal, what kind of an animal would it be?”

Just sit down with Fink’s letter, the letter from the world’s biggest investor.  Work out what it would mean for you if your company followed the logic through.

No silly group-exercises then, but you can still retire to the bar for a G+T afterwards.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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