Boards and directors have been placed on notice that the world’s biggest fund manager will vote against if they fail to adapt to making sustainability disclosures.

The warning to act or lose the support of a key investors comes from Larry Fink, chief executive of BlackRock, in his annual letter, now an institution in the investment world.

Fink’s letter is almost entirely focused on sustainability and climate change. He wants investee companies to embrace “purpose’ to serve stakeholders, while also adopting the right kind of reporting standards to ensure they disclose work on sustainability and climate risks.

“Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability,” writes Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”

Reallocation of capital

The letter ups the ante for companies and boards slow to adapt to climate and sustainability-related concerns. Last year BlackRock withheld votes from 4,800 directors and 2,700 different companies. Fink makes plain that directors should be held accountable “when a company is not effectively addressing a material issue”.

The letter calls on boards to ensure they make a disclosure using standards from the Sustainability Accounting Standards Board (SASB), and a report on climate using guidelines published by the G20’s Task Force on Climate-related Financial Disclosures (TCFD).

Fink says “no framework is perfect” but the SASB provides “a clear set of standards” while the TCFD is a “valuable framework”.

He believes the investment world is approaching a tipping point in which it sees major movement of capital. According to Fink, because capital markets “pull future risk forward” markets will see changes in capital allocation “more quickly that we see changes to the climate itself”.

“In the near future—and sooner than most anticipate—there will be a significant reallocation of capital,” he writes.

Last year Fink was a signatory to the Business Roundtable statement which saw the ranks of US business leaders pledge they would in future pursue “stakeholder value” rather than shareholder value. The event attracted attention from around the world, both positive and sceptical.

However, in his letter Fink appears to stand by the decision. “Companies must be deliberate and committed to embracing purpose and serving all stakeholders—your shareholders, customers, employees, and the communities where you operate. In doing so, your company will enjoy greater long-term prosperity, as will investors, workers, and society as a whole.”

‘Positive contribution’

Last year Fink warned he wished to see companies develop long-term thinking, though BlackRock’s patience as an investor could not be considered “infinitely patient”.

“When BlackRock does not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect our clients’ long-term economic interests, we do not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation,” he wrote.

In 2018 Fink wrote that companies should make a “positive contribution to society”. He said: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also how it makes a positive contribution to society.”

This year BlackRock has faced questions about its record on sustainability. Mercy Investment Services, the investment programme of the Sisters of Mercy of the Americas, has tabled a motion ahead of BlackRock’s AGM next month, calling on the fund manager to review its climate-related voting policies.

BlackRock has faced criticism, along with other investment managers, that its policies are “greenwash”—giving a misleading impression of how environmentally sound its policies and practices are.

In January BlackRock said it was signing up to Climate Action 100+, a campaign group dedicated to persuading the world’s biggest emitters of greenhouse gases to change their behaviour.

In his latest letter Fink says Blackrock will make sustainability “integral to portfolio construction”; exit investments that “present sustainability-related risk”; and launch new investment products that “screen” fossil fuels.