A headline in the Financial Times speak volumes: “BlackRock’s Larry Fink tries to dodge Republican ire.” The piece was responding to Fink’s latest CEO’s letter, an eagerly anticipated event on the corporate calendar, even more so after a year in which the topic of ESG (environmental, social and governance) issues have become highly politicised in the US.
BlackRock has been under attack in the past, accused of “woke” investment policies by Republicans who politicised ESG and climate change as part of their attack on what they’ve dubbed the “radical left”.
A first reading of Fink’s letter suggests he may be bruised from recent battles defending the fund manager. Unlike in previous letters, the term ESG does not appear a single time, with the annual communique appearing to focus on macro issues such as interest rates, inflation and the transformation of proxy voting.
That worked to some extent. Fink made headlines by highlighting the current banking debacle involving Silicon Valley Bank, and suggesting it could be a “slow rolling crisis”, of a similar scale and importance to the “savings and loan” crisis of the 1980s.
“It does seem inevitable that some banks will now need to pull back on lending to shore up their balance sheets,” Fink warned, “and we’re likely to see stricter capital standards for banks.”
The era of easy money is over, with potentially much fallout to come. Fink also believes inflation will continue to dog economies as the reverberations of the war in Ukraine continue. In particular, the effect on supply chains has meant a new focus from corporates and governments alike to source “essential goods” closer to home, even if it costs more.
‘Inflation will persist’
The effect would be “highly inflationary,” Fink writes. “This trade-off between price and security is one of the reasons I believe inflation will persist and be more difficult for central bankers to tame over the long term.
“As a result, I believe inflation is more likely to stay closer to 3.5% and 4% in the next few years.”
With those subjects front and centre, the letter does appear to have left behind the subject of ESG.
One news site cites Cleo Rank, a sustainable finance analyst with InfluenceMap, a data provider, saying: “Despite what BlackRock may say, the company appears to be giving ground to those who are trying to undermine the finance sector’s role in addressing the climate crisis.”
An editorial on website BusinessInsider says it is “clear that Fink is using his platform less as a vocal champion of ESG and more as a reminder that BlackRock is a fiduciary — it must put its clients’ interests, not its own, first — and not an advocacy organisation.” BlackRock could be responding to a year in which the fund manager has been under fire from Republicans for “woke” investment policies that have stressed issues, such as diversity and climate.
Last year Fink boldly declared he stood by “stakeholder capitalism” and declared that the firm was “not woke”.
But campaigners on the right have aligned their “anti-woke” agenda with anti-ESG and, recently, an anti-BlackRock stance. At one point, attorney generals from 18 states claimed the firm had breached its “fiduciary and legal obligations” by pursuing ESG investment policies.
Climate risk, investment risk
While the term ESG may not be mentioned in Fink’s letter, “climate” well and truly is.
“For years now, we have viewed climate risk as an investment risk,” says Fink. “That’s still the case. Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world. There’s more flooding, more wildfires, and more intense storms. In fact, it’s hard to find a part of our ecology—or our economy—that’s not affected.”
The remark did not go unnoticed. Lawyer Martin Lipton, of Wachtell, Lipton, Rosen & Katz, writes in support, arguing the letter reiterates how key risks—even “climate or human capital”—could impact client portfolios and therefore must be managed.
“The views expressed in Fink’s letter are not ‘woke’, and the pursuit of stakeholder capitalism and sustainable long-term value is not ‘woke’ capitalism—it is sound and prudent capitalism,” writes Lipton.
ESG—climate in particular—has become a highly divisive part of US political discourse. Fink may have softened his language, but there is no sense in which he disavows greenhouse emissions as a stewardship issue. Republicans may rail at ESG, but it looks very much like corporate America will get on with it nonetheless.