Larry Fink’s letter hints at a subtle reset on ESG

By Andrew Adie

“Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism.” So says Larry Fink, CEO of Blackrock in his annual CEO letter.

Few business people (with the exception of Warren Buffett) get as much attention for the annual opining as Larry Fink now gains for his annual shareholder letter. Inevitably his annual missive attracts negative reactions in some quarters. The spotlight has often fallen on whether Blackrock’s record of action as a shareholder meets the high standards set out in the letters.

Much of the media coverage today has focused on his defence of stakeholder capitalism. There has been some pushback, particularly from the US political right, who have argued that ESG and purpose-led business is pushing a ‘progressive’ political agenda (not a compliment). Larry Fink’s letter aims to put that argument back in its box: Stakeholder capitalism is good for business and good for society.

Yet, if you step back from the words of the letter and look at it within a wider macro context, Larry Fink’s letter is fascinating reading, and it does highlight a number of key trends that are set to shape the relationship between business and all the stakeholders that surround it in 2022.

His defence of stakeholder capitalism as more than window dressing (I paraphrase) and as a driver for growth and shareholder returns plays strongly when placed in the context of ongoing criticism of ESG. From Terry Smith’s criticism this week of Unilever’s ESG strategies (as quoted in the FT; “a company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot” to Tariq Fancy (the former Global Chief Investment Officer for Sustainable Investing at BlackRock) who described ESG as a dangerous distraction from what really matters, purpose, the defence of ESG as a driver for good business in all senses is well timed.

Larry Fink’s defence of investment rather than divestment is also, in my view, an argument that deserves more consideration and a more nuanced approach from ESG investors. 

It is an argument he also made at COP26 at the Green Horizon Summit when he raised his belief that divestment from fossil fuel companies merely pushes investment from public to private markets (potentially bringing less transparency, less oversight and less ESG focus). The argument being remade in the annual CEO Letter comes the day when 25GW of new offshore windfarm development rights have been granted off the coast of Scotland with the largest investors including BP and Shell. The journey to net zero is about transitioning to a green and good economy and if ‘good’ is delivering that transition then an oil company becoming a renewable energy company (influenced by the power of investors, consumers and politicians to drive change) surely has to be a ‘good result’. The sight of consumers brawling on petrol station forecourts in autumn last year highlights that oil and gas remains a vital transitional fuel whether we like it or not – but clearly the need to transition faster to ‘keep 1.5 alive’ is critical.

Larry Fink’s comments about workers demanding change in the way they work and the opportunities available to them is also powerfully made coming from a US business leader and the world’s largest asset manager. The belief that Covid has changed the way we work for ever and that corporates should heed the views of their employee stakeholders is clearly a core theme, particularly for businesses contemplating the impact of ‘The Great Resignation,’ Life has changed, good businesses (that understand that talent drives growth, drives profit, drives better business) will ride these storms more effectively than those that want to turn the clock back to pre-Covid eras of working.

Yet for me, the most interesting element of Larry Fink’s letter is his views on the role of communications and stakeholder engagement as businesses look to balance purpose and profit.

He says: “COVID-19 has also deepened the erosion of trust in traditional institutions and exacerbated polarization in many Western societies. This polarization presents a host of new challenges for CEOs. Political activists, or the media, may politicize things your company does. They may hijack your brand to advance their own agendas. In this environment, facts themselves are frequently in dispute, but businesses have an opportunity to lead. Employees are increasingly looking to their employer as the most trusted, competent, and ethical source of information – more so than government, the media, and NGOs.

That is why your voice is more important than ever. It’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment. The stakeholders your company relies upon to deliver profits for shareholders need to hear directly from you – to be engaged and inspired by you. They don’t want to hear us, as CEOs, opine on every issue of the day, but they do need to know where we stand on the societal issues intrinsic to our companies’ long-term success.”

If business is to be trusted to lead in a new era, with a generational changing of the guard and with a workforce, investors and business partners looking for far more than strength of balance sheet to guide who they want to work for, with and invest into, then these words should be at the forefront of the minds of any board of directors in 2022.

COP26 was seen as the business COP, corporates demonstrated that they had ideas, and determination to find solutions and lead change in the drive to transition the world to a net zero economy. Yet the responsibility and role of business goes far deeper than the environment. Business has to be a good employer, a good corporate citizen, a force that drives greater fairness and opportunity. All of these things drive profitability and success, despite the fact that they aren’t easily translated into a P&L line.

Regardless of the headlines, the trends that Larry Fink’s letter underlines are worth heeding. It’s a subtle reset on ESG (or arguably a return to its roots). Purpose-led business is about driving benefit to all stakeholders (and that definitely includes shareholders and investors as well as the rest of society).