Larry Fink's annual letter to corporate executives is widely viewed by companies, big investors and policymakers as agenda-setting. In 2018, the chairman and CEO of BlackRock, the world's largest asset manager, penned 1,737 words that sought to redefine the purpose of capitalism.
Companies, Fink wrote, don't exist solely to generate profits for their shareholders. Their DNA also requires that they improve the world.
"To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,"
In subsequent years, Fink expanded his idea, writing in 2019 of an "
Last year, amid a burgeoning backlash to the sustainable investing principles he championed, he doubled down.
"Stakeholder capitalism is not about politics," Fink wrote. "It is not a social or ideological agenda.
In recent years, dollars poured into ESG-themed funds run by BlackRock, Vanguard, State Street Global Advisors and smaller asset managers. Then last March, the Fink Doctrine appeared to shift.
In his his most recent letter, Fink discussed 2022's lousy stock and bond markets, the need for investing to be "more accessible, affordable, and transparent," the banking crisis that first claimed Silicon Valley Bank, higher interest rates, inflation, the
As for the environmental, social and governance theme that pervaded his prior letters? Fink wrote that "It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy … government policy, technological innovation, and consumer preferences will ultimately determine the pace and scale of decarbonization. Not once did his letter refer to "ESG" or the phrase "environmental, social and governance."
BlackRock oversees $9 trillion in investor assets, including $650 billion in sustainable mutual and exchange-traded funds, making its leader's letters a barometer of a broader economic and cultural zeitgeist. Depending on your view, Fink's March 15 letter was either a refinement, a retrenchment or a hard pivot from the sustainable investing conversation that increasingly dominates corporate boardrooms, political offices and mainstream news headlines.
What's clear is that Fink's shift in tone came amid a burgeoning backlash against sustainable investing tenets. Conservative politicians in fossil-fuel heavy states are railing against ESG tenets as "progressive" and "woke" investing that sacrifices profits for principles.
In March, the Republican governor of Texas, Greg Abbott, wrote to President Joe Biden to denounce "ESG fanaticism" as "
Twitter owner and Tesla chief Elon Musk tweeted last year that "ESG is a scam — it
The climate is heating up, and so is the divisive and partisan battle for the soul of sustainable investing.
"ESG is going through a healthy reckoning," said Nikita Singhal, the co-head of sustainable investment and ESG at Lazard Asset Management.
Asked if Fink's recent letter signaled a softening of BlackRock's stance on ESG, a spokesperson said that it "reinforces what BlackRock has said consistently about sustainable investing."
The spokesperson added that "investing for the long term requires taking a long-term view of what will impact returns for clients, including demographics, government policy, technological advancements, and the transition to a low carbon economy."
Knives are out
Fink's letter came seven months after attorneys general in 19 Republican-controlled
Last January, a block of 25 conservative states, led by Texas,
Meanwhile, more than a dozen conservative states petitioned the Federal Energy Regulatory Commission in May to challenge the legality of BlackRock's ability to own more than $10 million of voting shares in utility companies — heavy fossil fuel emitters whose shares are in its funds — or 20% of such shares across all its index funds, while potentially requiring those energy providers to follow ESG priorities.
Last November, red states filed
The scrums come as ESG themes are increasingly woven into the fabric of daily life.
In June, The New York Times reported on New Jersey as the first state to require that climate change be
Now asset managers that focus on sustainable investing are shying away from the ESG label, even as they say they remain committed to running investment funds focused on companies that will improve the environment and society.
"We don't really like the letters 'ESG'," said Joe Sinha of Parnassus Investments, an early pioneer of sustainable investing that uses ESG factors when researching and choosing companies to include in all of its investment funds. He added that in client conversations, marketing materials, social posts and on its corporate website, Parnassus is "trying not to use the label as much, because unfortunately, some of those words become charged."
ESG, Sinha said, "is framed as, or is, the attribute itself. I'm honestly happy to just do away with the phrase entirely."
Asked if the ESG backlash had impacted the way BlackRock thinks about and markets ESG funds, the spokesperson said, "BlackRock's model is based on providing our client's choice. For the clients that want it, we've seen persistent demand for sustainable investments regardless of the market environment."
The ABCs of ESG
The umbrella term ESG comprises a welter of issues, from carbon emissions and fair labor practices to boardroom diversity and good corporate governance. Though purists would argue that socially conscious investing, impact investing and corporate social responsibility also generally fall under the ESG umbrella.
Therein lies a fundamental problem.
"It's almost like we need to get rid of ESG as a brand or as a monolithic concept, because it's not monolithic — it's actually part and parcel of good fundamental investing," said Lazard's Singhal. "This space is actually one of the greatest alpha generation opportunities of our time because the market does not have a consensus view on things like carbon emissions and other issues."
Only several years ago a niche investing strategy, its main investors are institutions such as pension, endowments, hedge funds and mutual funds. Accounting giant PwC sees ESG-focused institutional investment
Some 61% of North American investors
Debates have raged for years over whether ESG funds have lagging or superior performance compared with broader funds, with different studies proving one side or the other.
"In a bull market, ESG was easier," said Michael Patanella, the national managing partner of asset management at accounting and advisory firm Grant Thornton in New York. Even though stock and bond markets are up this year following significant volatility, "right now, returns are very challenging," he added. "So the big question now is, how focused are investors on ESG versus on returns?"
The Fink Doctrine conceived of companies as agents of environmental and social change. But ESG is often marketed as something else: as an expression of an individual investor's personal values and beliefs.
In a March 2022 study by NORC and the FINRA Investor Education Foundation that was conducted with 1,228 retail investors, 77% of respondents said that if they had the opportunity to invest in a "socially responsible" mutual fund, they would assume that companies held by that fund would
Only 57% agreed strongly or somewhat that ESG investing can be a way to make positive change in the world. Retail investors thus see sustainable principles more as about their personal beliefs than about remaking society.
The "2023 Trends in Investing Survey" from the Journal of Financial Planning and the Financial Planning Association found that
Companies are caught between a rock and a hard place. On one front, the Securities and Exchange Commission is finalizing rules that will require them to report climate-related risks and emissions data in securities filings. Meanwhile, 3 in 4 investors now consider ESG to be
Notably, the idea of duty doesn't reflect the Fink Doctrine's premise that a company's "positive contribution to society" is in addition to its raison d'etre of achieving the best financial performance. Instead, the fiduciary notion signals how practices to promote sustainability are increasingly built directly into a company's financial metrics.
The fusion takes concerns about climate change and social issues from an exterior position to an internal one. And it turns a focus originally rooted in values and judgments into one baked into corporate balances sheets.
"ESG principles are less about a value judgment and more about good business decisions," said Parnassus's Sindha.
What's known as ESG risk refers to the degree to which a company's operations and practices expose it to potential disasters that can tank its share price. For example, when owners of Samsung Galaxy smartphones were warned in 2016 that their lithium ion batteries could
When 149 freight train cars run by
Morningstar's Sustainalytics calculates a company's ESG risk through its exposure to an "incident," meaning "company activity that generates undesirable social or environmental effects."
"Incident" can refer to faulty infrastructure, sexual harassment, bribery, corruption, drought-stricken rivers that make transportation of consumer goods difficult and operations in countries with repressive regimes, among other things. Sustainalytics says that most incidents are "social" in nature and involve product quality, safety and labor relations. Corporate governance-related incidents account for roughly one-third the total, followed by environmental incidents at 10%.
Like storm categories ranging from squall to a catastrophic category 5 hurricane, a company's ESG risk rating reflects the degree to which its financial performance can be impacted by an incident.
BlackRock isn't the only giant to shift its messaging.
Last December, Vanguard, the world's largest mutual fund manager, said it was pulling out of a global investment industry initiative aimed at attaining "net zero" greenhouse gas emissions no later than 2050. Investment firms don't emit much by way of greenhouse gasses, so the Net Zero Asset Managers program is intended to push those firms to screen the companies they include in their funds.
Vanguard, where 80% of clients' assets are invested in low-cost index funds that provide diversified access to stocks and bonds, including those of fossil-fuel companies, and thus don't screen holdings for ESG criteria, said it undertook the move for
The first: "so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks." The second: "to make clear that Vanguard speaks independently on matters of importance to our investors."
Two days after it announced its withdrawal, Vanguard posted a note by two of its senior investment strategists who wrote a paper in a peer-reviewed finance journal. Said the note: "ESG funds have
In his most recent letter, Fink wrote that "I've long believed that it's critical for CEOs to use their voice in the world — and there's never been a more crucial moment for me to use mine. I will do so whenever and wherever I believe it can serve the interests of our clients and the firm."
