Larry Fink’s Letter to CEOs
"Purpose In Action"
At the start of each year, I have made it a tradition to write to you, the leaders of companies in which our clients are shareholders, to advocate governance practices that we believe will maximize long-term value creation. This year, while celebrating our 30th anniversary amid a turbulent market, I took time to reflect on new areas of opportunity and consider how BlackRock and companies it invests in should adapt. It has been a great privilege and responsibility to manage the $6.4 trillion in active and passive investments that clients have entrusted to us. BlackRock reaffirms our commitment to protecting and enhancing the value of our clients’ assets by encouraging management practices that drive long-term performance and take into account environmental, social, and governance (ESG) factors.
Last year, I wrote that companies must declare a social purpose that benefits all of their stakeholders—not only shareholders, but employees, customers, and society at large. The importance of serving a social purpose was never more clear than in 2018, as geopolitical instability, fear, and changing investor preference contributed to high volatility. But volatility in equities is normal. The US economy expanded in 2018, fueled by tax cuts and spending increases. Stock prices have climbed back since their December plunge, and BlackRock foresees economic growth in 2019.
Still, uncertainty has increased. Our analysis locates various causes, including political irregularities in the US, trade war frictions, fragmentation in Europe, the rise of populist political parties, 2019 elections planned in India, Canada, Australia, South Africa, and the EU, and the 2020 US election. But we find that the biggest contributor to uncertainty is also the greatest threat to the long-term stability of our economy and our investors’ assets: climate change. Companies must address climate risk factors or fail in their fiduciary duty.
BlackRock has engaged companies we invest in toward longer-term growth and discouraged short-term thinking that leads to volatility and downturns. I spent much of 2018 reflecting on BlackRock’s own social purpose and how it protects long-term value for our clients.
Our market position brings significant influence to bear. This power is a privilege we wield by engaging with management to drive the sustainability our clients need. As fiduciaries, we are entrusted with grave responsibilities. Our investments affect decisions made in C-suites around the world and shape corporate behavior at the highest level. If we are honest about the central role asset managers play in driving the global economy, we must also be honest about the direction we are steering it in.
As we enter a year of increasing uncertainty, BlackRock will make two strategic pivots to better align our investment decisions with our social purpose, and engage companies we invest in to adopt similar methodologies. We will move beyond merely defining our social purpose—we will demonstrate that purpose in action.
Purpose In Action, or Purposeful Inaction?
BlackRock has always been motivated by social purpose. In the past few years, we have evolved our approach to ESG. Michelle Edkins, Global Head of Investment Stewardship, and her team will continue to engage with companies toward greater long-term thinking. Brian Deese, Global Head of Sustainable Investing, has been working to move more assets under ESG target-date funds and exclusionary screen ETFs, and is developing new emerging market fixed-income indexes, all with ESG principles. We spent much of 2018 mapping near-term climate risks that will affect municipal bonds and real estate, and we’re going to scale that methodology across all of our investments. We engaged companies on increasing board diversity and expanding ESG values. With our partners in the Investment Stewardship Group, we criticized the Trump administration for pulling the US out of the Paris Agreement to combat climate change. We see the Paris Agreement as an important framework for long-term sustainability. Despite denouncing the short-term thinking that pervades management, BlackRock’s voting record has not aligned sufficiently with our own ideals. That’s going to change. Moving forward, we will demand more accountability. We will require all companies we hold stakes in to align their business models with the goals of the Paris Agreement. We have made strides in this direction, but the urgency of the threat demands that we increase our focus.
After extensively analyzing our role in driving market trends, and acting out of a need to protect our clients’ long-term returns, we have identified two pivots that we have the ability to make this year—a structural adjustment to our exclusionary-screen indices, and a cultural adjustment to our shareholder action:
First, we are expanding a screen of non-Paris compliant companies to now apply by default to all ETFs, mutual and other broad indexed funds we offer, except when investors opt out and explicitly ask for these stocks. It is not enough to simply create exclusionary funds that screen out certain companies, because we offer thousands of products and most investors are passive. To make good on the threat I issued last year, we will begin this work by divesting from coal companies in our actively managed funds. Within 5 years, more than 90% of our 1000+ investment products will be converted to screen out non-Paris compliant companies such as coal, oil, and gas, which we see as declining and endangered. As a result, an increased percentage of our assets under management will align with our ESG values while sustaining high returns. This approach keeps responsibility in the hands of our clients, who will always have the choice to opt-out of our vision of a stable future and back into coal, oil, and gas.
Second, BlackRock will shift its approach to engagement. We have always supported management, but our clients have become impatient with companies that tout ESG values but do not align their planning to a Paris-compliant model. Beginning in 2019, BlackRock resolves to use our considerable stake in energy and related sectors to vote in favor of management only when we find them to be working toward net zero carbon emissions by 2050. We will use our shareholder position to keep companies accountable to resolutions that align with these values, and aggressively vote down those that do not. In cases where companies consistently fail to value long-term viability, we will vote out obstructionist boards and vote in members who are more forward-thinking.
Generating sustainable returns into the future requires that we have a future. BlackRock’s market share and influence offers an historically unprecedented opportunity to make lasting change that will protect long-term returns by protecting global stability. By designating non-Paris-compliant companies as a screened-out “sin stock” by default, and by taking more aggressive shareholder action, we will build a healthier economy while still securing long-term profitability.
It is time that companies evolve beyond short-term interests that we all know drive instability and risk. Companies must now be able to reconcile their strategy for long-term growth with their publicly articulated social purpose. If a strategy for growth cannot be synthesized with social purpose, no matter how profitable it may seem in the short term, we will no longer consider that a sustainable model.
With climatic threats positioned to destabilize markets at ever greater levels in 2019 and beyond, BlackRock is determined to take a leadership role in building a Paris-compliant economy. Our clients—who are your company’s owners—are asking you to demonstrate management practices that will drive not only healthy investment returns, but also civilization’s very survival. We look forward to engaging with you to that end.
Laurence D. Fink
Chairman and Chief Executive Officer