World’s largest asset manager champions corporate stewardship
Each January, Blackrock CEO Laurence Fink writes to the CEO’s of all the major companies his clients are invested in to outline Blackrock’s approach to investment and his expectations for the period ahead. As the leader and founder of the largest asset manager in the world, many people believe that what Fink has to say is worth paying attention to.
It should come as no surprise to anyone harrowed by the shocking scenes of Australia’s devastating bushfires that Fink’s 2020 letter has a sharpened focus on the need to take action on climate change. According to Fink, we are on the edge of fundamental reshaping of finance as the evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Further, the capital markets response will come long before we see further physical climate change as financial markets bring forward the risks. For its part, Blackrock will begin to exit certain investments that present high sustainability-related risks such as thermal coal producers.
To respond to heightened environmental risks, Fink’s returns to his previous call for companies to embrace their purpose and serve all stakeholders. If we are to make a lasting impact on the existential threats we face as a society, we need business to use its ingenuity and resources to drive the solutions. A company’s core purpose starts with delivering value to customers in a way that contributes positively to society. How it operates is just as important as what it sells. If the company treats employees fairly, deals ethically with suppliers and supports the community, then it can achieve its purpose with profit as the expected outcome.
Fink drives home the importance of companies demonstrating responsiveness to their stakeholders for their ability to attract quality capital. In the absence of such transparency, institutional investors will increasingly conclude that companies are not adequately managing risk. For Blackrock’s part, it will make use of its significant size to vote against boards that are not making significant progress towards sustainability.
Blackrock is not an island in its philosophy on “investment stewardship” given that over $US23 trillion of global assets were invested according to socially responsible investment in 2016, representing a quarter of total assets under management in the world. Its approach is consistent with the statement on the purpose of the corporation by the Business Roundtable representing corporate leaders responsible for $US7 trillion ($10.2 trillion) of combined sales. It also accords with BCG’s call for total shareholder returns (TSR) to be complemented by attention to Total Social Impact (TSI), referring to the sum of all the ways a business affects society.
Blackrock’s approach to investment governance, TSI, and CSA’s approach to “customer stewardship” all share the same underlying objective – to judge the total impact of companies in addressing the needs of customers and contributing to society while creating profit to ensure their longevity. Each of these approaches places central importance on the articulation of an organisation’s purpose and the value to be delivered to customers, which CSA refers to as “ambition”. It is the board’s role to fully engage with management to ensure the embodiment of this purpose in the business model, strategy and culture to underpin sustainable financial performance.
A strong sense of purpose and commitment to stakeholders can help an organisation connect more deeply with its customers and adjust to the changing needs of society. For this reason, CSA looks at how the organisation engages with customers and stakeholders and factors their needs into its long-term strategy and its adaptiveness to changing social and economic needs.
Both Blackrock and CSA consider how the organisation achieves alignment of management, employees and community with the organisation’s purpose including links to long-term strategic goals, milestones to demonstrate progress and employee compensation that promotes long-termism.
Common to each of these approaches is account of the impact of the organisation on the whole supply chain – referred to as connectedness by CSA – including ethical sourcing of inputs. In relation to transport infrastructure, it means taking a whole of journey perspective in adding value for the customer.
Moreover, all these approaches seek evidence of organisations managing sustainability issues extending beyond climate to include disclosures on investment in people and communities and how they serve the vulnerable and the disadvantaged in society.
For further information on how CSA can help your organisation to implement, and communicate, stewardship practices please contact us.