Economy and Society: Responses to BlackRock CEO annual letter


Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

On Wall Street and in the private sector

BlackRock CEO Larry Fink on ESG

Last week, BlackRock CEO Larry Fink’s wrote his annual letter to fellow CEOs. This year’s letter was adamant about the importance of ESG, stakeholder capitalism, and sustainable investing but was also something of a response to critics. The CEO of the world’s largest asset management firmnow with officially more than $10 trillion in client assets under managementargued that sustainability is a financial, not political, value and that, in his view, stakeholder capitalism is capitalism at its finest. About stakeholders, he wrote the following:

“Over the past three decades, I’ve had the opportunity to talk with countless CEOs and to learn what distinguishes truly great companies. Time and again, what they all share is that they have a clear sense of purpose; consistent values; and, crucially, they recognize the importance of engaging with and delivering for their key stakeholders. This is the foundation of stakeholder capitalism.

Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not “woke.” It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism. 

In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”

About sustainability, Fink wrote the following:

“Most stakeholders – from shareholders, to employees, to customers, to communities, and regulators – now expect companies to play a role in decarbonizing the global economy. Few things will impact capital allocation decisions – and thereby the long-term value of your company – more than how effectively you navigate the global energy transition in the years ahead.

It’s been two years since I wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions towards decarbonization have also increased. This is just the beginning….

We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses for the massive changes the economy is undergoing. As part of that focus, we are asking companies to set short-, medium-, and long-term targets for greenhouse gas reductions. These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders.”

About his position that BlackRock and others must continue investing in fossil fuels and traditional energy companies while the global economy makes the transition to zero-carbon, he argued the following:

“The transition to net zero is already uneven with different parts of the global economy moving at different speeds. It will not happen overnight. We need to pass through shades of brown to shades of green. For example, to ensure continuity of affordable energy supplies during the transition, traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen….

As we pursue these ambitious goals – which will take time – governments and companies must ensure that people continue to have access to reliable and affordable energy sources. This is the only way we will create a green economy that is fair and just and avoid societal discord. And any plan that focuses solely on limiting supply and fails to address demand for hydrocarbons will drive up energy prices for those who can least afford it, resulting in greater polarization around climate change and eroding progress.

Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy. We do have some clients who choose to divest their assets while other clients reject that approach. Foresighted companies across a wide range of carbon intensive sectors are transforming their businesses, and their actions are a critical part of decarbonization. We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net zero world.”

Finally, in response to critics who charge that Fink’s ESG goals are to advance his own political agenda and, thereby, to disenfranchise voters who might otherwise be expected to make the decisions about the climate and other policy matters, Fink aims to flip the switch, arguing rather that he’s trying to allow every voice to be heard:

“[W]e are pursuing an initiative to use technology to give more of our clients the option to have a say in how proxy votes are cast at companies their money is invested in. We now offer this option to certain institutional clients, including pension funds that support 60 million people. We are working to expand that universe….

We know there are significant regulatory and logistical hurdles to achieving this today, but we believe this could bring more democracy and more voices to capitalism. Every investor deserves the right to be heard. We will continue to pursue innovation and work with other market participants and regulators to help advance this vision toward reality.”

ESG opponent responses

Scott Shepard, the Director of the Free Enterprise Project at the National Center for Public Policy Research, which bills itself as the only full-service shareholder activist group defending traditional shareholder-business relations, wrote the following in response:

“We have reviewed Larry Fink’s 2022 letter to you and your peers, and we have reached two conclusions. Larry Fink doesn’t think that you as CEO or we as shareholders are very bright, or he wouldn’t make so many glaringly false assertions. And because of this, you will lead your company into true mountains of risk – reputational, legal, regulatory, legislative, and more – if you follow his lead.

Over the course of his fairly brief letter, Fink reveals that he doesn’t understand (or pretends not to understand) capitalism. He makes overtly absurd claims about the non-partisan nature of his demands to the corporations in which his clients have invested. He misunderstands his fiduciary duty. And he fails to recognize that his vision for the future is already failing, in the United States and all around the world.

It’s probably not fair to say that your fiduciary duty to your shareholders and your moral duties to other relevant parties require you to reject everything that Larry Fink says. But it is certainly true that you cannot simply rely on anything he says without undertaking your own full, objective, independent investigation.”

At National Review’s “Capital Matters” newsletter/online section, Andrew Stuttaford picks up the theme of misunderstanding or adopting what is referred to in the piece as the “wrong kind of capitalism”:

“CEOs clearly know how to talk the talk to an important investor. There’s nothing wrong with that. What is worrying is that more and more of them have actually come to believe in its more malign aspects. Why? They, and many of their colleagues in the C-suite, have realized that, in a regime where stakeholder, rather than shareholder, capitalism is the dominant ethos in the “private” sector, their rewards will be less dependent on delivering value to shareholders (who can be a demanding bunch) than in the past. Rather, they will be expected to pay increased attention to the somewhat nebulously defined aspirations of their almost as nebulously defined stakeholders. In practice, that means putting “their” companies’ capital, and the power that comes with it, behind a social, political, and economic agenda set by the state, various interest groups (unions, say, or NGOs, to take two examples), and, yes, business, a set-up that may not only offer them a pathway to (in many cases, even more) wealth but also to a degree of political power. And the latter comes with the advantage that it is largely free of conventional democratic control. That’s how corporatism works — and stakeholder capitalism is, as I have argued many (!) times before, a form of corporatism.”

At the Competitive Enterprise Institute, Richard Morrison wonders if Fink might be attempting to walk-back some of his previous rhetoric:

Larry Fink and his team at BlackRock seem to have heard the growing roar of opposition to politicized investing that is emerging in the United States. While his 2022 public letter to CEOs features a heavy focus on climate change and decarbonization (as in years past), it opens with a defensive insistence that the company’s approach to stakeholder capitalism is not political or “woke.” Such a statement would not be necessary if Fink and his allies were not feeling the heat from shareholder activists opposed to the embrace of progressive-left social policies that, contra Fink’s insistence, are inherently political. 

The rhetorical backpedaling is even apparent on Fink’s own favorite topic—climate. Over the past year, skeptics of climate policy (including the policy of a net-zero target for greenhouse gas emissions), have highlighted the problems with the aggressive policy path we see in, for example, the European Union. Energy reliability is falling and energy prices are skyrocketing. Traditional energy sources are being phased out without sufficient baseload capacity being developed to replace them.

This year’s letter—which seems like a response to such criticisms—contains several caveats that climate activists generally prefer not to acknowledge. Fink writes that, “green products often come at a higher cost today,” and acknowledges that “traditional fossil fuels like natural gas will play an important role” during the future energy transition, and that “governments and companies must ensure that people continue to have access to reliable and affordable energy sources.” Refusing to address continuing demand for fossil fuels “will drive up energy prices for those who can least afford it.” That’s a far more reasonable approach than the investing public has generally seen from institutions that place climate change at the top of their list of priorities.

In the States

Pushback against ESG in the states

In last week’s edition of this newsletter, we covered issues facing banks in Texas, some of whom claim, for marketing purposes, to be against investing in oil and guns but also claim, for the purposes of compliance with a new state law, that they do not discriminate in lending arrangements against oil and gas.

The aforementioned Texas law is not the only move being taken by governments against asset managers and banks that are, in their view, allegedly playing politics. Most notably, West Virginia State Treasurer Riley Moore announced last week that the state will no longer use a BlackRock investment fund “based on recent reports that BlackRock has urged companies to embrace “net zero” investment strategies”:

“State Treasurer Riley Moore on Monday announced the Board of Treasury Investments, which manages the state’s roughly $8 billion operating funds, will no longer use a BlackRock Inc. investment fund as part of its banking transactions.

Treasurer Moore said the decision was based on recent reports that BlackRock has urged companies to embrace “net zero” investment strategies that would harm the coal, oil and natural gas industries.

“As the state’s chief financial officer and chairman of the Board of Treasury Investments, I have a duty to ensure that taxpayer dollars are managed in a responsible, financially sound fashion which reflects the best interests of our state and country, and I believe doing business with BlackRock runs contrary to that duty,” Treasurer Moore said.

Treasurer Moore said this action is consistent with his belief that the state should not do business with firms whose corporate policies directly threaten West Virginians’ interests and livelihoods.

“BlackRock CEO Larry Fink has been outspoken in pressuring corporate leaders to commit to investment goals that will undermine reliable energy sources like coal, natural gas and oil under the guise of helping the planet,” Treasurer Moore said.”