In recent years, BlackRock chief executive Larry Fink’s annual letter to corporate chiefs has become the kind of marquee event in the sustainable investing world that Warren Buffet’s shareholder letters have for years been for the value investing crowd.

His CEO letters have helped to inject “corporate purpose,” “inclusive capitalism,” and “social license” into mainstream investing vocabulary. His letters carry weight: When he declared “Climate risk is investing risk,” it made headlines outside the environmental, social, and governance investing community.

But by the very nature of sustainable investing—investing according to ESG principles—where investors are looking for action and not just talk, his letters have also invited scrutiny of whether BlackRock’s mutual funds are living up to Fink’s words. So far, the verdict is mixed.

While up to 2020, BlackRock’s ESG stewardship performance had remained underwhelming, there are promising signs: The asset manager has since joined the Climate Action 100+ investor coalition, and started disclosing proxy votes and key vote rationales on its website ahead of the SEC’s annual reporting deadline for fund voting records.

Below we examine whether the most recent letter, published in late January, marks a new approach to being the largest capital market steward in a time of existential reckoning.

Longer letters, stronger message

One thing is clear: Fink has been putting greater and greater focus on ESG investing over the years.

Larry Fink’s CEO Letters Press the Case for ESG

Larry Fink CEO Letter

- source: BlackRock

His early letters centered around the theme of long-termism in corporate governance and investing. From 2012 to 2017 he bemoaned the overuse of dividends and share buybacks, and of cutting capital expenditures - railing against the drivers of short-termism in capital markets.

Fink’s 2016 letter, penned just a month after the adoption of the Paris Climate Agreement, made a strong connection between ESG and investing. “Over the long-term, environmental, social and governance (ESG) issues - ranging from climate change to diversity to board effectiveness—have real and quantifiable financial impacts,” he wrote.

In 2017 BlackRock cast its first vote in support of climate resolutions that management had opposed. BlackRock voted for shareholder resolutions at Exxon XOM and Occidental OXY that asked the companies to report on the business risks of a low-carbon policy scenario.

The term “purpose” appears for the first time in Fink’s 2018 message. While stopping short of calling it “stakeholder capitalism,” the vision he articulates over the following three letters clearly goes beyond the prevailing “shareholder primacy” model of governance.

However, this strident tone hasn’t altogether squared with BlackRock’s investment approach.

In November 2020, Morningstar published the first round of a new asset manager ESG Commitment Level evaluation based on an analysis of how intentionally an asset manager incorporates ESG factors into their investment processes and organisations. BlackRock was among 40 asset managers evaluated and was assigned a “Basic” level, meaning it ranked third-tier in a four-tier ranking system. Members of this category were strong in some areas and weak in others.

“BlackRock in January 2020 declared its desire to augment and extend its existing ESG efforts throughout its organisation. The world’s largest money manager’s vow could prove to be a turning point for the industry—a sign that investment firms can no longer ignore ESG risks. But it was also an effort to catch up to global rivals that have more thoroughly inculcated ESG standards in their investment processes, operations, and cultures.”

One area where BlackRock lost points was its ESG proxy voting record. Morningstar’s proxy voting data shows that between 2016 and the close of the 2020 proxy season, the asset manager’s funds had supported only 10 of 165 climate change resolutions voted at US companies.

So how does Fink’s 2021 letter depart from previous years, and in what ways does it commit BlackRock to using its $8.7 trillion capital market influence to “confront the global threat of climate change”?

Below are five points from both the CEO letter and the companion client letter, called “Net Zero: A Fiduciary Approach,” that stand out to us.

Firstly, the companion letter - the one sent to BlackRock clients - commits to “increasing the role of votes on shareholder proposals in our stewardship efforts around sustainability.” At the end of 2020 BlackRock reports already having supported half of the 22 shareholder proposals voted in the second half of 2020.

Furthermore, the letter commits BlackRock to a more-formalised climate engagement strategy, identifying carbon-intensive companies that risk voting action where significant progress is not made toward increased transparency, as well as being flagged for potential exit from discretionary active strategies. It remains unclear whether this list will be publicly disclosed and the laggards named ahead of their respective shareholder meetings.

Secondly, Fink makes a commitment to publishing a “temperature alignment metric” for public equity and bond funds.

Also referred to as an “implied temperature rise” or “portfolio warming potential,” this metric gives an indication of a portfolio’s aggregate global warming trajectory, which can be used to evaluate how well a portfolio is doing in staying within an allowable carbon budget that conforms to a bigger-picture net-zero transition plan.

Some European investment firms have already started reporting such a metric. But as always, the devil is in the detail—there are presently seven methods for calculating this statistic. The adoption of a single, industry-standard metric would drive better emissions disclosure and data availability and is essential in the global accounting for progress toward net-zero.

Thirdly, the letter urges large private companies and issuers of public debt to also embrace the Taskforce on Climate Related Financial Disclosure recommended reporting framework, which is an imperative as these asset classes become increasingly attractive to investors. Previously, Fink’s letters had been less specific about the disclosure obligations of private companies and silent on the obligations of providers of debt. Again, BlackRock has the power to be specific and will likely drive adoption by being prescriptive about the appropriate reporting framework.

Fourthly, the letter emphasises that every company needs a climate plan and every board needs to oversee this plan:

“We are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy… how this plan is incorporated into your long-term strategy and reviewed by your board of directors.”

Fink says that this plan should be disclosed publicly and, while continuing to endorse the TCFD and Sustainability Accounting Standards Board disclosure frameworks for this purpose, BlackRock ultimately backs a single global framework. In October 2020 BlackRock endorsed the International Financial Reporting Standards Foundation’s proposal for a sustainability standards board that would oversee the creation of a global sustainability disclosure framework. Consultation on this proposal ended late in 2020 and the proposal is likely to be formalised by September 2021.

Finally, while Fink’s 2020 letter had a fair bit to say on the responsibility of governments to advance the low-carbon transition and prepare for the inevitable reallocation of capital that this would entail, the 2021 letter implores governments more specifically to “undertake massive climate infrastructure projects, both to protect against physical risk and to deliver clean energy…require[ing] creative public-private partnership to finance them.” As the next round of U.N.-mediated climate negotiations (called COP 26) approaches, will BlackRock this time lend its voice to the anticipated collective investor message to global leaders, previously convened by The Investor Agenda, conveying investor support for net-zero policymaking?

Fink is by no means a pioneer of the ESG lexicon, nor is BlackRock a pioneer in ESG investing. Nevertheless, his much-anticipated CEO letters deserve credit as contributing to the mainstreaming of ESG in investing. Importantly, they’ve also become something of a proxy season kick-off and this year’s letter sets a discernably higher bar for climate-linked engagements ahead of annual shareholder meetings.