Leaders: Get real on climate – or expect your company to whither
At TTU we highlight cutting edge trends to alert leaders on why they must change how they think. We also share examples of great leadership as an inspiration for others.
This is a lightly edited version of Larry Fink’s remarks to the World Economic Forum‘s Davos Agenda on 26 January 2021. That day he published his annual letter to CEO’s. In it he warns companies they must “disclose a plan for how their business model will be compatible with a net-zero economy.” He writes that “no issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day”.
BlackRock has great influence. It has nearly $9 trillion of investments. In 2020 it voted against 69 companies and 64 directors for climate-related reasons. It also put 191 companies “on watch”.
Here Larry Fink adds greater perspective to his alert.
- The ground is shaking: wake up!
- Huge new economic opportunity opening up
- Gap widening between good and bad investment performance
- As a result investor preference is changing
- More data and metrics are expected
- Coming soon: customised and personalised portfolios
I think 2020 was a pivotal year. In 2020 we saw an extraordinary shift in how investors invested.
Across every industry you see a widening gap between the best performing companies in industry and the worst performing companies in industry. So we are seeing investor preference is changing. And much of it has to do with stakeholder capitalism. How a company and their leadership and board are navigating themselves.
Investors think differently
I believe that the differentiation between company A and B in every industry is really changing how investors are beginning to think, and we’re seeing now valuation shifts.
That is because of a company’s role in their stakeholders and how they are building a better community around their stakeholders. In 2020 you needed to spend a great deal of time on your employees. At the same time we saw very big instances in the United States related to racial inequalities. That’s thrust upon us what role we’re playing as leaders.
Sustainability, social and much more
It wasn’t just the role that CEOs had to play related to sustainability. It was also on the S – Social -issue. And let’s be clear, that’s because of the pandemic and the inequality from the pandemic.
It’s hard to measure what you’re doing on the S – social - side of ESG, versus what you’re doing on the sustainability side. That is because they intersect. Re-analyse everything
Companies that are focusing on everything are the leading companies in each industry.
I think the most important change that we are seeing is the existential risk of health because of COVID. It set the framework for the existential health of the world. And this is why we’re seeing more and more in terms of investing.
But as more and more companies report on TCFD [the Task Force on Climate Related Financial Disclosures] and other forums that we have better transparency in every company, that transparency in itself is going to allow capitalism to flourish more, not better.
Huge new economic opportunity
So let’s be clear. The transition that we are going to be undergoing related to sustainability is a huge economic opportunity. We’re going to be creating new technologies, new industries, as other industries are going to be become less important.
Let’s focus on society’s acceptance to create new jobs, to create new technology, to move forward. We’re going to need $50 trillion investing to get to a net zero world. And so it’s not a small price tag. But the opportunity is going to be large.
Coming soon: customised and personalised portfolios
Let me highlight the most significant change that I see for investors. As more companies report, and we have better data at each corporate level, we’re going to be able to customise and personalise portfolios.
The era of just looking at FTSE or MSCI or S&P index is evolving. More and more of our clients are saying: can you design a customised index that meets better sustainability efforts? Or maybe better S efforts or whatever lens that is important to you as an investor?
And if you’re not included in those new customised indexes as a CEO and a board, your company is going to have less demand on your shares. And you’re going to see a further gap between the successful companies and the unsuccessful companies.
That was a big message in my letter.
The ground is shaking. Wake up!
We all have to wake up to this idea that not only technology is changing how we live and how we work and in the future. Technology and investing in data and analytics is changing what we invest in. That will transpire into a huge differentiation between the companies who are moving forward and companies who decide purposely not to do much. And we’re going to be seeing that in valuations.
So I talked about this tectonic shift that’s happening. It happened dramatically in 2020. It’s only going to accelerate in 2021.