Guest essay by Eric Worrall
Mainstream media is reporting that Blackrock Vice Chairman Philipp Hildebrand thinks investors should consider environmental benefits rather than simply focussing on maximum return on investment. But there is more to this story than some reports might suggest.
‘We have to change capitalism’ to beat climate change, says world’s biggest asset manager
By Climate Home News on 25 January 2018
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Climate Home News
Capitalism must change to avert climate change, according to the vice-chair of the world’s largest asset manager, Blackrock.
Two weeks ago, Blackrock boss Larry Fink shook the corporate world with a letter demanding social responsibility in return for the support of his company, which manages around $6 trillion in assets.
On Wednesday at the annual World Economic Forum in Davos, Philipp Hildebrand expanded on that theme in a discussion of “fiduciary duty” – the responsibility to make clients the best return on their investments.
That would mean funds like Blackrock could become duty-bound to consider environmental risks such as climate change while making investments. It would create a dramatic shift, he said, but warned it would take time.
“We have to be realistic, we also have an enterprise to run, we have shareholders, this is a complicated story. Nobody is served by reducing this to very simple, fast things that we have to do immediately.
We have to change capitalism. This is really what’s at stake here. And frankly we need a new contract between companies, investors and governments,” said Hildebrand.
Former US president Al Gore, who was on the panel with the Blackrock executive, agreed that the field of research was still evolving.
But he said: “In 26 sectors of the economy, the vast majority of them, the companies that integrate ESG (environmental, social and governance) into their business plans perform better.”
The following is from Blackrock founder Larry Fink’s letter;
… In 2017, equities enjoyed an extraordinary run – with record highs across a wide range of sectors – and yet popular frustration and apprehension about the future simultaneously reached new heights. We are seeing a paradox of high returns and high anxiety. Since the financial crisis, those with capital have reaped enormous benefits. At the same time, many individuals across the world are facing a combination of low rates, low wage growth, and inadequate retirement systems. Many don’t have the financial capacity, the resources, or the tools to save effectively; those who are invested are too often over-allocated to cash. For millions, the prospect of a secure retirement is slipping further and further away – especially among workers with less education, whose job security is increasingly tenuous. I believe these trends are a major source of the anxiety and polarization that we see across the world today.
We also see many governments failing to prepare for the future, on issues ranging from retirement and infrastructure to automation and worker retraining. As a result, society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.
Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives. And ultimately, that company will provide subpar returns to the investors who depend on it to finance their retirement, home purchases, or higher education.
A new model for corporate governance
Globally, investors’ increasing use of index funds is driving a transformation in BlackRock’s fiduciary responsibility and the wider landscape of corporate governance. In the $1.7 trillion in active funds we manage, BlackRock can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth. In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities as long as that company remains in the relevant index. As a result, our responsibility to engage and vote is more important than ever. In this sense, index investors are the ultimate long-term investors – providing patient capital for companies to grow and prosper.
The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth.
I can’t help thinking Blackrock’s top people have done a remarkably poor job of communicating their ideas, and possibly not fully thought through the consequences of some of their ideas.
I agree with Blackrock that governments are doing a very poor job of preparing people for the future – but governments always do a bad job. Arguably governments are doing an unusually poor job of managing education, law enforcement and public finances by historical standards, though maybe thanks to the Internet we are simply more aware of their mistakes.
The climate message in my opinion is a bit of a red herring. Blackrock might be worried about Climate Change, though this doesn’t mean they’ve bought into the whole climate social justice package. But weaving their climate reference into a message of corporate responsibility has created a lot of confusion.
Companies should invest in their employees. But this investment must be tempered with the knowledge that other companies might take advantage of companies which invest in employees, by poaching well trained employees from their rivals rather than training their own.
I think Blackrock executives are motivated by compassion for the suffering they see, though I also think Blackrock is worried that the frustration and suffering of ordinary people might empower politicians to take radical action, such as seizing or heavily taxing the assets of companies like Blackrock.
Where I think Blackrock has made a mistake, is that people ultimately have to take responsibility for fixing their own lives. You can lead a horse to water but you can’t make it drink. Look at all the people who needlessly live in fear of the carbon demon, despite the wide availability of information on the web and elsewhere, which demonstrates climate risks are wildly exaggerated. People who take responsibility do their own research. People who don’t take responsibility for their own education remain the victims of scare stories they read or see on television.
Many rich people provide scholarships, try to give something back to society. But this is the limit of what can be done. You can offer someone help, but you can’t make people accept that help – the recipient has to be willing to accept the help which is offered.