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.
…
Read more: https://www.blackrock.com/corporate/en-au/investor-relations/larry-fink-ceo-letter.
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.
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An efficient well managed steel mill, for example, will probably use less energy and emit less carbon dioxide than an inefficient one. But it is not necessarily true that a steel mill can become ‘greener’ and more efficient by simply targeting reduced carbon dioxide emissions.
People like Philipp Hildebrand and Larry Fink are paid lots of money to not misunderstand cause and effect. They can be replaced by shareholders if they are seen to be losing the plot.
Using less energy to get the same output means more money for the owners.
You don’t need government mandates to force companies to become more efficient.
Some of the more obvious stuff is missing from this discussion.
1 – China has become a major manufacturing center. It is currently the USA’s biggest trading partner. Almost everything you buy is made in China now, including your clothing and the household stuff like appliances, things that you take for granted. Hong Kong has a rag trade district that has been in existence for more than a century and is busier than ever, and the major clothing designers (Gucci, Versace, etc.) get their work done there, not in some atelier in the attic of their design center.
2 – The following industries used to be major US employers: furniture; clothing; dishes; appliances; automobiles; footwear. Check the manufacturer labels on everything. My stove was made in Mexico 20 years ago. The same stove is now made in China. My jeans are made in China. It used to be my t-shirts were made in Egypt; now they’re made in China. Only a few major companies like Purina (pet and livestock foods) and Busch still employ people in great numbers, and even the craft beer brewers end up selling their formulae to larger companies like Busch. Even your precious tablets and phones are made in China. Check the labels on everything in your household and then tell me I’m wrong. With VERY few exceptions, your entire world is manufactured in China.
3 – While you’re moaning about the great companies of the past, read the history of how Montgomery Ward failed as a major corporation: management did not see what was coming down the road. It’s the reason shops are pulling out of malls and Sears is barely hanging on. Neither Wards nor Sears produced products. They were sellers, but they both failed to see the changes in hardware goods marketing and have paid for it. Same is true of Macy’s, which bought up Marshall Fields.
There are very few manufacturers of goods left in this country, despite some very clever ideas from very bright people: all those bright ideas end up being manufactured in China. The only reason Amazon can expand as it does it that it does not manufacture anything; it simply acts as a 3rd party delivery system. Neither Google nor Apple produce their own tangible products (tangible, as in phones, tablets.)
Again: check the labels.
4 – The REAL issue is profit; Blackrock doesn’t produce a product. Its only product is a paper/electronic sheet that tells you, the investor, what your net worth is when you look at it. You should be able to pull out any time you want to. Corporations only exist for the purpose of making a profit. If the profits stop flowing, investors pull out.
I made a reference to Enron in my first comment. If you don’t remember that financial disaster and what followed, look it up: everything Enron put on paper was a lie. My random guess is that Blackrock’s CEO is taking whatever cash he can grab out of this company because something is wrong at the bottom line, and he’s blustering to cover it up. He’ll escape unscathed and everyone who has cash in that company will end up wondering ‘wha’ hoppen?’ A real money manager, someone worth his salt, would cast a jaundiced eye on the green industry, recognize the consistent failures and avoid putting even one cent into it. Ergo, I believe it’s fair to say that Blackrock is hiding a problem and this is a smokescreen.
We still make as much clothing in this country as we used to.
The difference is automation has dramatically reduced employment in those industries.
While some of the manufacturing has moved overseas, the design and development still are done in the US.
It’s not Capitalism that’s the problem. Capitalism is the way the world works – free exchange of goods and services.
It’s human nature — greed, unconcern, selfishness, hatred, manipulation, lying, dishonesty, pride — they need to change.
But those things are embedded too far in their own behaviors, so they won’t go there. No, labeling them “Capitalism” and making a lot of noise while raking in the wealth is what they do.
‘Capitalism must change to avert climate change’
Capitalism is a term invented by Marx, his pejorative of free enterprise.
“Free enterprise must change to avert climate change”
It’s nonsense. Freedom can only be stopped, not changed.
The first use of the term ‘Capitalist’, from which ‘Capitalism’ grew was by Turgot, in 1770, in his book, “Reflections on the Formation and the Distribution of Riches”. Marx did not use the ‘Capitalism’ in his original work, ‘Das Kaptial’, 1867, the word ‘Capitalism’ was ‘interpolated’ into later translations of his work by Soviet editors.
Free enterprise is an ideal that cannot be realized because the underlying assumptions do not hold.
I’m willing to bet you have no idea what these underlying assumptions are.
PS, for government to fix free enterprise, than government must be more free of flaws than is free enterprise.
Since this will never be the case, no sense trying to fix whatever these imaginary free enterprise flaws.
‘for government to fix free enterprise, than government must be more free of flaws than is free enterprise.’
Which, as you indicated, is an impossible scenario because there are no corrective mechanisms in government as exist in the private sector.
These are the ‘underlying assumptions’ that our ‘Independent’ seems unaware of – not an ‘ideal’ – that’s progressive jargon (as in deceptive BS) – it’s simple economics.
In my experience, everyone one of these so called “flaws of free enterprise” are the result of other people being allowed to have priorities that differ from the person doing the complaining.
Actually, the two main assumptions that do not exist are that the two parties in an economic transaction have the same knowledge and the same abilities. That is they are equals. Under Capitalism, the majority of people have only one thing to sell in the marketplace and that is their own labor, which for many, if not most, is losing its value. They are wage slaves.
The fact that both parties believe themselves to be better off is all that matters.
That some third party then feels they have the right to intervene and declare that the two parties are not optimizing their well being in the manner that the third party feels should be optimum isn’t relevant.
Wage slaves, the terminology of the fascist, why am I not surprised to find that you believe in such nonsense.
BTW, where did you get the absolutely insane notion that labor is loosing value?
Wealth is increasing, all over the world.
The only place where it isn’t is where busy bodies such as yourself have decided to fix the “flaws of capitalism” by having the government take control.
MarkW – Wealth is increasing for some people, not everyone. The gap between the wealthy and poor is increasing in the U.S. and the middle class is shrinking. You think I am advocating more Government, but I am not. Big Government is just as flawed as Big Business.
Governments? Not all do poorly. The government of Iceland is pretty good at managing things. The people are a pretty happy bunch. Senegal is admired in Africa.
“Society is demanding that companies, both public and private, serve a social purpose. ”
In some countries, at the encouragement of the government, companies have embarked on corporate social responsibility programmes. This led in South Africa, for example, to thousands of private initiatives that deliver something to those with less, however defined. When the imagination of the whole country is applied to a large social problem, the result is far better than any of the governments.
I am sure that one day funding of even international programmes will be by voluntary contributions and ‘earmarked funds’ dedicated to solving problems that are quite unnecessarily being loaded on the shoulders of the governors. The future ain’t what the past was.
Global warming, or its more encompassing phrase, climate change, is nothing more than the Left’s effort to co-opt science in the name of socialism. I wonder what investors will think of Blackrock’s decisions to fund a progressive agenda rather than provide income and retirement.
Sounds like Blackrock wants to follow the Venezuelan model of transforming a society from wealth to poverty,.
With elites. Don’t forget the elites.
For most environmental issues, corporations already pay for whatever damage they cause via pollution control technologies etc. They pay for the rest via taxes (e.g., for municipal water treatment of waste, funds to EPA). The idea that no externalities are considered is simply false. The attack on capitalism is simply insane. The most polluting economies have always been the communist ones, with dictatorships not far behind. The problem is not capitalism but simply that any economic activity creates some waste, including CO2.
And so the transfer of wealth begins from within as the “conspiracy theory” comes to life.
In the early 1990’s, we found a sodium borate mine called Loma Blanca in Jujuy Province in Northern Argentina at about 4200m elevation above sea level. We funded this discovery 50:50 with INCO (International Nickel Company).
Herds of wild vicunas were visible, always in the distance, and the occasional rhea (ostrich cousin) roamed the range – they were large, very fast and nasty.
The local people grew little potatoes and raised llamas in this high desert. They lived in villages with no apparent government or medical services. I think they lived much like they have for thousands of years. They were very nice, amiable and hardy. I liked them and think of them often.
The air was thin and some non-natives found it difficult to survive without oxygen at night. In winter, temperatures dropped to -40C (-40F) because of the altitude, even though it was not that far south of the equator.
At the time of our discovery, I was encouraged with the idea of bringing modern medical care to these people – their infant mortality rate was probably very high and life spans shortened by preventable diseases. I think that medical care has been introduced because of the new mine.
Along with that medical care has come a lot of other “modern conveniences” – I’m not so sure that these will prove helpful.
Regarding “corporate social responsibility”, I think it is generally a good ideal – but one must tread carefully. You can never be sure if you are making things better or worse, until you know the society very well. As a parallel example, we have plunged into countries to overthrow vicious dictators, only to create anarchy and much worse living conditions for the average inhabitant.
The problem I see with the Blackrock approach is that these people understand money, but they often do not understand science. If they think that “catastrophic manmade global warming” and “climate change” are serious problems, then they are likely to take the wrong action and do more harm than good – that has certainly been the history of global warming alarmism to date.
Since they are financial people, I strongly suggest they read Charles McKay’s book written in 1841, entitled ““EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS – Financial Panics and Manias”. Modern examples could include Y2K, the Dot-com bubble, the sub-prime mortgage disaster and the 2008 market crash, etc etc.
If financial people were really that good, most or all of these fiascos would have been avoided.
Regards to all, Allan
“Without a sense of purpose, no company, either public or private, can achieve its full potential.”
And what is Blackrock purpose? TO MAKE MONEY! That is all … and the managers there have to know that. If they can convince other people that setting non-productive goals is truly productive then they can use that to make more money for themselves.
Then again, maybe they are truly emotionally stunted and they are trying to assuage their guilt because they produce nothing.
Hi Don,
I have made an enormous amount of money for those who invested in my projects. That does not preclude me finding ways to help people.
The big problem is differentiating good from bad ideas, and preventing misallocations of resources into false or fraudulent schemes, like global warming alarmism.
These financial people may be well-intentioned, but they apparently have no scientific training nor any understanding of the Scientific Method. They just believe what they are told, and do great harm when they think they are being virtuous.
One does not need to always look for scoundrels. Only about 4% of the population is sociopathic*, so for every scoundrel there are about 25 others, but half of them are of less–than-average intelligence. This group provides the audience for Al Gore’s speeches. Don’t laugh – somebody’s got to comprise the bottom half.
Regards, Allan
(*OK – more like 80% of lawyers)
I think the whole thing is heading to an entirely different destination than anyone is expecting. AI and machines in robots and automatons will inevitably take over manufacturing stuff and providing most services. The important job of making things (other than artsy-fartsy one-off stuff) will not be entrusted to weak, mistake prone, humans who are limited by their biological requirements and so waste two thirds of every day sleeping, procreating and eating. Everything will all be done by machines so that everyone’s needs can be met much more efficiently and conveniently, in the process, be kinder to the environment.
But how will everything be distributed if no one has a job? I’ll guess that will be taken care of by people owning the means of production, i.e. shares of stock in the various manufacturing or service companies. Individuals will be bequeathed by the government a basic portfolio of stocks at birth and can then live in moderation or trade their way in to wealth or blow it all and end up in a back-to-basics, artsy-fartsy communes or perhaps a robot run asylum. This will simultaneously satisfy both the socialist and capitalist cravings of thinking humans . . . that is, if any humans are still thinking after all this happens.
What is wrong with living in moderation in small, close-knit communities where everyone knows each other? Sounds like living on a human scale.
If that’s what you dig, go for it.
It isn’t for everybody.
That’s not what’s being pushed. Instead, we’re talking small, high-density populations – all the things that produce the worst conditions, behavior, and strained resources – every time. Don’t try to pretty it up by trying to sell it as suburbia – it’s not.
South River Independent
Well, I need to live on the ground floor (stairs, getting material into the house), and don’t want anybody living above me (work nights, need quiet above during the days and evening!), and need a large work room or heated garage. So, everybody else must live below me in the multiple basement tiers, and put up with me walking around and cleaning dishes and vacuuming above them during the nights. What was that little bit about “freedom” I remember from distance past?
So I guess John G. has never heard of slum neighborhoods, or places like Englewood in Chciago, or 63rd and Stony Island. How about the CHA project housing in Chicago, built in the 1960s to provide low-cost housing to low income families. Instead, the projects turned into the worst slums ever, ridden with criminals, gang bangers, drug dealers, and lots of dead children (ages 3 to 18), dying of crime-related causes such as being thrown from a 3rd story stair landing to the ground below.
That’s your “small, close-knit communities where everyone knows each other”, The projects were demolished in the late 1990s-early 2000s and those “close-knit communities’ moved out into the neighborhoods on the South Side, and the crime rates went up and up and up….
Idealism is a mental disorder.
But of course I do not mean the pathological communities you mention. These are perversions of small, close-knit communities that live in harmony for the mutual benefit of all. What you describe is the result of the Capitalism that you think is the solution to our problems.
In other words, you have some mental vision of a phantom utopia which you believe will be possible once everyone is forced to live the way you think they should.
There you go again MarkW. I am not advocating forcing anyone to live how I want them to live. I am advocating for those who recognize what is going on to voluntarily form new relationships with like-minded people for mutual benefit.
If everything is produced on demand by machines, from mine to final product, then nothing will cost anything.
[Don’t worry, be happy. The mods have already cornered the “spare parts for everything” machine future trading market. And the “new parts raw material for everything” futures markets. .mod]
MarkW – Of course you will need Big Government to build the machines and set them to work. Do you ever read the nonsense that you write?
You need big government to build machines?
Any you accuse me of writing nonsense?
Machine built by big government: https://tse4.mm.bing.net/th?id=OIP.BZRtZ8FUN_2UzBUcR_nuogHaFj&pid=15.1
MarkW – If you are suggesting that machines are going to produce everything and that the products will cost nothing, that is nonsense. (Business will not build such machines because there is no profit in it. Government, which is not concerned with profit, would have to build the machines.)
Mr. Hildebrand may talk about “serving a social purpose” and he may sail with the wind.
People who look at deeds rather than words remember, however, that he and his wife served themselves when he was head of the Swiss Central Bank. His wife bought foreign currency just before it was up-valued by Mr. Hildebrandt.
He had to resign shortly afterwards.
How many people invest in socially acceptable funds? I know, quite a few. I don’t know why. Invest in something that has better chances of making you money, then invest those profits in your own windmill if you wish. If I had anything in Blackrock, I would be cashing out this minute.
Investing in windmills and solar farms is only going to make profits (sporadically) as long as governments support it.
If it makes them feel better about themselves, that may be worth the lower payback from such funds.
The problem is when they start demanding that everyone else invest as they do, or they demand that since they are such virtuous people they shouldn’t have to suffer because of that virtue, therefore government should do something to make up for the income they have voluntarily foregone.
That’s kind of the same philosophy Obama was using as justification for strangling our economy.
Of course, that doesn’t stop the Progressives from trying to give him credit for Trump’s economy – ‘building upon Obama’s.’
Beyond bullsh*t.
At least they are consistent. Whatever went wrong during Obama’s term, they blamed on Bush.
Leftism in a nutshell.
If it’s good, we are responsible.
If it’s bad, you are responsible.
Perhaps Blackrock should consider the beneficial effects of adding CO2 to the atmosphere rather than on global warming alarmism:
https://www.nasa.gov/feature/goddard/2016/carbon-dioxide-fertilization-greening-earth
We certainly need to change capitalism. But not “because climate change”. Actually because: Black Rock, Goldman Sachs (& Wall St generally), “The Big Five”, Enron, derivatives, George Soros (and others of his ilk), FreddieMac-and-FannieMae, VW, Carillion, Davos, Bilderberg, etc. etc.
You never know, capitalism – as in competitive free enterprise – might even work. But it hasn’t been tried for years/decades/centuries. The current system seems to be somewhere between a ‘rent-seeking economy’ and complete kleptocracy.
I’ve been told by quite a few communists, that everything that isn’t pure communism is a form of capitalism.
That’s how they can manage to blame everything on capitalism.
And of course “pure” communism has never been tried, but as soon as it is, it will work.
We have to change capitalism because of all the socialists???
Just because someone has money, doesn’t mean they are a capitalist.
“Just because someone has money, doesn’t mean they are a capitalist”. In this day and age it really DOES (by and large). These people are capitalist exactly and by definition because they have large amounts of money mostly in the form of capital. NOT because of some politico-economic ideology they hold.
So Soros might be a socialist in terms of his ideology (though I don’t know that for a fact); but he IS a capitalist precisely because of his vast reserves of capital.
Now your when Blackrock man talks about the need to change ‘capitalism’, I take that to mean he thinks it’s the actual current (western) system that needs to change (i.e. I think he calls the current western system “capitalism”). People who regard ‘capitalism’ as an ideal will disagree of course.
I myself find the word ‘capitalism’ ambiguous and try to avoid using it when talking about the politico-economic ideal which (in my opinion) is better described by the name ‘competitive free enterprise’ (If you will excuse my UK spelling of the word)
Having money does not make one a capitalist, not today, not ever.
What makes one a capitalist is engaging in the free market.
OK, Blackrock has contracted the plague. Good to know. Divest all assets tied to Blackrock. Ignore their “wisdom.”
A majority of emissions are coming from non-capitalist countries. One third from China.
Is ‘changing capitalism’ going to slow China’s emissions. Or reduce them?
Wake up, the world has changed.