BlackRock Fink’s Bully Pulpit: Accelerating Stakeholder Interests

posted by Marsha Vande Berg on February 12, 2018 - 9:58am

If you have a bully pulpit, use it. That’s precisely what BlackRock’s CEO Larry Fink did when he championed corporates’ engagement with purpose to staunch the pace of climate change and embrace the preservation of the public commons together with its specific stakeholders.

In his second annual letter to corporate CEOs, Fink told them to get their act together and put purpose on behalf of stakeholders at the frontline of management and make a long-term “positive contribution to society.” He didn’t mince words which also carries implications for corporate boards and directors as well as management.

BlackRock’s advocacy, joined by two other huge index fund money managers, Vanguard and State Street, is squarely on point with what has turned into an accelerated push to incorporate sustainability in business management and by extension, lend standing to the interests of stakeholders both internal to the business and external as in the public commons.

First and foremost, they want corporations and their governing boards to be more forthcoming and transparent in their strategies for advancing the company’s bottom line.  They want corporate thinking to reflect long-term and considered planning in the face of external risks such as climate change, as well as internal business-related risks. Short-termism is out of bounds.

Their position has considerable clout because their invested assets represent the wealth of millions who are willing to trust the quality of their lives, present and future, to the trio’s investment management skills.  Any way you count the assets they have under management –which exceed the $11 trillion-dollar size of the world’s second largest economy, China, the calculation adds up to a very big number.

Nor does their advocacy spring sui generis. It is part of a whole that in recent years also has begun to engage large asset owners, notably public pension funds and sovereign wealth funds, long-since concerned about the capital markets they rely on and the investment implications of short-termism. Their roots are in no small part with advocacy groups speaking on behalf of sustaining the public commons for future generations as core to a larger commonwealth of shared concerns.

Many if not all who are engaged in the effort are signatories of the United Nations Principles of Sustainable Investment. The 225 fund signatories appended to the December 2017 One Planet Summit pledge in effect renewed the UN-styled commitments toward curbing greenhouse gas emissions. 

The Summit took place in Paris, the city where the global community in 2015 pledged their respective country’s commitment to reduce greenhouse gas emissions by two degrees Celsius by 2025 – capping warming at two degrees.

This evolution in orientation toward putting investment behind the E – the environment in ESG (environment, social issues and governance) is both contemporary and part of a relentless and accelerated commitment to push forward - step by small step - toward a goal whose achievement in another day and time might have taken a millennium.

There have in fact been some notable successes. Late last year, shareholders in ExxonMobil sided with New York Common Retirement Fund, a co-sponsor of the winning proxy resolution, and the “corporate purpose” advocators to deliver a hit at a core management thesis of a core ExxonMobil business.

Shareholders, with nearly two-thirds voting against the new management, headed by Secretary of State Rex Tillerson’s successor as CEO, Darren W. Woods, said the company must come forward with an acceptably transparent analysis of impact on its oil and gas reserves were there a mandated two-degree Celsius target in greenhouse gas emissions per the 2015 Paris Accords in place globally.

The bottom line: Shareholders wanted to know what is the resiliency of the world’s largest Big Oil company in the face of a worldwide shift to alternate fuels -- and the possible impact of “stranded” or unused oil and gas assets to future company profits and thus shareholder value.  At the same time, Occidental Oil and PPL Corp., a large utility holding company, adopted similar resolutions while Chevron managed to sidestep the shareholder challenge when the company stepped forward with additional disclosures and won an agreement for ongoing dialogue on the matter.

Meanwhile, BP, Total, Conoco Phillips and Royal Dutch Shell each has endorsed the two-degree analysis without shareholders having to come off the sidelines.

In the case of ExxonMobil, it was a rare illustration of management losing out to shareholders’ preference. The company had rejected the stranded assets argument in its proxy materials, a position that was echoed by Daniel Yergin at about the same time when the author of The Prize: The Epic Quest for Oil, Money and Power, spoke at a Chamber of Commerce event.  Yergin said events that take place 30 years out are not material to big oil and gas companies today, and in any event, it is better that climate regulation be left to governments with expertise rather than financial interests.

The decision by ExxonMobil’s shareholders virtually dovetailed with President Trump’s controversial decision to pull the US from the Paris climate agreement, having previously declared climate change a “hoax”. 

According to Institutional Shareholder Services (ISS), these types of two-degree resolutions are on the increase and will figure more prominently on the proxy landscape this year.  As of late January, ISS counted 59 filed proposals relating to climate change for the upcoming proxy season. This included more than two dozen two-degree scenario proposals and seven related to climate change risk management. The resolutions have been filed by a total of ten different entities and thus do not represent a single campaign but instead a broadening of the interest base.

Investor interest momentum is likewise accelerating at the investment decision making level of public pension and sovereign wealth funds. These institutional investors and asset owners are insisting their direct investments as well as their investments through managers pay closer attention to external non-financial factors.

The world’s largest equity investor, the $1 trillion sovereign wealth fund of Norway, the Norges Bank Investment Management (NBIM), said last November that it would sell $35 billion in oil and natural gas stocks as a step to realizing its goal of completely abandoning the sector. The ripple-on effects of the announcement were described as a “shot heard around the world.”

Meanwhile, the $35 billion New Zealand Superannuation Fund slashed its high carbon holdings in some 300 companies late last year in a decisive move toward executing on its own long-term strategy of reducing exposure to carbon intensive investments -- namely those whose share prices will face price pressures as the global economy transitions away from fossil fuels.  Nearly $1 billion in passive investment was shifted away from investee companies that had high reserves of fossil fuels on their books.

From Norway to New Zealand to BlackRock’s headquarters in New York City, signposts of investor priorities are increasingly visible and accelerating. In his January letter, which he called A Sense of Purpose, Fink links ongoing engagement to corporate commitment to long-term strategies. He makes clear that sustainability and climate are increasingly central to that calculus.

Sometimes it takes a bully pulpit to underscore the obvious.