March 21, 2023

BlackRock’s Letter to Shareholders: Sign of the Times

Two years ago, I wrote that anticipating Larry Fink’s annual letter to CEOs, a 10-year tradition which typically has arrived in January, was like waiting for Moses to come down from the mountain. He softened his tone last year. Now, it’s apparent a “vibe shift” has arrived. Mr. Fink has finally made it clear…in March…that this year, there will be no pontificating to CEOs. At least, not as directly as in years past.

Instead, he’s sticking to updating BlackRock’s investors – via an 18-page letter published last week. That hasn’t stopped corporate folks from poring over his commentary for hints on how the world’s largest asset manager might vote at annual meetings this year, and what its priorities will be.

The term “ESG” doesn’t appear anywhere in the letter. That’s a sign of the times since that terminology, and investors’ involvement in encouraging ESG disclosures, has become a lightning rod for politicians (and wannabe politicians). However, it would be a bridge to far to declare that this means that ESG has been “cancelled” or that BlackRock has given up on long-term, sustainable value creation. The letter still gives plenty of play to the importance of solid corporate governance in the midst of evolving risks & opportunities – e.g., talking about the “price of easy money” in the wake of recent financial industry issues, and how that compares to BlackRock’s strong returns. The asset manager’s co-founder, Chair & CEO is also still continuing to beat the “climate transition” drum, although that message keeps getting refined away from directing portfolio companies what to do and towards how this is a choice for BlackRock’s investor clients:

Better data is essential. More than half of the companies in the S&P 500 now voluntarily report Scope 1 and Scope 2 emissions. I expect that number will continue to rise. But as I have said consistently over many years now, it is for governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.

Transition toward lower carbon emissions will reflect the regulatory and legislative choices governments make to balance the need for secure, reliable and affordable energy with orderly decarbonization.

We know that the transition will not be a straight line. Different countries and industries will move at different speeds, and oil and gas will play a vital role in meeting global energy demands through that journey. Many of our clients see the investment opportunities that will come as established energy companies adapt their businesses. They recognize the vital role energy companies will play in ensuring energy security and a successful energy transition.

He goes on:

Some of the most attractive investment opportunities in the years ahead will be in the transition finance space. Given its importance to our clients, BlackRock’s ambition is to be the leading investor in these opportunities on their behalf.

I wrote last year that the next 1,000 unicorns won’t be search engines or social media companies. Many of them will be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers. I still believe that. For clients who choose, we’re connecting them with these investment opportunities.

The letter also touts BlackRock’s new “voting choice” initiative and has this to say about stewardship activities:

Making these decisions requires understanding how companies are responding to evolving risks and opportunities. Changes in globalization, supply chains, geopolitics, inflation, monetary and fiscal policy, and climate all can impact a company’s ability to deliver durable value. Our stewardship team works to promote better investment performance for our clients, the asset owners. The team does that by understanding how a company is responding to these factors where financially material to the company’s business, and by advocating for sound governance and business practices. For many of our clients who have entrusted us with this important responsibility, BlackRock’s stewardship efforts are core to what they are seeking from us.

At the same time, we believe that adding more voices to corporate governance can further strengthen shareholder democracy. But democracy only works when people are informed and engaged. As more asset owners choose to direct their own votes, they need to make sure they are investing the time and resources to make informed decisions on critical governance issues. Proxy advisors can play an important role. But if asset owners rely too much on a few proxy advisors, then their voice may fall short of its potential. I certainly believe that the industry would benefit from more proxy advisors who can add diversity of views on shareholder issues.

Amid these shifts, companies will also need to find new ways to reach their shareholders who choose to direct their own votes, and robust disclosures and advances in the proxy ecosystem will become even more important.

I blogged about BlackRock’s 2023 voting guidelines a few months ago. If they’re a big shareholder at your company, make sure to review those and their “Global Principles” as you head into annual meeting season.

Liz Dunshee