The Nickel Report

In his annual letter to CEOs, Larry Fink, CEO of BlackRock expressed his belief that climate change and sustainability were important considerations in investment risk assessments. Investment based on these concepts is often captured under Environmental, Social and Governance Criteria, commonly called ESG. In his letter, Mr. Fink emphasized that he believes “we are on the edge of a fundamental reshaping of finance.”

BlackRock’s letter builds on the ever-advancing trend in corporate institutional investing over the past decade regarding the examination of corporate valuation and investment risk within the context of ESG issues, otherwise referred to as sustainable investing.

ESG considerations for publicly traded companies have become more focused, and companies often find themselves confronted with inquiries and performance demands from the investment community that involve wide-ranging ESG issues, including those specific to climate change; stakeholder outreach and advocacy; and internal policies, procedures or management systems associated with ESG matters. Although inherently a subjective analysis, more and more investment analysts and managers consider certain baseline sustainability or ESG factors as critical to the separation of a company from industry peers for inclusion in investment portfolios, ranking of companies within a particular industry or subsector, or guiding equity valuations and advocacy.

Fink underscores this in his 2020 letter to CEOs, stating ESG issues “are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future—and sooner than most anticipate—there will be a significant reallocation of capital.” (Emphasis in original). Fink specifically highlights potential impacts from climate change as investment risk, such as the concerns around the unknown scale and scope of government action on climate change, which will generally define the speed with which a move to a low-carbon economy occurs.

ESG issues are often included within diligence inquiries for corporate debt or equity issuances. With ever-increasing frequency, as evidenced by the 2020 BlackRock letter, however, they are a part of other outside stakeholder evaluations. Certain industries have more recently become the focus of ESG related evaluations. For example, subsectors of the energy industry in the United States now frequently receive ESG related inquiries and rankings as they pertain to climate change and other social issues. Fink, in his letter, acknowledges that “[u]nder any scenario, the energy transition will still take decades…[and] despite recent advances, the technology does not yet exist to cost-effectively replace many of today’s essential hydrocarbons.” He stresses the need for government and the private sector to work together to pursue a “fair and just” transition that does not come at the cost of certain parts of society or countries in developing parts of the world.

The general investment thesis assumes that the promotion of ESG performance and initiatives not only supports the ethical management of social considerations but also sustainable profitability. As stated by Fink, he believes “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.” Investment analysts seek information or confirmation from companies on topics that range from how a company incorporates ESG concerns in its risk management programs or presents the issues to senior management and boards of directors, to what efforts companies take to measure or reduce emissions from its operations. Frequently, investment analysts consider whether companies tie executive compensation to ESG-related performance and the degree to which corporate governance and structures are designed to promote transparency of ESG factors.

The long-term trends around ESG issues indicate that ESG focuses will remain a component of how external stakeholders, most importantly, investors, view a company. Companies should address these topics with decisive and careful resolve.