Larry Fink’s Annual Letter: “ESG” out, “Energy Pragmatism” In

Larry Fink’s annual letters carry a lot of clout. As CEO of the world’s largest asset manager, BlackRock, with over $10 trillion in assets under management (AUM), his annual open letters to investors set the tone for investors, companies, and - until recently - was required reading for environmentalists.

Mr. Fink’s prior letters shaped the investment communities' focus on climate and ESG with lines like “climate risk is investment risk” in 2020 and “it is not ‘woke’ (stakeholder capitalism). It is capitalism” in 2022.

This year's letter is different.  

Fink’s BlackRock is at the center of the political backlash against ESG (environment, social, and governance). Republican-led states have just this week launched a cease and desist against them for pushing ESG factors on portfolio companies and have removed $13+ billion from the firm. Although that is only 0.1% of BlackRock's overall AUM, it has made headlines and created an unwanted controversy. In fact, last year, Fink said he's no longer using the term "ESG" because it is being politically "weaponized," and he's "ashamed" to be part of the debate on the issue.

Not surprisingly, this year’s letter, “Time to rethink retirement,” did not mention the now “toxic term” - ESG - which has become the Lord Voldemort of BlackRock (he who shall not be named). Instead, the letter focussed on pensions and increasing retirement ages. 

However, he did cover what he called “energy pragmatism.” He argues that to ensure energy security while decarbonizing will extend the reliance on fossil fuels - “even the most climate-conscious among them saw that their long-term path to decarbonization will include hydrocarbons, albeit less of them, for some time to come.” 

Adding that although decarbonization and the energy transition is a “mega force,” it has to be “fair,” “Nobody will support decarbonization if it means giving up heating their home in the winter or cooling it in the summer. Or if the cost of doing so is prohibitive.” 

Then, as if talking directly to those who believe BlackRock is boycotting oil and gas, he says, “BlackRock has more than $300 billion invested in traditional energy firms… for one simple reason: It’s our clients’ money. If they want to invest in hydrocarbons, we give them every opportunity to do it – the same way we invest roughly $138 billion in energy transition strategies for our clients.”

Will ESG Investing Recover?

BlackRock distancing themselves from ESG is just the tip of the iceberg. Mentions of the term, naming of investment vehicles, and searches for ESG are all at record lows. ESG may have reached a point of no recovery. 

This WSJ article argues that ESG is beginning to look more like an investment fad rather than an economic transformation. It claims that ESG investing will transform into “sustainability investing,” which will focus on specific aspects of ESG.

This Forbes article reiterates the sentiment, adding that any even rebranded “sustainable investments” will face a backlash from oil and gas interests. The article ends by saying a swing to the right in upcoming EU elections and the return of Trump could “knee-cap ESG.”

Javier E. David paints a more positive picture in ESG is down but not out. It points to recent research from Pitchbook showing that companies and investors are still using ESG, but the backlash is just causing “green-hushing” - i.e., silent support of ESG.

EU Nature Restoration Law Stalled

EU sustainability bills losing support at the last minute seem to be a recent theme. After the drawn-out saga to approve the Due Diligence Directive, the EU’s Nature Restoration Law is now in jeopardy. 

The bill was meant to be rubber-stamped on Monday, but the vote was postponed when it became clear it did not have the required support. The European Environment Commissioner Virginijus Sinkevičius said if the bill fails, it would raise “serious questions and concerns as to the consistency and stability of the EU decision-making process.”

The eleventh-hour loss of support for the bill, which will restore 20% of the EU’s land and waterways by 2030, did not go down well with some ministers. For example, Irish Environment Minister Eamon Ryan, in an impassioned speech, said, “Going into a European election where we say the European system is not working—we do not protect nature, we do not take climate seriously… would be a disgrace.

However, the bill only needs the support of one more member state, leading Sinkevičius to say  he was "optimistic" that "the member states can bring it over the finish line."

AI and Sustainability

With so much hype around how AI can accelerate productivity, the sustainability community is pondering how best to apply this technology. I was quoted in a Fortune article by John Kell, which explores myriad ways that AI can help with ESG metrics, reporting, and assessing climate risks. 

A similar article from FT shares “What AI Means for Responsible Businesses.” The article explores both the opportunities and challenges of AI, such as the opportunities in decarbonization and the risk of increased energy use from AI. The piece underlines the importance of governance, transparency, and human oversight in the deployment of AI to ensure it contributes positively to social and environmental goals.

Fast Fashion Slowing Down?

Could a new bill passed by the French parliament last week slow down fast fashion? The bill aims to lighten environmental impact by banning advertising of certain ultra-fast-fashion companies – and increasingly penalizing them up to 10 Euros by 2030 per article of clothing.

While the allure of low-cost clothing is still very attractive, as consumers become more conscious of sustainability, they are turning to second-hand clothing for bargains - a segment that will soon top 10% of global fashion sales.

The views expressed on this website/weblog are mine alone and do not necessarily reflect the views of my employer. 

Other Notable News:

• I attended the World Petrochemical Conference in Houston last week, where I hosted a panel and discussed decarbonization with petrochemical leaders. Check out my video summary of this important event.

• If you are looking for a job in sustainability, check out this list of great opportunities from Adam Elman, sustainability lead at Google.

• After last week’s lottery, the right-leaning 8th Circuit Court will hear all nine lawsuits regarding the Securities and Exchange Commission’s final climate disclosure rule. On Friday, the 5th Appeals Court retracted its stay on the SEC Climate Rule. However, the same companies have now requested that the 8th Appeal Court do the same. Time will tell if they do. 

• Nigeria launched its Adoption Readiness Roadmap this week, which includes a set of ISSB-aligned standards that companies can voluntarily report to before planned mandatory adoption in 2028.

• Are financed emissions a good proxy for transition risk? In this excellent piece about the climate-related financial risk disclosure framework from the Basel Committee on Banking Supervision (BCBS), Louie Woodall argues that emissions reporting is not necessary for assessing transition risk. 

• To decarbonize the global economy, the world must rapidly expand its capacity for clean technology manufacturing. Governments are turning to “green industrial policy” to stimulate investment. Read BCG’s new white papers to find out more about these policies - one specific for policymakers and the other for investors.

• A new UN report reveals we are wasting around a fifth of all food globally. The report states that a billion meals are wasted daily while more than 750 million people are suffering from hunger. 

• It is easy to get overwhelmed by the amount of negativity surrounding sustainability, but as IEA Executive Director Fatih Birol says in this piece, let’s not forget about the good news. Real progress is being made across the board. 

• New data from Swiss Re found that global natural disasters amounted to $280 billion in damages. The report shows that insured disaster losses are increasing at an alarming rate, and although climate is not currently the main reason for that, its role will increase

• Some states are suing the Biden administration for pausing Liquified National Gas leases. 

Notable Podcasts: 

• In this week’s episode of the Harvard Business Review’s Climate Rising podcast, they discuss how to build climate-resilient cities. Harvard Professor John Macomber discusses how companies and governments need to incorporate climate resilience into real estate and infrastructure developments and consider what adaptations will need to be built in.

• Over the last week, the ESG Insider podcast has produced a series of podcasts sharing some of the sustainability insights from one of the biggest energy events in the world, CERAweek. It includes three episodes covering case studies for decarbonization solutions in banking, mining, and utilities.