Analyzing Larry Fink’s letter to CEOs - Climate Intelligence, ESG, and more!

Two years ago, Larry Fink wrote that “climate risk is investment risk” for the first time. And from then on, transition to a net-zero world, decarbonisation of the global economy and ESG investing have become a focal point of Larry Fink’s annual open letter to the chief executives. Being the CEO of BlackRock, the world’s largest asset management firm, Larry Fink’s annual letter sets the tone each year for various stakeholders, including investors, companies, and employees.

Thanks to the $10 trillion under management at BlackRock, when Larry Fink speaks, companies listen!

This year, we decided to break down Fast Company’s takeaways from Larry Fink’s annual letter and analyse the role of intelligent climate data in powering the global transition to a net-zero world.

1. The capitalist’s case for ESG

The core of Fink’s philosophy is that businesses that are connected to stakeholders need to deliver better and more sustainable returns over the long term. Under this thesis, purpose-driven companies will be the ones that will achieve long-term success for all stakeholders—including shareholders. This year’s letter makes it clear that BlackRock “will invest in the most dynamic companies—whether startups or established players—with the best chances at succeeding over time.” He doubles down on the connection between profit and purpose with this statement: “Access to capital is not a right. It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you.”

• Sooner or later, companies would require objective, third-party satellite-derived climate intelligence to demonstrate to all stakeholders their sustainability measures in an objective manner as:

• Shareholders would require satellite-derived climate intelligence to analyse various companies and power their investment decisions objectively.

• Asset level emissions monitoring and climate risk data would be crucial in empowering the stakeholders during the transition to a net-zero world, thus, building more trust in the ecosystem.

2. The tectonic shift toward sustainable investing will accelerate

Sustainable investing is at the highest it has ever been, and Fink claims “this is just the beginning—the tectonic shift towards sustainable investing is still accelerating.” The recently launched Glasgow Financial Alliance for Net Zero, a pledge from the world’s largest financial institutions aligning $130 trillion to net-zero strategies, supports this claim.

BSA notes:

• Presently the data market to enable sustainable investing is in the early stages. Most data is qualitative and unstructured. In the long term, Sustainable investing will require high-resolution, detailed, and expansive satellite-derived asset level emissions and climate risk data to analyze business impact and plot growth projections.

• Data and Technology Infrastructure in the form of a standard monitoring infrastructure would be required to enable Glasgow Financial Alliance for Net-Zero.

3. Investors can’t do it alone

The most interesting feature of Fink’s annual letter is the “man bites dog story” of the forces of capitalism aligning with the needs of people and the planet. But even Fink recognizes that businesses cannot police themselves. He makes a strong call for governments to “provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets.” He uses the analogy of the public-private partnership that led to the development of COVID-19 vaccines in record time as a model for what we must do to get to net zero.

Similarly, finance writer Clara Miller points out that investors are not capable of decarbonization alone. Investors provide capital, but it is real companies run by enlightened leaders that create sustainable innovations.

BSA notes:

• Governments would require well-established standard monitoring infrastructure backed by data and technology to efficiently manoeuvre the transition as cities and countries that don’t plan for the future risk being left behind. This needs very extensive and innovative technology and infrastructure development, that most individual governments are neither the best actors to undertake nor currently or in the past have been able to undertake. Just like the internet infrastructure of the world, which has been developed over the last decade by a few innovative companies and leaders, environmental monitoring infrastructure will soon have to adopt the same path, lest it risks delaying the mining and development of requisite fundamental datasets too late and thereby delaying the much-needed climate action we must embark upon to stay below 1.5 degrees

• Clean pathways and consistent taxonomy for policy, regulation, and disclosures across markets require quantitative data on the business impact on the environment (emissions or pollution disclosures) and the effect of planetary changes on business activities (climate risk).

4. Innovate to new zero or become extinct

The COVID-19 pandemic rattled the economy, creating many new winners and losers. Some capitalised on the new normal, while others could not adapt quickly enough. There will be an encore of this economic sorting created by the accelerating climate crisis.
Fink points out how, in just a few years, the automobile industry has been completely reimagined with virtually every car manufacturer racing toward an electric-fueled future. A similar massive transformation will touch every sector. Some companies will fail to adapt and go the way of the dodo, while others who embrace the transition will be a phoenix and thrive.

BSA notes:

• For the market forces to materialise either of the outcomes (net-zero/ extinct), active climate investing and even more active climate divesting would be crucial. Detailed climate intelligence would play a pivotal role in supporting these investment decisions.

• To enable different stakeholders in the ecosystem including, companies, shareholders, credit rating agencies, market makers, stocks exchanges, accountants, auditors and others, to make informed decisions, the ongoing climate analysis needs to be supplemented by adequate and reliable climate and environmental data.

5. The next 1,000 unicorns will be climate-tech companies

With the enormous scale of the energy transition, Fink predicts that “the next 1,000 unicorns (startups worth $1B or more) will be sustainable innovators and startups aiming to decarbonise the world.” 2021 was a record year of investment in climate technology, and Fink predicts this trend will continue.

BSA notes:

• Environment monitoring and climate risk assessment often come at a higher cost today. Blue Sky Analytics leverages the latest technological developments in the Space economy, Data, Cloud, AI, and APIs to deliver Climate Solutions to bring down the green premium which will be essential for an orderly and just transition.

• India has a population of 1.4 billion out of the global 8 billion people, aka almost 17% of the global population. One of the fundamental equity that we stand for as Indian founders is that global nations and populations must be adequately represented and active in this global innovation and transition. We hope, expect, and strive to build and support more Climate-tech startups, eventually with a vision of 15-17% of global Climate-tech unicorns to emerge from the Indian ecosystem.

6. Create carbon targets and report emissions

Returning to the theme that capitalism and environmentalism are mutually supportive, Fink states that BlackRock’s focus on sustainability is “not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
With this backdrop, the letter calls for companies to produce short, mid-, and long-term greenhouse gas reduction targets and align their reporting with the framework from the Task Force on Climate-Related Financial Disclosures.

BSA notes:

• Sophisticated climate data would take centre stage to enable businesses to accurately and efficiently follow the TCFD guidelines and disclosure practices for physical risk assessments, including wildfire risk, flood risk, drought risk and heat risk.

• Establishing a standard monitoring infrastructure would also be vital in building a single source of truth for all stakeholders, including shareholders, employees, customers, communities, and regulators.

7. Engagement over divestment

In a somewhat defensive tone, this year’s letter explains BlackRock’s continuing investment in the fossil fuel sectors. Fink writes: “Divesting from entire sectors—or simply passing carbon-intensive assets from public markets to private markets—will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy.”
The main point is that divestment doesn’t work. Fink argues that we will go through “several shades of brown before we get to green”—stating the obvious that the economy will not shift to clean energy overnight. BlackRock sees its role as picking the winners and providing them capital to accelerate the transition.

BSA notes:

• Transitioning to a net-zero world without complete divestment would require a data-driven approach to investments, and reliable climate data would be vital in steering this transition.

8: Stakeholder capitalism is here to stay and evolve

While certain that his version of “stakeholder capitalism” will serve the needs of investors, Fink shares that there is still much to learn about how a company’s relationship with stakeholders impacts long-term value. To build this knowledge, BlackRock announced a new Center for Stakeholder Capitalism, to create research, dialogue, and debate on the links between stakeholder engagement and shareholder value.

BSA notes:

• Under the traditional structure, the relationship and hence data or monitoring of the environmental impact of a private company was available solely with the government and regulatory bodies. However, in the new decade of proactive climate action and stakeholder capitalism, the discussions around environmental footprint are finding a place on the same pages as financial information of companies. Particularly for large industries with significant assets, those assets’ carbon and environmental footprint have moved from a regulatory concern to a valuation or stock price concern. A growing number of asset managers, asset owners, or large investors are demanding more environmental data more transparency around a company's operations, whereby satellite-based Asset monitoring emerges as one of the best, scalable, and transparent solutions.

• Further, climate change also poses a serious risk to various businesses in terms of asset protection, business continuity, health and well-being of employees. Large damages from wildfires, floods, droughts, and extreme heat are making their impact prominent on company bottom lines on a growing basis. Pacific Gas & Electric's (PG&E) bankruptcy was one of the first in the series of businesses looking at severe adverse impacts from climate change. For asset managers, this information holds the key to making decisions on investing in any new asset and even holding the older assets.

• The core of Fink’s philosophy is that businesses that are connected to stakeholders need to deliver better and more sustainable returns over the long term. Under this thesis, purpose-driven companies will be the ones that will achieve long-term success for all stakeholders—including shareholders. This year’s letter makes it clear that BlackRock “will invest in the most dynamic companies—whether startups or established players—with the best chances at succeeding over time.” He doubles down on the connection between profit and purpose with this statement: “Access to capital is not a right. It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you.”

Keeping the above in mind, Larry fink’s statement - “the next 1,000 unicorns (startups worth $1B or more) will be sustainable innovators and startups aiming to decarbonise the world.” does not come as a surprise at all!