BlackRock CEO Larry Fink recently released an open letter to CEOs where he details the key long-term investment and ESG trends he sees coming in the future.
Overall, Larry Fink argues that companies that a clear view of purpose will succeed while those without will struggle. This philosophy manifests itself not only in a company's market strategy, but also within their employee and stakeholder relations and environmental/ESG practices.
1) A New World of Work: A Shifting Employee and Employer Relationship
Over the past few years, the nature of work has shifted dramatically. As Fink puts it, "no relationship has been changed more by the pandemic than the one between employers and employees."
This changing relationship manifests in companies rethinking work in multiple ways, including remote work, racial equity, childcare, and mental health.
Currently, one of the most dramatic changes is the Great Resignation. In the US and the UK, quit rates are historically high. In the US, Fink reports that we are experiencing some of the highest wage growth in decades.
The result? Employee retention has never been more important. Fink explains that turnover raises expenses, decreases productivity, as well as erodes culture and corporate memory.
However, Fink also believes that these conditions offer great opportunity for those willing to adapt:
Workers demanding more from their employers is an essential feature of effective capitalism. It drives prosperity and creates a more competitive landscape for talent, pushing companies to create better, more innovative environments for their employees – actions that will help them achieve greater profits for their shareholders.
In other words? Those who rise to the challenge will out-compete those who don't.
2) Increased Available Capital Fuels Market Innovation (and Disruption)
Available capital has exploded over the past four decades; Fink cites that today's global financial assets total $400 trillion.
How does this translate into investment strategy? Fink explains:
Never has there been more money available for new ideas to become reality. This is fueling a dynamic landscape of innovation. It means that virtually every sector has an abundance of disruptive startups trying to topple market leaders.
He predicts a tremendous rise in innovation and disruption over the coming years.
3) Sustainability Initiatives Offer Valuable Investment Opportunities
Almost all stakeholders now expect companies to play a role in decarbonizing the global economy. Shareholders, employees, customers, communities, and regulators now assign companies to play a key role in decreasing emissions.
The result? Sustainable investments have now reached $4 trillion. Fink explains that the auto industry is racing towards electric power, and scientists are working around the clock to decarbonize cement, steel, and plastics. These initiatives are also occurring across shipping, trucking, aviation, agriculture, energy, and construction, in addition to many others.
Fink sees incredible investment opportunity in this space:
I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime.
He predicts that the next 1,000 startups " won’t be search engines or social media companies," but instead, "startups that help the world decarbonize and make the energy transition affordable for all consumers."
And for companies that drag their feet? Fink puts it simply: climate risk is investment risk.
Fink concludes with the idea that divesting from entire carbon-intensive sectors is not the path to net zero . He recommends that companies issuing reports consistent with the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Investors also play a key role in ESG efforts, and Fink foresees that relationship changing. He states, "we are committed to a future where every investor – even individual investors – can have the option to participate in the proxy voting process if they choose."
Empowering clients with choice on ESG votes won't be easy: significant regulatory and logistical hurdles must be overcome first. However, this effort can bring In Fink's words, "every investor deserves the right to be heard."
With this mission in mind, Fink announced that BlackRock is launching a Center for Stakeholder Capitalism, to create a forum for research, dialogue, and debate. This center will explore the relationships between companies and their stakeholders and between stakeholder engagement and shareholder value.
Do you agree with Fink that these trends represent opportunity for innovation? How do you approach your ESG reporting? Let us know in the comments below!