ESG was not explicitly mentioned once but was the core theme of BlackRock founder, chairman and CEO Larry Fink’s annual letter to shareholders as he attempted to cater to both pro and anti-sustainability investors.
Invoking the Milton Friedman doctrine that companies only have a duty to their shareholders and not society at large, Fink started his letter with the clear message that “we are a fiduciary to our clients” and “when we deliver value for our clients, we also create more value for our shareholders”.
However, much as he did in 2022 when he described ESG as “not woke” but stakeholder capitalism in action, he said “part of supporting our clients includes speaking out on issues important to their investments”.
He added it is “crucial” for CEOs to use their voice and he would use his “whenever and wherever I believe it can serve the interests of our clients and the firm”.
As for clients expressing their own ESG convictions, Fink pointed to BlackRock’s Voting Choice initiative which has seen clients “representing over $500bn AUM” choosing how their proxy votes are cast since launching in November 2021.
“We see opinions diverging across regions – including the US and Europe – and even within regions – especially in the US,” Fink said. “That divergence creates challenges for a truly global asset manager like BlackRock.”
The scale of diverging opinion on ESG was illustrated last August when Texas became the 16th US state to boycott firms such as BlackRock, UBS Asset Management and BNP Paribas Asset Management for excluding certain sectors from ESG products, meaning its funds would not feature in the state’s more than $300bn public pension schemes.
Florida Governor Ron DeSantis added ESG would be “dead on arrival” in his state and its $188bn retirement system would not “implement policies through the board room that Floridians reject at the ballot box”.
Despite the traction gained by anti-ESG sentiment in the US, Fink’s letter reiterated climate risk is an investment risk and BlackRock’s view on this remains unchanged.
“Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world.
“There is more flooding, more wildfires, and more intense storms. In fact, it is hard to find a part of our ecology – or our economy – that is not affected. Finance is not immune to these changes.”
He added the transition to a low-carbon economy remains “top of mind for many” but “it is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy”.
Fed financial flameout
Away from ESG, BlackRock’s CEO turned his attention to the impact hawkish monetary policy has had on the financial system.
After inflation hit a four-decade high last year, Fink said the Federal Reserve raising its funds rate by almost 500 basis points is the “price we are already paying for years of easy money” and after bond markets fell 15% last year, the fastest pace of rate hikes since the 1980s “exposed cracks in the financial system”.
He said the collapse of Silicon Valley Bank (SVB) was the biggest bank failure in 15 years amid “a classic asset-liability mismatch” and it is “too early to know how widespread the damage is”.
“Prior tightening cycles have often led to spectacular financial flameouts – whether it was the Savings and Loan Crisis that unfolded throughout the eighties and early nineties or the bankruptcy of Orange County, California, in 1994.
“We do not know yet whether the consequences of easy money and regulatory changes will cascade throughout the US regional banking sector – akin to the S&L Crisis – with more seizures and shutdowns coming.”
Fink resolved banks will likely reduce lending to shore up their balance sheets which could lead companies to turn to capital markets for financing.
Business as usual at BlackRock
While anticipating a new monetary and fiscal regime in the US, Fink pointed to ongoing demand for BlackRock products. Last year, the firm amassed $400bn inflows including $192bn of long-term net inflows from institutional clients and $123bn into its bond ETFs.
Over the past five years, the asset manager has added $1.8trn net inflows with asset-weighted average fees on its US mutual funds and ETFs falling 35%, showing BlackRock’s low-cost model is still in vogue for investors.