Rescue Me

Rethinking retirement and infrastructure is ESG

Good news for everyone outside the Americas and those of you anywhere with a Kindle. Starting tomorrow, April 3rd, you can order and read my new book, ESG Mindset! For those in the Americas looking for a physical copy, you’ll have to wait until April 30th.

As we enter the launch of my book, it is an excellent time to explain why I wrote ESG Mindset because it intersects with this week’s topic: Larry Fink’s Annual Chairman’s Letter to Investors.

I came into ESG a few years ago, supporting some of the world’s largest ESG data aggregators and asset managers. I had a front-row seat as ESG began to tip over in the markets, but something bothered me. It became very apparent that not all companies even knew what ESG was.

I often wonder if Fink started to include ESG in his other annual letter targeting CEOs because of their inattention to these issues. It was my observation that no one at companies were focused on these topics. One particular ESG data aggregator told me their research teams would call into Investor Relations to gain more understanding about their ESG issues, but few would call them back. So, I started listening closely to how companies were talking about their core business challenges and found ESG challenges within.

That’s when Liz Simmie, co-founder of Honeytree Investment Management, told me that “ESG is everything,” and she is appropriately credited in the acknowledgments. It was like a light switch going on, or if you’re a fan of The LEGO Movie, it was like the moment Emmet became a master builder. I saw the world differently.

Over time, my perspective evolved, but the core challenge of companies ignoring ESG well remained. In other words, I wrote the book I wished I had when I was over on the corporate side, so I could have an advantage from this new perspective.

My book will be in your hands soon, but in the meantime, we can continue to explore together how ESG is everything, even when it isn’t mentioned, which brings us back to the topic at hand.

Fink famously said he would stop using the term “ESG,” but ultimately, the idea hasn’t disappeared. His latest annual letter to investors offers us a glimpse of a world where if business headlines are to be believed, ESG no longer exists.

For Fink, stripping ESG out of the letter and taking a material approach may rescue him and the firm from political backlash. It also provides a chance to see a future where ESG issues are integrated into the business, where they belong.

The book ends with timing the end of ESG well and why, but for now, here we are.

To ESG or not to ESG, ask me no questions

Living in Pennsylvania, I have a soft spot for Vanguard. While I’m not a Boglehead, I believe that Jack Bogle, who attempted to democratize the markets through index funds, would have liked ESG. Bogle considered stakeholders well and favored long-term investment over short-term speculation.

Still, when it comes to ESG, BlackRock is the asset manager that comes to mind. Again, BlackRock CEO Larry Fink writes a letter to CEOs every year, which I decided to take up this year, and another one to investors. As I’ve mentioned, ESG does not make an appearance this time around, which led to headlines like:

BlackRock’s Fink Calls For Energy Pragmatism, Omits ESG From Annual Letter (forbes.com)

Will Larry Fink reap any rewards for going quiet on ESG in his annual letter? (edie.net)

BlackRock’s Larry Fink ditches ESG for “energy pragmatism” (Insurance News)

But then there were these headlines:

BlackRock CEO Larry Fink Re-Focuses Stakeholder Capitalism On Retirement (forbes.com)

Letter: Don’t mistake Fink’s letter as signalling an ESG retreat (ft.com)

So, what did he write in over 10,000 words? Well, Fink got material around stakeholders at the intersection of the retirement business and talked about investing in infrastructure for energy security and long-term resilience. Despite the absence of ESG and related words, these are ESG ideas and align with Bogle’s perspective.

Rethinking retirement is a Social issue

Fink covers A LOT in this letter, opening with a personal story and moving into the history and power of the capital markets to set the stage for the first big message:

People are living longer lives. They’ll need more money. The capital markets can provide it — so long as governments and companies help people invest.

About half of BlackRock’s $10T of assets under management (AUM) are focused on retirement. ESG topics surround retirement investments because:

1. It focuses on a particular type of investor or stakeholder.

2. It is in service of long-term resilience.

Fundamentally, retirement products are the best aligned ESG investment vehicle.

From here, Fink outlines the issues surrounding people and their retirements.

1. People are living longer, but the retirement age remains at 65.
   Side note: As a Gen-Xer about 20 years out from retirement, the suggestion of raising the retirement age annoys me like you wouldn’t believe.

2. Retirement isn’t affordable for many.

3. Gig workers don’t have access to a retirement plan.

These are core social issues and the last two are perhaps the most intersection with the Social pillar. Of course, there’s one more thing that drives into the Social even more deeply:

Fear is as important and actionable a metric as GDP.

Fink writes about the fear that the future (there’s that long-term again) will be worse than the past. This fear is real and a significant driver of why ESG should remain a focus. If we don’t fix climate change and systemic social justice issues, especially with the rise of polarization in the US, the future does appear bleak. Even in the short term, when I hear I might need to work longer, it doesn’t fill me with optimism.

He finally wraps this section with hope. He writes about his hope that Baby Boomers can reinstill hope in the younger generations.

Young people have lost trust in older generations. The burden is on us to get it back. And maybe investing for their long-term goals, including retirement, isn’t such a bad place to begin.

In effect, he’s approaching the Social and economic challenge from BlackRock’s core business, retirement.

While this section addresses a potential world of retirement issues, the second part of his letter addresses the more significant issue of a transition head-on.

Focusing on infrastructure is a long-term transition issue

Again, helping people save for retirement and ensuring a high quality of life is a material Social concern for BlackRock as younger generations may remain disillusioned. After all, if you save for retirement in an increasingly volatile world, what is the value?

Well, that got dark quickly.

From here, Fink writes about rising debt levels and the need to look to public-private partnerships to support infrastructure improvements. He quickly narrows in on one specific area predicted in this March 3rd headline from the Wall Street Journal: Step Aside, ESG. BlackRock Is Doing ‘Transition Investing’ Now.

He writes about focusing on energy specifically for two reasons. The first is the energy transition. This part hits the Environmental part of ESG.

With wind and solar power now cheaper in many places than fossil-fuel-generated electricity, these countries are increasingly installing renewables. It’s also a major way to address climate change. This shift – or energy transition – has created a ripple effect in the markets, creating both risks and opportunities for investors, including BlackRock’s clients.

The second reason is also ESG-related, focusing on the long term aspects of energy security.

Fink combines the issues of “decarbonization and energy security” under “energy pragmatism.” A summary definition might be ‘responsibly supporting a transition to clean energy sources.’

Here, he comes back to the power of the capital markets to lower the costs of this transition and uncover innovation. In a little defensive move, he states how BlackRock invests in these projects alongside traditional energy projects.

BlackRock has more than $300 billion invested in traditional energy firms on behalf of our clients. Of that $300 billion, more than half – $170 billion – is in the U.S. We invest in these energy companies 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. That’s part of being an asset manager. We follow our clients’ mandates.

In other words, BlackRock has clients with different investment strategies, and it accommodates them. This pragmatic approach is what ESG is all about, and it explains why certain energy or tobacco companies may rate higher than others on ESG scores. If you’re managing your business well around the transition of your material ESG issues, your company will have a higher ESG score.

The long-term connections

What’s interesting to me is that this letter is amazingly consistent in a singular theme: the pursuit of long-term resilience. On one side, we have stakeholders who need to secure their financial future. On the other side, we have investments to help ensure a resilient energy market involving transitioning from threats to a stable global future (without explicitly calling it out).

While there are many more issues to address for a resilient future, these two pair well, and in their pairing, they offer some hope.

Still, while forces conspire against progress, the near-term pain must be defended against, regardless of using terms like ESG, sustainability, social justice, or others. This approach, where you remove the boogeyman from the picture, helps those passionate about change continue the work while stripping those focused on political fear of their power.

So, the takeaway here is an interesting lesson in talking about ESG issues in a defensible manner at the intersection of your core business and purpose. If you’re consistent in your message while considering your company, it doesn’t matter what you call the approach; you just do the work.

Let’s get back to it, shall we?