The ripple effects of Larry Fink's letter on sustainability leaders
In his annual letter to CEOs earlier this year, BlackRock CEO Larry Fink called on the private sector to think hard not just about how it could deliver financial performance but also how it could serve a social purpose. "Without a sense of purpose, no company, either public or private, can achieve its full potential," he wrote.
Fink's letter created quite a stir, signaling that social and environmental responsibility are no longer just concerns of socially responsible investors. When the CEO of a $6.3 trillion asset manager says companies need to serve a social purpose, it means these issues are firmly planted in the mainstream.
In the private sector, this letter underscores a larger trend of investors driving sustainability strategy, which I have noticed in my work: There's a growing demand for talent with knowledge in environmental, social and governance (ESG) issues among the mainstream investment community and a growing demand for investor relations people who have sustainability experience. But how is the "investor influence" trend affecting sustainability leaders? For insight, I asked a few leaders in my network.
The rise of the investor
First, some context on the trend: Recent surveys show that the investor influence is growing. In the latest BSR/GlobeScan State of Sustainable Business (PDF) survey, 25 percent of respondents said investor influence is one of the top three drivers of sustainability efforts at their organization. Respondents also named investors the third most important sector in advancing the sustainability agenda. According to the latest GreenBiz "State of the Sustainability Profession" report, pressure from investors is one of the top two factors impacting company sustainability programs.
Jackie Roberts, chief sustainability officer at the Carlyle Group, said she believes these trends demonstrate the deep connection between sustainability and company success. "Larry Fink's letter captured the attention of investors and CEOs around the world, affirming what Carlyle long has believed — sound ESG practices enhance outcomes and performance and improve brand values," she said.
What does this mean for sustainability professionals?
The sustainability leaders I engaged said companies should prepare for investor influence in three ways:
1. Define their company's purpose: Fink made it clear that he expects CEOs to have a position on social purpose. As governments fail to prepare for the future, he wrote, "society is increasingly turning to the private sector and asking that companies respond to broader societal challenges."
That means companies need to truly understand their risks and opportunities, and they need to ensure that leaders at the highest level — especially the board — are deeply engaged on these issues. That will signal to the investment community that the company is invested in addressing them over the long term.
2. Expect more questions from investors: Today, some of the biggest questions investors are asking business leaders surround risks related to climate change. The emergence of the Task Force on Climate-related Financial Disclosure and the development of the Science Based Targets initiative are evidence of this interest.
But investor questions aren't only focused on climate risks; they cover the gamut of sustainability issues — from diversity and inclusion to gender balance in leadership to how technological innovation will affect their workforce. And as the GreenBiz report notes, investor questions are more sophisticated: "Corporations are no longer just being asked to supply ESG data, they are being asked to provide context for the numbers."
Investors are also formalizing their sustainability teams. BlackRock, for instance, is doubling the size of its investment stewardship team over the next three years. In an interview for the GreenBiz report, Citi's global head of corporate sustainability, Val Smith, said banks are creating specialized sustainable finance teams dedicated to topics such as green bonds, renewable energy and green buildings.
Campbell Soup Chief Sustainability Officer Dave Stangis told me that while he has been having regular conversations with shareowners for 20 years — starting during his tenure at Intel — he has noticed "a clear increase in the number of large institutional investors specifically adding ESG to the topics they want to discuss." Stangis believes these conversations help him understand the issues of concerns for investors and also "provide a forum to educate investors on key emerging trends."
Jill Kolling, global sustainability leader at Cargill, said her team responds to questions from investors frequently. "We get about two to three questions a month from financial institutions regarding sustainability risks across our supply chains," she said. "For example, at a recent lender meeting, we shared our long-term vision for sustainable cocoa, as well as the progress we're making to develop a science-based climate strategy."
3. Collaborate more with investor relations teams: As investors become more influential in shaping sustainability strategy, it makes sense for practitioners to increase their collaboration with colleagues on the investor relations team. Unfortunately, this is not happening enough. According to the BSR/GlobeScan report, there is surprisingly little engagement between sustainability and investor relations teams.
At some companies, such as Visa, this is changing. "In the last few years, our approach to investor engagement on ESG has seen increasingly close collaboration of the investor relations, corporate governance and sustainability teams," said Douglas Sabo, vice president and head of corporate responsibility and sustainability at Visa. "Whether during our annual proactive outreach to our top 50 shareholders, inviting them to engage with us on our ESG progress, or in response to ad hoc investor inquiries throughout the year, these teams work closely together to ensure we are positioned for and responsive to the growing expectations of our shareholders — particularly the U.N. [Principles for Responsible Investment] signatories who own more than 50 percent of our total shares outstanding and include 24 of our 25 largest investors."
An influence companies can’t ignore
It's clear mainstream investors are making their mark on sustainability — signaling to every business that it’s time to step up, define their purpose and engage with investors on sustainability.
Fink's letter highlighted this trend, and his message deserves revisiting. As the Aspen Institute's Judith Samuelson put it in a column for Quartz: "My advice to CEOs? Read the letter, and then read it again."