For those involved in GRC (governance, risk and compliance), the beginning of a new year brings an annual milestone — and a North Star for the year ahead. It’s BlackRock CEO Larry Fink’s annual letter to corporate CEOs. Over the past few years, these “Larry Letters” have told an evolving story, with the focus leaning more and more toward ESG. Now more than ever, it’s vital not to miss the plot.
In 2020, Fink outlined how climate risk was an investment risk and that the firm would put sustainability at the heart of its investment decisions.
In 2021, Fink’s letter delivered five key takeaways on climate change, covering data, disclosures and the urgency of achieving a net-zero future, even during a global pandemic. BlackRock backed these words with action when it joined forces with activists to replace two Exxon board members, helping to push the oil company towards a greener business strategy.
Now, Larry Fink’s 2022 letter expands the narrative into workforce issues and innovation and solidifies the message: Firms that fail to prepare for a carbon-free future risk being left behind, and those who still think adherence to climate demands does not necessarily equate to profit need to shift their mindset.
What does this all mean for the executives setting strategy, the GRC teams managing compliance and risk, and the corporate boards overseeing it all?
3 Top Takeaways for GRC Teams and Boards from Larry Fink’s Letter
If readers remember just three things from this year’s Larry Fink letter to CEOs, they should be the following:
1. Sustainability Is What’s Next in Innovation
Every company wants to innovate. For many, the big question is where and how. Does the future lie in blockchain, bitcoin, AI, the metaverse or somewhere else entirely?
According to Larry Fink’s annual letter for 2022, companies should look toward the rise of sustainable investments, which have reached $4 trillion worldwide, and this message doesn’t just apply to businesses in the energy and natural resources sectors.
“I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in,” he wrote.
“The next 1,000 unicorns won’t be search engines or social media companies,” Fink declared. “They’ll be sustainable, scalable innovators — start-ups that help the world decarbonize and make the energy transition affordable for all consumers.”
Look at your company and ask: Are we resting on our laurels, or are we finding our place in the quest for a carbon-free future?
How an innovative approach to sustainability can aid a move toward the decarbonizing of the global economy:
- Reduce your energy usage. Green practices can add up to big savings. The U.S. government’s ENERGY STAR program is one example. Hundreds of organizations that participated in its Energy Treasure Hunts reduced their facilities’ energy use by 15% or more.
- Reduce your water usage. Sustainable water practices also boost the bottom line. In the hospitality industry, for instance, towel and linen reuse programs can save an average of 17 gallons of water per day per occupied room.
2. Sustainability Includes Employees
Climate is just one area where Fink sees a moral responsibility, an imperative for adaptation and an opportunity for profit.
“The relationship between a company, its employees, and society is being redefined,” Fink writes. And as for the pre-pandemic world where employees come to the office five days a week, mental health is overlooked, and lower- and middle-income wages stagnate? “That world is gone,” Fink bluntly states.
“Companies not adjusting to this new reality and responding to their workers do so at their own peril. Turnover drives up expenses, drives down productivity, and erodes culture and corporate memory.”
Is your company living in the past — or rebuilding itself to forge stronger bonds with new and existing employees?
How a forward-thinking approach to sustainability can help your business to remain relevant to customers and employees alike:
- Leading on sustainability can give your organization a competitive edge both with customers and talent. Are people buying your products and services in today’s increasingly competitive, often disruptive, business environment? Are you able to attract – and retain – the brightest talent? Do the employees responsible for creating and delivering these products consider you a workplace of choice? Increasingly, a “yes” answer to either question depends on your company’s reputation for sustainability. In a February 2021 Statista survey, nearly 9 out of 10 (89%) respondents expect companies and brands to do more to reduce their carbon impact, and more than 8 in 10 (82%) want companies to put people and planet before profit.
3. Sustainability Is a Business Imperative
Within the Larry Fink 2022 letter, as Fink discusses the “S” in ESG, he offers a stern reminder and clarification: “Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism. […] We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.”
He continues: “It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability and value is created and sustained over the long term.”
If the head of BlackRock, the world’s largest asset manager, unequivocally links doing good to doing well, then sustainability has indeed arrived as a business imperative — and companies looking for financing and growth need to take note.
“Capital markets have allowed companies and countries to flourish,” the Larry Fink letter says. “But 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.”
How doing good can also mean doing well:
- A push for sustainability can lead to lower long-term operating costs. In Europe, investments over the past year on renewables, energy efficiency and emissions reduction are expected to net companies $45 billion over their lifetimes — a saving of $20 for every avoided metric ton of carbon dioxide or CO2 equivalent
- Reducing packaging and waste means an increase in revenue coming in. As sustainable packaging and clothing label provider Immago notes: “Less ink when it comes to printing, less cardboard for the box, less material to go inside… multiply that by hundreds or thousands of packages and it all adds up.”
- A sustainable approach to business can lead to cheaper capital. With sustainability-focused loans, an increasingly popular lending product, positive metrics for emissions reductions or overall ESG scores result in favorable interest rates and loan pricing
The correlation between sustainability and the bottom line is only getting stronger, as both Larry Fink’s 2022 letter and the examples given above demonstrate. To put it simply, ESG-focused activities are now a real generator of business value.
Actions to move the sustainability needle forward are only one side of the ESG coin. Risk management is the other. Learn about five climate-related risks your board might be overlooking.