BlackRock Chairman and CEO Larry Fink released his 2022 Letter to CEOs: The Power of Capitalism in which he spent a fair amount arguing for stakeholder capitalism, or the belief that companies must serve constituents beyond shareholders.
“Stakeholder capitalism is not about politics. It is not a social or ideological agenda,” Fink wrote. “It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper. This is the power of capitalism.”
In today’s globally interconnected world, he claimed, “a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. 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. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”
Environmental, social, and governance (ESG) investing is increasingly popular, with even the Business Roundtable embracing its principles in the summer of 2019.
“We have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion.”
Larry Fink
Critics claim ESG’s impact and returns are difficult to measure and point to the higher fees that investment firms charge for ESG investments as a driving factor for offering the option.
The Wall Street Journal, citing ETF data from FactSet, found the ESG funds’ “average fee was 0.2% at the end of last year, while standard ETFs that invest in U.S. large-cap stocks had a 0.14% fee on average …A firm managing $1 billion in a typical ESG fund, for example, would garner $2 million in annual fees versus managing the standard ETF’s $1.4 million.”
The paper points to ongoing fee compression with which asset managers must deal, leading to razor-thin margins. It’s affecting every area of the investing industry, so anything that offers a chance to charge more is getting attention—and assets.
Fink, for his part, believes the trend ESG trend will continue.
“It’s been two years since I wrote that climate risk is investment risk,” he concluded. “And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions towards decarbonization have also increased. This is just the beginning – the tectonic shift towards sustainable investing is still accelerating.”