Dear CEO,
at BlackRock we are trustees of our customers. We help you to achieve your long-term goals. Most of the money we manage is used to secure the retirement of teachers, firefighters, doctors, entrepreneurs and many others. It is their money that we manage, not our own. The trust that our customers place in us and our role as a link between them and the companies in which they invest comes with a great responsibility to stand up for the interests of our customers.
It is for this reason that I write a letter to you each year addressing issues that are critical to creating lasting value. Topics such as capital management, long-term strategies, corporate purpose and climate change. We have long been convinced that our customers, as shareholders of your company, will benefit if you value enduring and sustainable values all Create your stakeholders.
I began to write these letters under the fresh impression of the financial crisis. Last year, however, we experienced something far more serious – a health crisis that has gripped and changed our entire world. It has already claimed many lives and has fundamentally changed the way we live, work and learn, but also our health care and much more.
The burden of the pandemic is very unevenly distributed. It triggered the worst recession worldwide since the Great Depression and the sharpest drop in share prices since 1987. But while some industries, especially those that thrive on human contact, have been hit to the marrow, others have adapted and thrived. And even if the recovery of the stock markets bodes well for growth after the pandemic has subsided, the economy is currently grappling with great devastation: Unemployment has risen massively, and every day small companies close their doors forever and everywhere In the world many families lack the money to pay their rent and buy groceries.
The pandemic has also accelerated trends – from the worsening pension crisis to systemic inequalities. In late spring, the pandemic was joined by an unprecedented wave of protests against racial discrimination in the United States and around the world. It has recently exacerbated the political turmoil in the United States. This month we saw the deep divisions in American society turn into violence – spurred on by lies and political opportunism. The events outside the Capitol in Washington made it clear to us how precious and fragile our democratic system is.
But while the past twelve months have been a difficult time, there is also cause for hope. We see that companies take courageous steps forward and take responsibility for their stakeholders. In a very short time they developed new ideas to ensure the supply of food and goods during the lockdowns. At the same time, they spared neither money nor effort to support non-profit organizations in their work for people in need. The fact that several vaccines were developed in record time is one of the great successes of modern science. Many companies also responded to calls for racial equality, although there is still a lot of work ahead of them. It was particularly astonishing for me that, despite the upheavals that 2020 brought with it, companies resolutely faced the challenges of climate change.
I am convinced that the pandemic has turned into an existential crisis that relentlessly shows us how vulnerable we are. It has also prompted us to look even more closely at the global threat posed by climate change and to think about how it will – similar to the pandemic – change our lives. This reminds us that the greatest crises – medical or environmental – require a global and decisive response.
In the past year, we have not only witnessed the increasing physical toll that global warming is taking in the form of fires, droughts, floods and hurricanes. The direct financial consequences are also becoming increasingly apparent. Energy companies have to make billions in depreciation for lost investments due to the climate. Meanwhile, regulators are focusing on the risk that climate change poses to the global financial system. Increasing attention is also being given to the significant economic opportunities the transition will bring and how it can be done in a way that distributes the burdens fairly among all. No other topic has a higher priority for our customers than climate change. We receive questions from them almost every day.
Tectonic shift is accelerating
In January last year, I wrote to you that climate risks are also investment risks. As soon as the markets began to price in the climate risk in stocks, I argued, it would initiate a major shift in capital. Then the coronavirus came and in March it seemed clear to everyone that the pandemic would take a back seat to the climate crisis. But exactly the opposite happened. And with that, the reallocation of capital accelerated even more than I expected.
From January to November 2020, investors worldwide invested $ 288 billion in sustainability funds and ETFs. That is an increase of 96% over the previous year.1 I am convinced that this is the beginning of a rapidly accelerating change that will take place over many years and will fundamentally change the prices of assets of all kinds. We know that climate risks are investment risks. But we are also convinced that the climate-related change processes bring historic investment opportunities with them.
Sustainable investment products that are available and affordable for everyone are central to this change. Not that long ago, building a climate-conscious portfolio was a tedious endeavor that only large institutional investors could manage. Since sustainable index investments have been on the market, however, the shift in favor of companies that are better prepared for the climate risk has accelerated rapidly.
Today we are on the cusp of another transformation. Thanks to innovative technology and better data, asset managers can now offer more people tailor-made index portfolios – and in the past only the largest investors benefited from this. More and more investors are now giving preference to companies that focus on sustainability. This means that the massive capital shift that we are currently observing is picking up speed. And because this will have a significant impact on capital allocation, every company management and board member must consider the consequences of this development for the shares of his company.
The past year has not only brought about changes in investor behavior. It also set the trend for policy action against climate change. In addition to the EU, China, Japan and South Korea have also committed themselves in a historic act to become climate neutral. Last week, the US also announced that it would rejoin the Paris climate agreement. 127 governments, responsible for more than 60% of global greenhouse gas emissions, are already considering or committed to achieving net zero emissions by 2050. This dynamic will accelerate further this year – with far-reaching consequences for the global economy.
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