69: Larry Fink on our sustainable future

It's great to be here. Great to be in the office today exactly.

It's a long story, but I started writing the letters because it was an epiphany about what we did when we acquired BGI - Barclays Global Investors, which we acquired in 2009. All of a sudden we became one of the top two largest investors in equities in the world, and a high percentage of those assets were in index assets. Indexation is the ultimate of long-termism, because you own these companies' stocks forever as long as they're in an index, and you can't sell these stocks as long as they're in an index. So the only component where you have some role and responsibility is in the power of your vote. It came to me that it is even more important for us to effectuate a corporate action or corporate behavior through the vote, because we can't sell the shares if we don't like the company or their behaviors. So the power of our vote became very enlarged. Spending time looking at the financial media, the conversations are all about the moment, the ups and downs of the market. As an indexer, we are the ultimate long-term investor. But importantly, two-thirds of all the assets we manage at BlackRock are for retirement savings. I became more sickened by watching the narrative: markets going up or down, what does it mean with one country doing this or that? The reality is for the majority of investors, the ups and downs of today, this week, or this month, has very little bearing on the outcome 30 or 40 years for a retirement. The beginnings of the letters in 2012 were about long-termism and why we need to reorient ourselves from short-term behaviors to long-term behaviors. That evolved from focusing on long-term behaviors and long-term outcomes like retirement, but also trying to change the narrative: what are the contributions of a company that can create good, durable, long-term outcomes? The whole concept of corporate stewardship and stakeholder capitalism became much more part of what I thought were the responsibilities of management teams and boards. It became more and more clear we have more than shareholders as our stakeholders; we all have multiple stakeholders that we have to work with and for. One of the major components: I didn't write this as somebody just writing letters to companies we invest in; I was writing from the lens of a CEO of a public company. I was trying to invoke what are my responsibilities as a CEO of a public company, and then I focused on what are my responsibilities in terms of my stakeholders: the employees of BlackRock, our clients. Much of it also has to do with the whole concept of deglobalization. My whole career prior to that was about globalization and the positive nature of what globalization can bring to the world and humanity, and that became thrown out with this idea of deglobalization. That raised the whole concept of your stakeholder of your community. If you are a multinational company like BlackRock, we have many communities here in the United States, but if we're going to earn the license to operate in all the different countries where we work, we have to earn that license in every country. That's when I started really focusing on the needs of stakeholder capitalism on behalf of our shareholders at BlackRock, but on behalf of us as a shareholder in every other company. I get excited when I start thinking about what I'm going to write about in fall. I get excited about what are the issues that are bothering me, what are the issues that I think are important. Most people think I've come up with something original, but I don't think anything's original. I get all these ideas from our clients. That's what's so wonderful about the responsibilities and role we have: we have incredible conversations with clients throughout the United States and the world. Through these conversations, I hear what's on their mind. I'm just putting all those thoughts on paper and trying to evoke what I'm hearing, what I feel, what I see. I put them in my own words and my own feelings, but it is through that process that it all comes together.

Let me just start off. 2020 was shaped a lot from the fall of 2019, when through the conversations and the consecutive conversations I had about why sustainability was becoming important, more and more clients were asking for it. That letter was published in January of 2020, and we talked about climate change as investment risk. That was probably the major theory behind it and why we believe this is going to be a tectonic shift in how we think and how we invest. In 2020, when we started the year, we were aware of this rising virus in China and other parts of Asia by January, February. But when March rolled around and it became very real that it was not just a pandemic in a few countries, it was a global pandemic, that shaped everything we do and everything we did. We still are being shaped by this existential risk of health and security. We all now have experienced a vast change in how we live, how we work, how we are educated, how we are receiving medicine and medical advice, on and on. The year changed quite dramatically. But through that year, we've seen blessings of humanity and we've seen terrors of humanity. We have learned to work and operate, to consume information differently, to consume products and purchase things differently. We are working so differently because we're all mostly working remotely, but we were able to prevail. That's why I can sit here today and say why I'm so optimistic about the world of the future, why I'm so optimistic with capitalism too. I could look back in 2020 and say there are some wonderful blessings here, but at the same time, like all recessions, recessions expose all the inequalities. As you mentioned, the racial injustices. Recessions create real economic difficulties in segments. Because this recession was so deep and required so much government fiscal stimulus and monetary stimulus, it really shaped the outcomes in very extreme ways. Equity markets have rallied quite considerably. Technology companies have flourished because of the necessary need for all of us to use more technology. But at the same time, it created huge hardship in parts of our economy that are based on the aggregation of human beings: culture, travel, business gatherings, social gatherings, gatherings at restaurants, hotels. These industries have been devastated, and all the employment in these industries has been destroyed. Now into 2021, there are segments of the economy doing really well and parts of the economy doing very badly, leaving a lot of unemployment worldwide. We've seen more exposure to the emerging world that is more devastated by this. The emerging world is being devastated by climate risk at the same time, and the deglobalization I spoke about. There are many macro trends that are leaving society more fragmented. But the one thing that is so loud and persistent: the existential risk of health because of COVID actually illuminated the existential risk of climate change on the health of the planet. What we witnessed in 2020 was an acceleration, even faster than I talked about this tectonic shift, but it really has created a real acceleration globally, not just with governmental policy but investor preference. I do believe more and more investors believe that climate risk is investment risk, so it's embodying everything they do. That's going to be transforming how we think about investing in 2021 and beyond.

I need to step back for a second and talk about my 40-plus year career. As a young leader in the mortgage industry back in the late '70s and early '80s, I was very self-aware that we were at the cutting edge of changing the whole capital markets. It was in 1983 when we were allowed to have personal computers on a trading floor, and we were able now to use that computer to customize portfolios of mortgages into different types of securities, auto loans, credit card loans, and derivative contracts. By having the computer capability on the portfolio manager trader's desk, that transformed finance as we know it. As more and more companies report under SASB and TCFD — and I would urge every company listening, if you haven't begun reporting on it, you've got to do it now because the pressure is going to be on — more importantly, through the data, we're going to create the analytics to basically understand the behaviors of each company. As you framed the question about investor preferences, I think through this data, we're going to show why climate risk is investment risk. We're going to have the data to show how one company is moving forward versus another company in the same industry. Having all this data at the corporate level, we're going to be able to create portfolios of companies that have much greater performance related to how they're moving forward in terms of sustainability issues: are they moving towards a net zero platform as a company? We are going to have the ability to customize, personalize a portfolio strategy that meets your needs. We could create a higher sustainability portfolio of companies that's closely tracking the liability that you want but has higher standards towards sustainability. If you want to have companies that have a much higher percentage of S or social issues, we could carve and create that out through better data analytics using SASB. It is my belief that the revolution is not going to be coming from the personal computer on a trading desk like it did in the mortgage area, but it could be the data. Through that data and the analytics we have, we have the ability to customize any portfolio that you want that will meet those sustainability attributes, your social attributes, your governance attributes over the whole cross of ESG standards. This is what's going to transform — in years, not decades, years — how people invest. For the companies that are not going to be properly reporting, and the boards that are allowing their management not to properly report, they're going to be left behind. The better companies, the more stakeholder-friendly companies, are performing better. We're seeing that they're producing more durable, consistent profitability. We are going to see big changes in corporate valuations through these big, large-scale transformations that help investors invest. You see market forces driving companies, not just a desire to do good or to be transparent. But I'm going to say it's not about doing good; if you believe that climate risk is investment risk, it's not being socially good. I mean, we could all be socially good. But in the United States, we have to be beyond doing something good; you have to do something with the idea that you're going to maximize return. If you go around that, then you're not a fiduciary under our rules. That may be changing under the new administration, but at this moment we have to live under that rule. Through the data, through the process, we expect to have the analytics to show why climate risk is investment risk and why we could create these portfolios.

Once again, there's nothing novel about what I'm asking. I'm asking every company to move forward on reporting under a Net Zero economy. Basically, we're asking every company to report under TCFD, which is asking those questions about how every company is going to be prepared to meet the requirements of the Paris Accord. The one beauty — and I learned this over my 40-plus years in business and finance — once we understand a problem, we bring the problem forward and we identify it and try to minimize the problem. That's why I'm an optimist: when we identify a problem, we find solutions. I believe through this process, moving this problem forward by having more and more companies report under TCFD and for companies to report how they're moving forward in terms of a Net Zero carbon economy or Net Zero carbon footprint — we are doing that at BlackRock. We reported under TCFD and we're moving forward, but we're asking every company, as a part of their reporting, to also report to us how they are moving their company forward to reach the targets of the Paris Accord — to have a Net Zero carbon economy.

I'm not sure we're leading. I think what we are doing is responding. We're responding to where governments are asking everyone to move forward. As I said, the beauty of finance is once we identify a problem, we bring it forward and try to eradicate it. I think that's our important role as the largest investor in the world: to identify a problem, to respond to societal needs. I could say as a CEO of a public company, our employees at BlackRock are asking me to move faster, and I'm sure most companies are saying the same thing. But as we move forward to a Net Zero carbon economy, it's going to mean an acceleration of renewables. But until we have new technology — and this is one thing I constantly write about — it's about making sure that we are focusing on technology so we can move forward, because there are going to be segments of society that are not going to be able to adapt quick enough. The one thing I do write in my 2021 letter: why society still has to be just, this transition has to be a just transition. This is really, really important, because we need to make sure that we are creating jobs as fast as we destroy jobs. That happens, but it may not be in the same location. This is why it needs to be very thoughtful, at the top of mind. It has to come from government and the private sector working together. It can't just be advocating it, or we're going to have a great unevenness and we're not going to have a just society. So it's really important when we speak about these issues: the Net Zero carbon economy is going to mean this transition, it's going to mean that we have to manage it from the top down. The other thing I want to be loud about: this transition is not a transition just for public companies. We're asking a lot from public companies, and if public companies all did this, we would not get to a Net Zero carbon economy unless we have the private part of the economy doing it too. But also, governments: if you're really worried about climate change, you have to be worried about physical risk in cities. We just can't ask FEMA and the federal government to bail out every time there's a natural disaster. It's been a fantastic agency to help those who have been harmed, but we need to have a plan. Every country needs to have a plan. One of the things about my 2021 letter is it's not just about asking public companies to move forward; it's about governments moving forward too, in a holistic way, working alongside public companies.

As I say in the letter, I'm very proud of capitalism. I think so many companies have done so well making sure that their employees were safe during the pandemic. I can't think of a year where stakeholder capitalism wasn't even more vivid: how are we trying to move forward as a company, making sure that our employees feel secure and safe, not just physically, but with the transition away from office working, working from home, what is our mental health, what are we doing to make sure our employees feel safe and secure? When you have your employees believe in the culture of the firm and believe in what the firm's doing, they're the great sales force for the firm; they embody the culture and the organization. I can't think of a year in my lifetime of business where the stakeholder of your employees is so evident. For companies to move forward, we all know it is about making sure that we are connected with our employees, especially as so many of our employees were working remotely. What I could say from 2020: our clients were in more need of information, more need for what do we think and where should they go, how should they move forward? And three, my gosh, investing in being a part of the communities where you're working, whether it's a community in one country if you're only housed in one country, or if you're housed in many countries. At BlackRock, we're in 30 different countries and we do business in a hundred different countries. If we don't show and earn our license to operate in those hundred places where we do business, then we're not going to have a business in those countries. I would say 2020 shone more light on the virtues of stakeholder capitalism. I'm more convinced than ever that those companies who performed really well for their employees, for their clients, and their community, their shareholders have benefited dramatically. As I said earlier, we're seeing a widening between the best performing companies in industry and the worst performing companies in industry. So much of it has to do with those who are embodying stakeholder capitalism and working for all their stakeholders and building that enduring, durable profitability over the long run.

If I could channel the answer towards what government needs to do: every government needs to broaden their economies. Economies were narrowed during the pandemic — big winners but a lot of losers. This is how I frame the question for the governments that are focusing on broadening the economy through positive policies. Hopefully in the United States, we have a broad infrastructure bill to create better jobs, bigger jobs. We could transform our society. I think it's going to be very critical for the Biden administration and every government in the future to find ways to accelerate the vaccination, making sure we have herd immunity. Those who have herd immunity faster, we're going to have those restaurants open, we're going to have those conventions open, we're going to have rock concerts again, we're going to be traveling, we're going to go to museums. That's how we broaden the economy. We have to conquer this virus; we have to conquer it together, and we all have to move forward. First and foremost, for people who have lost hope, it is making sure that we broaden the economy through vaccination and then broaden the economy through policies, whether it's fiscal stimulus of some sort, making sure that we broaden the economy to create great domestic job creation.

Just an understanding of the acceleration of how fast this is going. I am so powerfully optimistic about capitalism, and I hope that comes across too. When you think about the pharmaceutical industry, which was in such disregard at the moment, four companies have a vaccination — three are approved, and one is on the way, and now another one's going to be on the way. What's important: it took only 10 months. I can't think of another thing that is so much more powerful than the ingenuity of capitalism, the ingenuity of companies. But even things as mundane as food and food delivery, making sure that our grocery stores were stocked at a time when we're all worried about our health and their employees are being protected. Things as exciting as the transformation of technology and our over-reliance on technology, and how technology has shaped and transformed our lives and truly made our lives better. The demand for EVs, electric vehicles, that's only accelerating, the advancements in battery. I'm more convinced than ever that stakeholder capitalism is broader, louder. I'm also louder in this letter about the need to accelerate corporate behavior related to issues around sustainability and social issues. We have a lot to do in front of us, but I'm absolutely confident the best companies are going to exhibit incredible behaviors. Just in the last few weeks, surveys are coming out that the most respected parts of society now are businesses and CEOs. We've come a long ways. But I really believe the transformation of leadership, the transformation of businesses, is about more and more leaders and their boards focusing on things about their stakeholders. They're connecting with their employees deeper and broader, they're connecting with their clients broader, and they're certainly trying to be more connected to society. So much of that is in this letter. As you said, it is about moving forward on better disclosure, more complete disclosure, especially on Net Zero. But I also believe this letter relates to this whole concept of the advancement of personalization and customization of indexes, which is going to change investor behaviors in a large, large way. Once again, like in everything else we do, data becomes an engine for everything we do. Five years ago, 10 years ago, most CEOs and boards didn't want to be that transparent. Now we're seeing the new leadership of companies and their boards really focusing on how do we become more transparent — not just transparent for their shareholders like us so we could analyze them, but more transparent so they could connect better and deeper with their employees. Greater transparency so their clients can understand the behaviors of a company. More than ever before, clients choose who they do business with. More and more people are choosing who they do business with and why. I believe those companies who have a loud, persistent, consistent voice are winning more of their clients' share of wallet, whatever product they're in. Clients are willing to pay premiums; it's not a race to the bottom of the cheapest price. It is about who do I connect with, who do I believe in, who do I identify with. I think these are all really important parts of what leadership has to be: identifying what is the best thing for their company, their employees, their clients. I think this is a natural evolution, but it's a powerful one. This transparency evolution is changing how we work, how we live, how we behave. I'm remarkably optimistic about how we are evolving, and how we are evolving with society. This is all good. This is not something to be afraid of; this is something to embrace. That's one thing I say loudly in the 2021 letter: climate change and investing is something that is a powerful economic result. As we move towards a more sustainable world, it's going to create great jobs, it's going to create a great environment. We should not be frightened of it; we should all be embracing it and finding ways that we could be a part of it. I think this is one of the big messages in the 2021 letter.

Thank you.