Dear Larry (PART I of II),
In your most recent annual letter to CEOs you assert that we are on the edge of a fundamental reshaping of finance involving a significant reallocation of capital according to sustainability-related risk.
Coming from you, the Chief Executive Officer of BlackRock, Inc. (the largest money-management firm in the world), that means a lot.
And it gets even cooler when I realize that you’re not alone:
First, I consider that over 2,300 investment managers, asset managers, and service providers representing over $80 trillion in assets under management have committed to incorporating sustainability-related risk into their investing and voting decisions. And I realize that’s an absolute tidal wave of change.
Second, I consider that U.S. sustainable investing already represents more than one in four dollars in total U.S. assets under management. And I realize that the the tidal wave’s relative size (relative to all assets under management) is no joke.
Third, I consider that the precise direction in which this tidal wave of capital needs to move is becoming ever more clear as leading lenders and ratings agencies such MSCI, Sustainalytics, Bloomberg, Moody’s and S&P Global Ratings continue to develop proprietary research methodologies to monitor and score companies on sustainability-related risk information (i.e. “ESG scores”).
Taking all of that into account, I get happy; and my friends and I (who provide legal advice to those pushing sustainability in America’s current corporate landscape) begin to refer to this fundamental reshaping of finance — to account for sustainability-related risk — as the “Age of ESG.”
“The Age of ESG is really here,” we say. “Our financial system is truly on the precipice of going green.”
And we — as well as the lenders and ratings agencies — use this term “ESG” as a proxy for sustainability because ESG metrics (which focus on companies’ non-financial environmental, social, and governance metrics), account for a broader set of negative externalities than traditional financial metrics.
To state the obvious, not compromising the ability of future generations to meet their own needs (i.e. taking sustainable action) involves avoiding (or at least accounting for) the negative externalities placed on future generations (i.e. the costs suffered by third party stakeholders as a result of a company’s economic transactions); and, as it happens, ESG scores are just that: an accounting of a broader set of the negative externalities than traditional financial metrics.
By way of example, greenhouse gas (“GHG”) emissions are a side-effect of many companies’ economically valuable activities. However, most of the negative impacts of GHG emissions do not fall directly on the companies that produce them — instead they fall on future generations or people living in the broader community at large. Hence, ESG scores that account for, among other things, companies’ GHG emissions, theoretically provide a better picture of companies’ true sustainability (i.e. the impact that companies have on all of their stakeholders — not just their stockholders, but also their employees, the broader community, and future generations as well).
All of that said, Larry, I read your most recent annual letter to CEOs very carefully, and I realize that, notwithstanding all of the momentum, you remain unsatisfied by the current ESG scoring regime.
The picture you’ve been provided (of how companies are managing sustainability-related questions) is not clear enough.
The growing network of ESG stakeholders has not adopted a standard framework for scoring. ESG ratings agencies often do not disclose their methodologies, they rely on a mix of public and voluntarily disclosed private information, and such information is often not material to a company’s operational performance and rarely tied to a company’s core strategy.
In an attempt to remedy this, Investors have petitioned the U.S. Securities and Exchange Commission (“SEC”) to implement a mandatory ESG disclosure framework, but, thus far, the SEC’s position on mandated disclosures remains rooted in its flexible “materiality” based standard and does not necessarily require ESG-related disclosure.
Consequently, I can understand why you’ve recently threatened to implement your own strategies to force the issue.
I hear you loud and clear.
You’ve unequivocally stated that Blackrock will conclude companies are not adequately managing risk and will therefore hold their board members accountable — by voting against them — when companies do not publish robust disclosures in line with (i) the industry-specific Sustainability Accounting Standards Board (“SASB”) guidelines, and (2) the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations, including a plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized.
The idea behind this strategy, as expressed by you, is to ensure that the data disclosed by companies covers how they serve their “full set of stakeholders.”
And I realize that you’re not alone.
So, today I thought I’d introduce you to Delaware public benefit corporations (“PBCs”) (a relatively new type of legal corporate form that, I believe, if widely adopted, would greatly facilitate the fundamental reshaping of finance).
In this Age of ESG, meaningful corporate action will entail at least two things for most companies: (1) responding to investor demand by producing useful ESG related disclosures; and, importantly, (2) having the ability to actually take the sorts of actions and make the sorts of decisions that genuinely allow a company to boost its ESG score, without, for example, the company’s board of directors thereby violating their fiduciary duties in the process.
Unfortunately for most companies and their boards, it’s not always going to be the case that the decisions they might make to boost their ESG scores — such as deciding to procure more expensive renewable energy to run their operations instead of less expensive but GHG intensive oil or gas —also clearly advance the interests of their stockholders.
This is unfortunate because, for most boards, their fiduciary duties run only to stockholders.
For instance, in 1986, in the case of Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court made clear that concern for other stakeholders (besides stockholders) was “limited by the requirement that there be some rationally related benefits accruing to the stockholders.”
Since then, the currently servicing Chief Justice of the Delaware Supreme Court — Leo E. Strine Jr. — has affirmed this understanding of Revlon, stating that “Non-stockholder constituencies and interests can be considered, but only instrumentally, in other words, when giving consideration to them can be justified as benefiting the stockholders.”
Larry, how do you expect companies and their boards to — in your own words — serve their “full set of stakeholders,” when any board can only consider non-stockholder stakeholders on an instrumental basis? Do not employees and communities have intrinsic value?
I’m sure you see the dilemma.
Luckily, there is a solution: Delaware public benefit corporations (“PBCs”).
Among other things, when making decisions, directors of PBCs must balance three separate interests: (i) the stockholders’ pecuniary interests, (ii) the best interests of those materially affected by the corporation’s conduct, and (iii) the public benefit or public benefits identified in its certificate of incorporation. Furthermore, at least once every two years, a PBC must provide its stockholders with a statement as to its promotion of the public benefit identified in the certificate of incorporation.
In PART II (available here), I discuss PBCs in more detail — with the twin objectives of (i) introducing the PBC corporate form, as well as (ii) examining how PBCs can facilitate meaningful corporate action in the Age of ESG.