James K.A. Smith has written extensively on how our hearts are—often unintentionally—formed by our habits. What investing habits are we participating in that may be subtly shaping our view of money?
God cares a great deal about how we care for his creation — that was the clear message of Parts I and 2. But now in this concluding piece, we tackle a different, entirely pragmatic question: should that matter to us as investors? More specifically, if we set aside any moral/theological considerations, should we care about the environmental practices of the businesses in which we invest?
Larry Fink, CEO of BlackRock, the world’s largest investment firm with $10 trillion in assets under management, says the answer is an emphatic YES. And the essence of why he answers YES is sustainability.
Let’s remind ourselves: sustainability means an activity can be practiced indefinitely. It is typically used to refer to environmental sustainability. In that context, it means that a practice neither harms nor diminishes the natural environment. And, of course, when we talk about whether or not particular practices are sustainable, we’re almost always talking about business practices. After all, the environmental effects of other sorts of entities — schools, churches, doctors’ offices — are typically inconsequential.
But not so with (plenty of) businesses. Even if we don’t pay close attention to environmental issues, most of us are aware that strip mining has devastated large swaths of land, that agri-business practices often pollute both our ground and our waterways, and that many factories spew toxins into the air. Now, more and more of us are concerned that the cumulative effects of all sorts of business activities are causing our planet to overheat. In fact, Fink says that “climate change is almost invariably the top issue that clients around the world raise with BlackRock.”
Why so much concern among investors? Because, according to Fink’s three most recent letters to top company CEOs, “climate risk is investment risk.” By which he means two distinct, but interrelated, things. One sort of risk to investors is that new government regulations force significant changes to current business practices. The government might, for example, tell auto companies that a few years from now all new vehicles must be electric. Or it might ban the use of particular fertilizers that are important to factory farming. Or it might require all new houses to be solar-powered. Any such dramatic changes in government regulation would necessarily be deeply disruptive for investors in companies forced to change, or even abandon, their current business model.
But that’s not, primarily, the investor risk that Fink is concerned about. Rather, Fink knows that well in advance of changes forced by government regulation, investors themselves often decide that certain kinds of business models are no longer as attractive as they had been previously. In fact, in Fink’s 2020 CEO letter, he suggested that just this sort of re-evaluation was beginning. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” That’s his euphemistic way of saying that investors were beginning to turn away from companies whose business models were likely to be hurt by climate change concerns. “In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.”
As a result, Fink announced that going forward BlackRock would “place sustainability at the center of our investment approach.” Among it’s new initiatives:
He concluded that companies (and countries) that do not “address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital.” Put more pointedly, the number of people willing to invest in such businesses will grow ever smaller, while the investors heading for the exits will be doing so with meaningful losses.
That was 2020. In 2021 Fink wrote that the change in investor sentiment and reallocation of capital was accelerating faster than even he had anticipated. And he sees no end in sight. “As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further.” Instead, he believes that the investing changes triggered by climate concerns will be long and widespread. “I believe that this is the beginning of a long but rapidly accelerating transition — one that will unfold over many years and reshape asset prices of every type” (emphasis in the original).
In fact, in his 2022 letter, Fink says,
It’s been two years since I [first] wrote that climate risk is investment risk. And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion . . . This is just the beginning — the tectonic shift towards sustainable investing is still accelerating.
Notably, Fink’s letters make clear that he shares with ECFI a conviction that sustainability is not only hugely important, but that it applies to every aspect of a business model, not just to its environmental impact. “Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.”
In other words, if any part of a company’s business model harms rather than helps one or more stakeholder groups, then those practices raise sustainability risk concerns for the business. Eventually there will be a price to be paid — by the business, and by its investors. Fink writes:
A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients — these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.
Exactly. Which is why investing that fails to focus on sustainability across every aspect of a business model is, in the end, both irresponsible and foolish. Whether Fink realizes it or not, his advocacy for win-win relations with all stakeholders is really a vote for applying the Golden Rule just as fully in business as in the other arenas of human behavior. In other words, God’s wisdom is both good and prudent. Investors ignore it at their peril.
Editor’s Note: Eventide shares no affiliation with BlackRock.