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Greenwash to wish-wash

20 Jan 2022 | Larry Fink's letter to CEOs reveals one possible direction for sustainable investing.

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🥫 Stop trying to make ‘purpose’ happen, says Terry Smith. In his annual missive, the Fundsmith CEO accuses Unilever of being “obsessed with publicly displaying sustainability credentials at the expense of [business fundamentals].” “A company which feels it has to define the purpose of Hellmann’s mayonnaise has lost the plot. The brand has existed since 1913, so we would guess by now consumers have figured out its purpose. Spoiler alert — salads and sandwiches.” Lmayo.

💌 In his annual letter(s), BlackRock’s Larry Fink pushes back. It’s “more important than ever” that companies be “guided by purpose.” Purpose is your “north star.” “If you stay true to your purpose, you will deliver durable returns and help realise the power of capitalism.” Which probably reads as a truism to both stakeholder capitalists and regular old capitalists? ‘Purpose’ can be anything to anyone. Using it 21 times speaks to BlackRock’s purpose. Spoiler alert — global domination.

🏦 One thing on which Fink and Smith might agree: Private markets “cannot be the climate police,” says Fink, who calls on governments to provide “sustainability policy, regulation, and disclosure.” His warnings arrive as the European Commission haggles, the SEC dithers, and both delay. Meanwhile, inflation threatens to derail progress, with the ECB claiming green policy “poses upside risks to our [inflation projection].” It shouldn’t, contends Generation.

💰 They may be reluctant to speak as moral arbiters in an increasingly fractious political environment, but pro-ESG asset managers are quietly directing assets to ESG. Standard Life is moving £15B (1.5M clients) to a default sustainable strategy; DWS and BNP Paribas have switched a number of ETFs to ESG indices; and BlackRock has ensured its prophecies are self fulfilling by inserting its primary ESG fund into popular model portfolios.

🗳️ 2022 will be a busy year for engagement. After last year’s win against Exxon, Engine No. 1, the little activist investor that could, is setting its sights on diversity and workforce issues. One obstacle to voting power: dual-class share structures, on the rise as countries soften listing rules to encourage innovative companies to go public. Fink’s vision is a sustainable future driven by “young, innovative companies with easy access to capital.” It may come at a cost.

Chart of the Week: Big Oil is back

In his latest annual missive to business leaders and shareholders, BlackRock CEO Larry Fink strikes a moderate note. Stakeholder Capitalism Is Not Woke. Fossil fuels—from which BlackRock will not divest—have an “important role” in the energy transition. Green products “often come at a higher cost,” and governments “must ensure people continue to have access to reliable and affordable energy sources.”

In aggregate, this year’s letter dials down the environmental rhetoric that defined its predecessors, while dialling up the social.

Similar patterns are emerging elsewhere. Last week, JUST Capital released its 2022 rankings of the most sustainable US companies. As ever, tech companies dominated, with a couple of notable exceptions. Facebook/Meta dropped 700 spots and Exxon Mobil made it into the top 100, with CEO Martin Whittaker observing that “climate is an important issue, but not the only issue.”

Exxon Mobil (left), ranked 89th by JUST, vs. Alphabet (right), ranked 1st by JUST. Exxon’s revenues are 19%, 30%, 41% aligned to SDGs 7 (affordable and clean energy), 8 (decent work and economic growth) and 9 (industry, innovation and infrastructure), respectively, compared to Alphabet’s 0%, 16%, 8%.

On SDGs 7, 8, and 9—affordable and clean energy, decent work and economic growth, and industry, innovation and infrastructure, respectively—Exxon easily outperforms JUST’s no.1 most sustainable company, Alphabet. It makes sense that those three goals would be on the mind of investors after a year characterised, as per Fink’s letter, by an energy crisis, employment upheaval and disruptive innovation.

Big Tech, on the other hand, faces growing unrest from shareholders concerned about human rights and governance structures. Serious issues? Sure, but not new ones.

In their nascent lives, Big Tech and ESG have been constant bedfellows. It’s a mutually beneficial relationship: tech valuations have been the greatest success story of the ten-plus-year bull market, while ESG has been the hottest strategy on Wall Street. The narrative of doing well by doing good sold itself.

But the beginning of this year marked a change in fortune for tech. Growth stocks are taking a hit as central banks withdraw stimulus: a move fuelling speculation of a sustained rotation towards value. Numis equity analyst David McCann tells the FT that shift will be “an important test for the industry.” By industry, he means ESG.

All in all, not a bad time for investors to “look for ESG prospects among more traditional companies”—and to focus on issues beyond climate.