Front Burner - World’s biggest money manager sees profit potential in climate change action

Episode Date: January 17, 2020

Today on Front Burner, host Jayme Poisson talks to business professor Sarah Kaplan about the decision by the world’s biggest money manager, BlackRock, to make climate change central to its investment decisions, and whether corporations can lead on climate change action.

This is a CBC Podcast. Hello, I'm Jamie Poisson. BlackRock is the world's largest money management company. It oversees $7 trillion worth of funds. $7 trillion worth of funds. $7 trillion. And on Tuesday, BlackRock CEO, a guy named Larry Fink, said the company would be moving that money away from fossil fuels and that it would dump companies that make more than 25% of their money from coal.

In this influential yearly letter that he writes, Fink also spoke in favor of the Paris Climate Agreement and recognized global climate protests. In a nutshell, here's Fink's message. Climate risk is investment risk. Today, can business succeed where politics is failing in the fight against climate change? Or is this just a green veneer? This is FrontBurner. Sarah Kaplan is a professor at the University of Toronto's Rotman School of Business. She wrote a book about this topic. It's called The 360-Degree Corporation,

From Stakeholder Trade-offs to Transformation. Sarah Kaplan, thank you so much for being with me today. My pleasure. So can we start with BlackRock? Sure. What place does it hold in the business world? Well, as you mentioned, they control $7 trillion in assets. All the money. It's a lot of money, and so people pay attention. And people have been paying attention to Larry Fink's letters for a number of years, he has been emphasizing that, you know, these letters that he writes are to the CEOs of the companies that they invest in.

And so they have to pay attention to him because their money is supporting the operations of the companies. And so he's been talking for a number of years about companies needing to have purpose and not just profits. Because it unites their employees. It connects the clients. But most importantly, it brings the organization onto a common plane. And so this move, I think, is part of that ongoing trend. Although you note that he does say this is climate risk is investment risk. So he's actually coming back and saying, actually, this might not even be purpose.

This might just be good, good business. He's saying that this is bad for business to not invest in sustainable businesses. Exactly. And so he's basically making the case that paying attention to other stakeholders, such as, you know, people who are concerned about the climate crisis, is actually part of a business decision at this point. The physical changes that we may see with climate change are more permanent. We don't have a Federal Reserve to stabilize the world like in the five or six financial crisis that occurred during my 40 years in finance. This is bigger. It requires

more planning. Can we talk a little bit more about that? So in his letter, he talks about, you know, what will happen to the 30-year mortgage, a key building block of finance, if lenders can't estimate the impact of climate risk over such a long time, and if there's no viable market for flood or fire insurance. He talks about inflation and interest rates if the cost of food climbs. I think what's interesting about that argument is that, you know, for a long time he's been vaunted as the person who was actually promoting purpose and, you know, paying attention to the needs of other stakeholders in addition to profit. But this argument that he's making now, it feels a little bit more like he's just saying, look, it's not a

purpose do-gooder thing to pay attention to these kinds of issues. Actually, it's just really important for business because if you have financial instability, if you don't have access to capital, if you don't have a good insurance or reinsurance market, if you don't have these things, then the economy is not going to function. So what I find is kind of interesting about this is that people have been lauding Larry Fink as this guy who's actually pushing companies to think more about purpose, to think more about stakeholders. And in fact, what he's saying here is, yes, but this is not, has almost nothing to do with do-gooderism. It has almost all to do with, you know, just making sure the business is in

function over the next 10 to 20 to 30 years, which I think is a very valid argument, because if we don't think of climate risk in that way, I think we are going to face a lot of these kind of financial and other crises that he's describing. I believe in the science, but I did not write it as an environmentalist. I wrote the letter as a capitalist. And my job is as a capitalist to help prepare our clients for the redistribution of capital. He mentioned that BlackRock is moving away from fossil fuels. Can we talk about what that means in more detail? Because I can't help but notice our producer Pete went to the old Bloomberg machine. And BlackRock is the single

biggest investor in Canada's biggest oil company, Suncor. So they have 75 million shares. And they own a huge stake, almost $20 billion in ExxonMobil in the US. So are they just pulling out now and not going to have any shares in these major companies? Well, note that they say they're going to be moving away from. So it's going to be a process. It's not like tomorrow they're going to fully divest of their ExxonMobil shares or Suncor shares. However, I think what they are saying is that they are going to be transitioning their portfolios to other companies. So it does have huge implications for these natural resource companies that they are not going to have access to capital, which, you know, if $7 trillion is not going to be accessible to them because if their cost of capital goes up, then it means taking fossil fuels out of the ground is going to be more expensive than wind energy or other renewables. And so it will actually change the financial

calculation and make it more expensive to do things that create CO2 emissions and relatively less expensive for renewables. So it's a way of getting the market to reinvest in renewables in a way. It's really important, and we see this with all sorts of universities divesting their investment holdings from fossil fuels because the students are actually forcing them to do it, and I think it's the same kind of thing. A McGill environmental ethics prof says the university's decision to refuse to stop investing in fossil fuels drove him to quit.

It's just a total contradiction for either a university or a country to brag about reducing their own fossil fuel consumption, but in the meantime, in the case of McGill, bank on its expansion. I have heard critics say that this feels more symbolic, like they're not moving fast enough, for example, that this is like greenwashing. My question on this is, how much will it really achieve? How are they going to actually measure businesses that are making strides when it comes to sustainability? Yeah. So greenwashing, pinkwashing, purpose washing. Yeah. You know, the question I have about Larry Fink's announcement, which I think is a great one, because, of course, it attracts a tremendous amount of attention, if nothing else.

But he has to actually do it. His organization has to do it. And it's, if you haven't been paying attention, you know, you would note that the market has been going up quite handily over the last few years. And it's much easier to make decisions like that when the market is going up, because there's lots of other investment opportunities for the $7 trillion. But let's say the market has a downturn, which we've been predicting for a while. And I think if, you know, given some of the many uncertainties that are going on, not just created by the climate, but created by the political condition and the things that the president of my home country are doing, the rubber is really going to hit the road when they are not hitting profit targets or returns targets.

And you talk about your home country. You're from the United States. I'm a proud American immigrant to Canada. I love being here. How are people in the business world reacting to this letter from Larry Fink, these decisions that he says BlackRock is going to be making? There has been over these past years a generally positive reaction to the kinds of moves that Larry Fink has been announcing. And, you know, one of the signs of that is that the business world is moving more in that direction more broadly than just Larry Fink. So last August, the Business Roundtable of the United States, which is an organization of, you know, almost 200

CEOs of the top biggest companies, signed a new statement that says that we're not going to just pay attention to the shareholder, which is something that they had historically. Their last statement from 1997 said our primary responsibility is to the shareholder. They've now said, no, we're going to pay attention to all the stakeholders. And they say, create value for all stakeholders. Just some highlights. We commit to delivering value to our customers, investing in our employees, dealing fairly and ethically with our suppliers, supporting the communities in which we work, and generating long-term value for shareholders. So it's not just Larry Fink, like this message is getting across and other companies are talking

about this, not so much in Canada, but certainly in the U.S. Again, the question about that statement was, is it real too? Like, we have to see the proof will be in the pudding. We have to see if companies actually take this seriously. This is this concept of shareholder primacy. Our bottom line is making as much money as possible for the shareholders. And now, at least in rhetoric, there is this shift where companies are saying, look, we also care about our employees. We care about our community. We care about doing things that are good for society. We're now joined by Joshua Bolton.

He is the president and CEO of the Business Roundtable. It's a recognition of 182 of our CEOs of some of America's biggest companies that it's the right thing to do. Because in the very long run, you can't take care of your shareholders unless you've taken care of your customers, employees, and communities as well. What is the argument that all of these CEOs are making? You talked about the business roundtable, Amazon, Apple, J.B. Morgan, Chase. Why are they saying that they want to be making this shift? Well, I think that there's probably a cynical and a less cynical answer to that question. The more cynical answer to that question is if you look, for example, at what happened after the financial crisis in 2008, where many companies were blamed for that crisis. When you look at the rhetoric in the U.S. presidential election right now, where we have candidates like an Elizabeth Warren or Bernie

Sanders actually saying companies are making too many profits and we're going to do all this stuff. Greed is not good. If Wall Street does not end its greed, we will end it for them. You know how American economy worked for decades, shoot, for centuries. The biggest companies in this country had multiple responsibilities. Responsibility to their shareholders, to their employees, to their customers, and to the communities that they were involved in. And it worked. You could imagine that you would want to make a statement like the Business Roundtable statement to preempt something worse, like, you know, self-regulation, where the companies are saying, oh, don't worry, you don't have to put a law on us because we'll do something. So the cynical argument is that this is just preemptive

based on critiques that they're receiving, and they want to be ahead of it as opposed to behind it. The less cynical answer is that people who work in companies are not monsters. They're people. We work in organizations, and we look around and see, you know, we see these problems, and we think, wait, we don't want to participate in that we as workers, we as leaders, we as executives don't want to participate in that. And so the less cynical view is that people are actually realizing that their company can be a tool for what they're doing. And that there's a way to, as you said, make purpose more central to what organizations do. And this is the argument that I make in my book, too, if you make it more central, you can actually use it as a way to transform your businesses in ways that are good for the world,

and also create new innovative products and or processes or ways of doing business that are also good for the company. I wonder, you know, the other cynical part of me thinks sometimes this is just when it's convenient, right? Like, I think about Nike's stance and their campaign around Colin Kaepernick. They got a lot of plaudits for that. Believe in something, even if it means sacrificing everything. But this is also a company that still has very poor labor standards. Is there a sense of hypocrisy here? Well, I think that we can worry about hypocrisy, and Nike's a great example.

You know, when it comes to their labor standards, they did get assailed a lot for that in the 1990s. Shame on Nike, shame! We made you! We'll break you! They struck at Nike's biggest image problem, its use of factory workers in the third world at wages as low as $2.50 a day, U.S.

Don't just do it. Do the right thing. And they have been on a more than 20-year journey to improve that. So even though their labor standards might not be perfect, and I'm not holding them up, they're actually still gold. They still get criticized today, but they're still gold standard today. They're better than many other manufacturers because they've actually spent the last 20 years thinking hard about how to address some of those challenges. So I don't want to hold them up as a great success story, but I think they are one of the companies

that has at least has a very rigorous process in place for thinking about that and working on that, not just putting regulations in to say you can't have overtime in this factory, but actually working with factories to innovate in how they manage designing products in different ways so that they're not using toxic chemicals, so the workers aren't exposed to those. They have done a lot actually to innovate in the ways that they have addressed factory conditions, and they've invested in ways that other companies have not. So, again, for most companies, when we talk about greenwashing or pinkwashing or purpose washing, you know, many companies are actually doing some things that are really wonderful and also doing some things that we would be very upset about. And so I think we have to have a more nuanced picture. Do you think that that's how you would categorize BlackRock right now?

Yeah, because they still have 75, whatever, million dollars in shares, right? Like if they actually did that divesting, which, you know, would actually really change the economics of fossil fuels in our society, then I think that would be a good thing. So but we also have to keep in mind that we need time to transition. But we also have to keep in mind that we need time to transition. We can't tomorrow say we're not going to, you know, do any fossil fuels or, you know, these companies are just going to go out of business. But what we do need to be doing is pushing these companies to aggressively pursue a low carbon future in a way that they're not being pushed right now. So, you know, we can't expect it to happen tomorrow. Jobs are on the line, the economy's on the line. But at the same time, if we're not putting all of our innovative talent and thinking into solving these problems, and we accept that, you know, if we just say, oh, well, there's jobs, so we can't do anything, then I think that's when we're going to be in

trouble. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. empowering Canada's entrepreneurs through angel investment and industry connections. You mentioned earlier that this conversation around purpose and focusing more on stakeholders is happening in the United States, but not so much here in Canada. Can you tell me more about that? Why? Well, it's something I've puzzled about as an immigrant and seeing both sides of the equation. A lot of companies do these corporate social responsibility reports where they actually go in and analyze what they're doing and report on it. And it's a mechanism for holding companies

accountable. In the United States, amongst the top S&P 500 companies, it's 86%. And in Canada, amongst the TSX, it's 50%. So we see fewer companies in Canada actually making an effort to even report on or hold themselves accountable on these kinds of things. And clearly, we are not doing everything that we should be doing. And as an American immigrant, I can really say, looking south of border to my home country, we need to be doing more in Canada, we have this unique opportunity right now to be a global beacon, whether it's on gender equality, fighting climate change. And I don't think we're pushing ourselves hard enough. I think there's some, it's easy to be up here and look down south of the border

and be sort of smugly self-satisfied with how great Canada is. The smug self-satisfaction is not going to get us to the next step. I think we need to be right on the bleeding edge of innovation and ambitious change. I don't think we're there yet, and I wish we were. Okay. Sarah Kaplan, thank you so much. My pleasure. Okay, so after Sarah and I spoke on Thursday, there was a bit more news on this front. Microsoft said it is planning to be carbon negative, not just carbon neutral, by 2030.

And by 2050, it hopes to have taken enough carbon out of the atmosphere to account for all the emissions the company has ever made. account for all the emissions the company has ever made. It also says it will invest $1 billion over the next four years to speed up the development of carbon removal technology. That's all for this week. FrontBurner comes to you from CBC News and CBC Podcasts. The show is produced by Mark Apollonio, Imogen Burchard, Elaine Chao, Shannon Higgins, and Pete Evans. Derek Vanderwyk does our sound design. Our music is by Joseph Chabison of Boombox Sound.

The executive producer of FrontBurner is Nick McKay-Blocos. And I'm J.B. Poisson. Thanks so much for listening and see you all on Monday.