Balancing purpose with performance

Editor’s note: One of the strongest voices for managing the dual imperatives of growth and purpose is BlackRock, the world’s largest asset manager. At a recent Deloitte event, Mark Wiedman, head of international and of corporate strategy at BlackRock, discussed expectations for companies in both areas and the role of the C-suite in championing each in a session entitled: “Balancing growth and purpose on your corporate agenda.” Here is an excerpt of what he had to say:

How did BlackRock come to believe that sustainability and purpose were not separate from strategy?

Wiedman: There are three words we’ll probably use a lot today: purpose, strategy, and sustainability. The word “purpose” is primary for us, although we’ve probably used “mission” more. Still, from the founding of BlackRock, and certainly in my own experience, the purpose of the firm—its mission—has animated everything we’ve done. After that comes strategy, and Larry [Fink, chairman and CEO of BlackRock] has driven it on the basic concept that we need to go where our clients go and serve their investment needs. That leads to the third word: sustainability. For us, sustainability came not out of “do goodness,” but a recognition that the financial markets were fundamentally changing and that sustainability risks were simply risks. So, part of being a good investor for our clients meant reckoning with sustainability alongside more traditional measures of risk.

What does that reckoning look like at BlackRock?

Wiedman: The common categorization is around environmental, society, and governance (ESG) risks. As an investor, we look at those parameters as a way to judge a company’s performance and its riskiness. Less well-governed companies may still have value, but they have more risk. Companies that have a less coherent plan around grappling with climate change, whether it be physical risk or the transition risk around regulatory change, are worth something, but they have a higher discount value because it looks like they may not know what to do in such circumstances.

How does that fit into BlackRock’s overall investment strategy?

Wiedman: As corporate stewards for them, what do we expect from the companies we invest in? Larry has published a series of letters on what do we expect, and his logic is simple: Companies need to articulate a framework for long-term value creation, not get whipped around by stock prices that go up and down. We need you as C-suite executives to set a long-term framework for value creation; explain how you’re going to get there; accept both financial and non-financial risks; and tell us how you’re going to manage them. After that, we’ll stand with you as long-term investors.

How should C-suite executives explain the value of sustainability to skeptics?

Wiedman: One obvious reason is because investors care about it. But let me use our own experience. We made a really big pivot more than a year ago to say that sustainability was going to be the centerpiece of how we interacted with the capital markets. You know what the great surprise was? It was like pushing through an open door. Employees at every level were fired up. Clients were enthusiastic. The biggest resistance was in upper middle management, but once we locked arms, the whole organization started to move. 

Can you comment on why environmental risk is of particular importance to BlackRock?

Wiedman: Let’s take the E (environmental) in ESG. It is the one with the most clarity. And in this case, it really boils down to climate risk, along with biodiversity risk, that are increasingly on people’s radars. Clients all over the world—Japanese pension plans, Dutch wealth managers, American wealth managers—are all raising the same basic concerns. Can you help me understand the physical risks related to climate change that my investments face? How can I understand the carbon intensity of my portfolios and the alignment with various scenarios under the Paris Accord? The great news is those are tractable problems. There is still some confusion around data sets, but we’re making huge progress. Let me just remind everybody it took more than 400 years for us to get to US GAAP. We’re making progress.

If companies are committed to pursuing sustainability and purpose, how do they know it’s working?

Wiedman: First, they need a framework with metrics. We are big fans of two: The Sustainability Accounting Standards Board’s (SASB) and Task Force on Climate-related Financial Disclosures’ (TCFD) frameworks. We’d all like one standard that everybody would use globally, but we’re not there. On the other hand, for the first time in years we’re seeing momentum toward creating a single set of standards. For now, though, we’re asking companies to use TCFD and SASB reporting, which along with a strategy, allows them to say here’s what we’re doing.

From what you’re saying, it seems that some people may believe there is a tradeoff between sustainability and purpose and profitability. Is there?

Wiedman: It’s a question of time frame. In the short-term, it may feel like there’s a tradeoff. But at BlackRock, we are very focused on long-term value creation since the vast majority of our equity positions are extremely long-term. The point is if you don’t have a framework around purpose, strategy, and managing sustainability risks, then you get whipped around by stock markets. And while we may play a role in that as an investor, we’d say let’s all try and focus on the long-term recognizing that in the short-term you’ve got to deliver results differently. That tension is one I think we all struggle with, but the answer is you’ve got to do both.

The Biden administration has a plan for a broad focus across the government on climate change. What effect will that have on the importance of these issues?

Wiedman: What’s been fascinating to watch over the last few years in the US is how the private sector has been way ahead of the public sector in both grappling with climate change and the real risk to cash flows in their portfolios. When you talk to companies around the world, they too have been ahead of the public debate. Still, the European Commission has been quite out in front on these issues, and I think soon we’re going to see the US quickly take a leadership role. One of the first things you’ll see is disclosure requirements for US companies around sustainable finance. So, while we’re urging you to do so as a shareholder, in a little while I think companies are going to have to do this. We will simply follow where the Europeans have already gone. There will be further legislation and regulation regardless of who the president is.

Purpose has become almost faddish in some circles. How does one identify genuine commitment?

Wiedman: For those who don’t love the word “purpose,” I share your slight eye-roll. But because it’s become so fashionable, that “fashionability” is distracting from the actual core idea, which is, what is our company here to do? What is our reason for existence? What are we trying to achieve for customers? Can we articulate that contribution to society? Those are good questions. And employees, in particular, and increasingly clients, want to know the answers, as do investors.

Many companies have understood for decades the importance of purpose. Do you see it as ironic that purpose is being “rediscovered”?

Wiedman: It’s like the parable about three guys building a cathedral. They’re all working. But when the first one is asked “what are you doing?” he replies, “I’m sawing wood.” The second says, “I’m building a truss.” But the third one says, “I’m building a cathedral.” The point is that the third one is expressing a human need “to achieve a greater purpose” that more companies need to articulate for their employees. That’s all we’re really talking about.

Do you have any parting wisdom for C-suite executives?

Wiedman: For those who have already embraced this as part of your company journey, keep going. For those who are skeptical, understand this is fundamentally about investments in business. It is not about just doing good.

Editor’s note: This article is part of an ongoing series of interviews with CEOs, CFOs, and other executives. The participation of Mark Wiedman in this article is solely for educational purposes based on his knowledge of the subject, and the views expressed by him are solely his own. This article should not be deemed or construed to be for the purpose of soliciting business for BlackRock.