2020 has been a year of contrast and disruption. It has also been a year to reflect on values, behavioural changes, and how the changing global landscape is affecting the future of the investment industry. Arguably, there are few people better placed to examine these issues than Larry Fink, CEO and chair of BlackRock, the world’s largest asset manager, with US$7.81 trillion in assets under management as of September 30, 2020. Lynn Patterson, the former deputy governor of the Bank of Canada, had the opportunity to discuss these topics, and more, with Fink during a live conversation hosted by CFA Society Toronto on October 6, 2020. 

It should come as no surprise that several key themes Fink has been vocal about in the past came up again during the broad-ranging conversation, like stakeholder capital, climate change and ESG, the role of ETFs, and the future of the investment industry. And of course, with CFA Society Toronto hosting the discussion, Fink shared his views on how Canada is faring amid the COVID-19 pandemic. 

Stakeholder capitalism and company culture a key driver of success

At a company level, there are many other factors at play apart from macroeconomic policy decisions and economic contraction that drive long-term success. Fink points out that part of the key to long-term success is growing stakeholder capital or value, as opposed to only shareholder value. An important factor in building stakeholder capital is a company’s culture—the shared beliefs that drive a company and define its values. He notes these principles and values have grown in importance, and it is not the product of a company alone that matters anymore. Great companies are a voice for their employees, clients, and their industry. Great companies retain the best talent.

Furthermore, to succeed in creating greater stakeholder value, the local community within which a company operates must identify with the company’s values. As such, a global company will have to become local in the regions it operates—meaning a global company must be a Canadian company in Canada and a Japanese company in Japan. 

The impact these factors will have on a firm’s valuation will become greater, and firms that take a holistic stakeholder approach are likely to have higher price/earnings (P/E) ratio than their peers. As CEO of BlackRock, Fink notes that he spends a lot of time thinking about firm culture and values, especially now that many employees are working remotely. 

Climate risk is investment risk

In his 2020 “Letter to CEOs,” Fink made it clear that climate risk is both an environmental and investment risk. In the conversation with CFA Toronto members that was part of the event, some aspects of his influential letter were discussed. It’s not surprising that Fink’s views remain unchanged—he still feels that companies should start to integrate climate change in their reporting, as climate change is not only carrying a social risk but is becoming an investment risk that needs to be quantified and managed. 

Climate change is leading to a large change in behaviour in general. Fink cites the recent wildfires in California as an example of climate change becoming an investment risk. Insurance premiums in general are rising as the cost of reinsurance for insurance companies is also rising due to fire risk. This increase puts upward pressure on the cost of doing business. The persistence of fires is changing the cost of home ownership, which sits on the back of rising insurance costs. At the same time, the zones best suited to agriculture are migrating north, towards cooler regions, where the risk of fire is less. Rising insurance premiums, the increased cost of doing business and of home ownership, as well as migrating agricultural patterns, all ultimately become an investment risk. 

When it comes to ESG reporting, Fink is of the opinion that every major company is likely to find some way to report in a transparent manner on ESG. The framework already exists—in his letter, he indicated that the Sustainability Accounting Standards Board (SASB) provides standards for reporting sustainability information across issues such as labour practices and business ethics. At the same time, the Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for evaluating and reporting climate-related risks, and BlackRock is asking the companies they invest in on behalf of their clients to adopt these standards—if they have not done so already.

How have companies responded to the adoption of ESG reporting? Fink’s assessment is upbeat. He suggested that major corporations across all sectors, including those dependent on the traditional energy sector, are generally on board and accept climate change as a reality. He is hopeful that the current momentum suggests ESG reporting can be achieved without large scale government intervention and government-sanctioned regulations. 

Big data and the investment management industry

In the past, the investment industry was fragmented at a firm level, as firms often differentiated themselves from the pack by holding information that was not necessarily available to the broader market. The ability to do so is now changing in a digital world, where news travels fast and information is often free. This new reality also implies that it will be harder for companies to be small and more difficult for them to differentiate on information alone, and as a result the industry will be less fragmented. The asset manager of the future will have to differentiate itself from the competition through the public data that it finds and holds, how it analyses this data, and how it quantifies risks. Finally, Fink suggests that big data analysis will become increasingly important, and that data analysis will become proprietary, as firms will come to rely less on third party research. 

Think of ETFs as a technology rather than just a product 

Any conversation with Larry Fink would not be complete without discussion of ETFs. To him, ETFs are more than a product, and should be considered a technology that, much like online shopping, carries three major advantages: a convenience factor, a pricing advantage, and transparency. Fink points out, for example, that one can mimic a bond index that contains more than 2000 bonds and have 97 percent of the tracking error with only four ETFs.

Fink believes the focus in the active versus passive debate around ETFs is somewhat misplaced. With developments in recent years, ETFs are now a playing meaningful part of the portfolio mix, alongside active other investment products. This trend will grow and, as a result, Fink believes that ETFs are only in the early stages of development.

And how is Canada faring during COVID-19?

Fink remains long-term optimistic on Canada. He believes the country’s strong leadership foundation in government has served us well and helped the country through the pandemic so far. Although Canada remains dependent on the U.S. economy, the Canadian economy is diversifying well and is less dependent on hydrocarbons than before.

Furthermore, if one looks at Canada through the lens of climate change, all indications are that the country would be one of the net beneficiaries if global warming persists. With its strong and functional banking system and the tailwinds of immigration and productivity, the country remains on a positive long-term trajectory.

Running on empty—public sector deficits and the need for targeted fiscal stimulus

More than six months into the COVID-19 pandemic and with a second wave threatening economic activity, expectations of growth and a strong recovery are fading. Despite these concerns, Fink is surprised by the resilience the world has displayed, partly due to the large policy support put in place in early 2020—fiscal policy played an important role in providing some stability to businesses, while monetary policy provided support to capital markets. His view is echoed by the International Money Fund (IMF), which in its October 2020 world economic outlook report, “A Long and Difficult Ascent,” indicated that without the fiscal measures in advanced economies that amounted to more than nine percent of GDP and another 11 percent in various other forms of liquidity support, the impact of COVID-19 would have been far worse.

However, the massive stimulus does not change how consumption patterns themselves are changing, and many macro trends that might have taken years to evolve are taking place over months. While a large segment of the economy is doing well, other parts are doing poorly, such as the hospitality, travel, and cultural services sectors. Fink believes that more targeted fiscal policy is necessary in these segments of the economy, and may be more effective than monetary policy. 

Partly because of the combination of stimulus and sharp economic contraction, the world is now also facing large public deficits.

Bet on humanity and bet on success

In parting, Fink left with some personal thoughts. When it comes to investments, he believes it is important to be invested at all times. At the same time, with life expectancy rising, there is a demand for long-duration assets, which means that a large part of a portfolio—70 percent plus—should be invested in equities. 

Larry Fink describes himself as a short-term pessimist but a long-term optimist—he believes pessimism allows us to solve problems, and that is what makes him a long-term optimist. That is also why he bets on humanity, and on success.