As the CEO of the world’s largest money manager Blackrock, which had $10 trillion of assets under management as of January 2022, Larry Fink has the power to move markets and focus minds within the global financial services industry whenever he speaks.
So when he wrote a letter in 2020 to the CEOs of the companies that Blackrock had a holding in, warning that “we are on the edge of a fundamental reshaping of finance”, people took notice
Carefully depicting Blackrock as an enabler of the everyday savers ‘long-term goals’ such as retirement and stressing its ‘deep responsibility’ to them, the letter was crafted to leave no room for doubt that climate change posed a systemic risk to the business world and needed to be acted on
“What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding?” he asked. “How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?” he pondered
And in a nod to the days before the industry was consumed by complex derivatives and instead focused on providing more wholesome products, he questioned: “What will happen to the 30-year mortgage?
The letter - and the two that have followed with the same central theme - represented a statement of intent from Blackrock to lead the way in accounting for the risk that climate change poses to investments and financial services.
In support of this, it pledged that the firm would: make sustainability integral to portfolio construction and risk management; exit investments that present a high sustainability-related risk; launch new fossil fuel screened products; and strengthen transparency on its investment stewardship activities.
But just how transparent was it committing to being?
In March 2022, an investigation by the Bureau of Investigative Journalism (BIJ) revealed that Blackrock may not speak so strongly about the topic behind closed doors as its CEOs public statements would suggest.
Following a successful Freedom of Information Request (FOI), the BIJ published an email sent by Wayne Christian, chairman of the Texas oil and gas regulator, to Blackrock staff he had just met with that included Dalia Blass, Blackrock head of external affairs..
In it, he wrote of how pleased he was to hear that “Blackrock didn’t mean or no longer believes many of the disagreeable things the company and its CEO Mr. Fink have said about the oil & gas industry.”
The BIJ investigation also revealed that a number of banks that have also publicly stated their commitments to combatting climate change - including Barclays and Citigroup - appear to have bowed to pressure from 15 fossil fuel rich US states in watering down their environmental policies in order to carry on doing business in those markets.
In response, each of the financial services institutions has denied that there is any contradiction between what it has presented as its public position and how it has acted away from the spotlight, but it is fair to say that their actions are at least inconsistent, and certainly fall short of the mark of any fundamental shift in finance.
That matters for the financial services sector, because were it to truly embrace such a shift then it would play into much of what consumers want to see from it.
Trust has gradually improved but there is still a long way to go
According to the latest edition of the Edelman Trust Barometer, a global survey based on more than 36,000 responses that assigns a trust score out of 100 to a variety of topics, financial services has steadily been regaining some of the trust lost in the aftermath of the financial crisis.
In fact, over the past ten years, the study suggests that the reputation of the sector has improved more than any other with its score of +10 points over the period. It has clawed back ground on the most trusted technology sector - which declined by 5 points - and narrowed the gap to its closest rival of consumer packaged goods by 8 points.
But overall, it remains at the bottom of the pack in the consumer trust stakes, trailing consumer goods by 6 points, technology by 18 points and standing alone as the only industry that has never merited trusted status at any point over the past decade.
It has safely emerged from the depths of distrust that it was held within from 2012 to 2015 but remained firmly within the neutral category of being neither trusted nor distrusted ever since.
The study doesn’t offer any hard and fast rules as to how this stream of regained trust and improved reputations can be turned into a flood, but it does offer insight into what the direction of travel might be.
Among the most notable findings within the study is the finding that while more than half of all those surveyed (54%) believed that capitalism as it stands does more harm than good, the belief was even stronger among those employed within financial services itself with 62% agreeing.
This sentiment was also mirrored by the fact that 67% of those employed within financial services were more likely to choose their employer based on their own values and beliefs when compared to the average of 60%.
This apparent desire for a more robust values based approach also extends to business as a whole, with respondents making clear they want to see more, not less engagement on societal issues.
This is most extreme on climate change, where the gap in favour of ‘not doing enough’ versus ‘overstepping’ was 43 points but also extended economic inequality (40 points) and systemic injustice (32 points).
Strong words must be backed up with evidence
So how to bridge this divide between how the sector is routinely seen and the clear signs there is demand both within it and outside for change?
According to Peter van Veen, Director of Corporate Governance & Stewardship at the ICAEW, the battle begins with ensuring that positive messaging such as that on climate change is backed up by more than just words.
“When it comes to sustainability and responsible business practices if you do something quite different to the image you are trying to portray, it is going to be very hard to come back from that reputationally. As the Edelmann Truct Barometer research shows, there is already a large amount of scepticism on what any corporate entity is saying on sustainability or ethical matters, ”
Instead, he suggests, the sector should capitalise on the increasing number of disclosure mechanisms, such as the Task Force on Climate-related Financial Disclosures, or by getting external verification to back up claims.
“You are starting with a trust deficit so for you to avoid people thinking it is just a PR exercise you are really going to have to back up a good story with real and verifiable data,” he says.
At a structural level, the upcoming consultation being conducted jointly by the Financial Conduct Authority, Prudential Regulatory Authority, and the Bank of England might provide the momentum for much needed progress in improving diversity and inclusion within the sector.
In a discussion paper published last year, the regulators made clear that measures such as linking remuneration to diversity metrics and considering the issue as part of non-financial misconduct were possible policy options to drive the agenda.
But with fewer than a third of senior management positions being held by women (32%) and less than 1 in 10 management roles being held by Black, Asian or other minority ethnic people, any such regulations without the required rigour to drive real action will surely falter.
Philippa Kelly, Director, Financial Services Faculty at ICAEW, is interested to see how far the regulators “will push it” with their policies but is far more certain of the value that any real reshaping of the macho and male dominated power structures would provide.
“If we look back at a lot of the issues that the industry has had, at least in part as a result of that culture, what might we gain by making it more inclusive and diverse,” she says. “Perhaps you might get more of the influence of staff who work in the bank branch and really doe put customers at the heart of everything they do.”
“People may talk about it, but maybe they don’t actually know what that means or feels like because it’s not something they’ve had to do,” she adds.
This view, that those at the top of financial institutions have become so isolated from what is going on at the ground level of their organisation and so distanced from their customer base is one that would explain much of how the sector continue to struggle with improving trust.
CEOs can offer carefully crafted speeches and letters that portray them and their companies as being focused on how climate change might affect those looking to get a mortgage, but unless they actually understand those people, how much good does it do?