Dear Mr. Fink
I hope this finds you well. Thank you for publishing your letter to CEOs earlier this year. You made a compelling case to take the risks of climate change seriously.
Your letter created a stir. I am involved in corporate reporting projects with publicly listed companies and I have seen firsthand: you have fueled an appetite for greater disclosure. Fortunately a lot of people were already pushing for this from within companies, so in many cases your note put wind in their sails by catching the attention of their executives and investor relations departments, validating years of effort.
If I’m honest, initially I was annoyed that it took the prompt of a white, male, American CEO of an investment management company to invoke the obvious. But I got over that when I realized it was having an impact.
The recommendations you reference — those of the Taskforce on Climate-related Financial Disclosures (TCFD) — guide reporting efforts on a company’s approach to managing, measuring and scenario-planning in an era of accelerated, industry-generated climate change. I have sometimes called the TCFD the “Trojan horse of sustainability reporting,” thinking that if companies apply it they will confront disruptive— even transformative— truths which could lead to meaningful positive change.
But even with TCFD-oriented reporting ramping up, something was feeling a little out of whack. I decided to do a little digging to test some of these disclosures against a sense of what’s actually needed.
I chose a dozen companies to examine a little more closely* — a narrow yet diverse group from banking, energy, consumer goods, technology, shipping and mining. I enlisted the help of a friend who comes from the grassroots of the emergent regenerative economy to sense-check with fresh eyes. We focused on climate change only, although you reference the broader environmental, social and governance (ESG) disclosure needed. We felt that climate change is an interconnected and profound challenge that, when addressed, covers many of the other issues of relevance to the Sustainability Accounting Standards Board (SASB). Hence for disclosure references our deepest dive was in the CDP database (formerly known as the Carbon Disclosure Project).
In a nutshell, we found the disclosures are often hard to find and make sense of, contradictory between sustainability and core business strategy (especially with investor communications), and indicative of an existential gap between climate reality and corporate purpose.
To address this, CEOs and investors need to bring climate risk disclosure closer to senior decision-makers so they recognize the scope of the required transformation. These disclosures need to inform the company’s core strategy, so it shifts towards a purpose that is aligned with healing communities and regenerating ecosystems. As the source of all market success, thriving and resilient living systems are the essential building blocks to managing climate and financial risk.
Below are more details and a few examples illustrating what we saw.
Disconnects in form and function
We found a lot of interesting content on climate activity, especially in the CDP responses where detail abounds on goals, risk management, metrics and scenarios. We also saw a lot of climate-related messaging on corporate websites. And we noted commentary on strategic plans in investor earnings calls.
But we found that even when this content checked the TCFD boxes, it fell alarmingly short of addressing the true climate risks, with a couple of serious disconnects at play. You call out the disconnects broadly — noting that most companies are inadequately informing their investors and other stakeholders on their approach to climate change. There is without doubt a form problem which is where the focus often lies. I’ll explain it first to set the stage for the more fundamental substance problem. It’s all more than addressable if we adequately recognize the depth of what needs doing.
Form issue one: important information is hidden behind layers
Most obviously for anyone who has weeded through these disclosures: there are barriers that make the material hard to find and follow. Despite the CDP responses being publicly available, the lengthy responses often use inaccessible terms with lots of typos and convoluted wording. These disclosures are usually compiled by people at arm’s length from those setting corporate strategy. These people may be hard-working, environmentally keen staffers hoping to make a difference, or sometimes even interns with next to no context—but they are generally not the executives setting the company course, and those people may never see the response.
These conditions lend themselves to the information being hidden behind layers, even from the internal decision makers within the reporting companies themselves. And external stakeholders such as investors have to dig to piece together an incomplete, badly cut jigsaw puzzle. As your letter stated, “the goal cannot be transparency for transparency’s sake.” Yet this reporting feedback loop, meant to inform decisions, has become buffered, inadvertently shielding CEOs and investors from the truth. This is a lost opportunity to bring the change that is really needed. It’s a shame, too, because there is amazing information buried in that CDP database. Someone should really thank those interns.
Form issue two: sustainability strategy does not match core business strategy
Compounding the lack of clear information that may or may not inform executives or investors, we noticed a disconnect in the strategic points emphasized in earnings calls as compared to the strategies outlined in these hard-to-dig-through CDP responses and corporate websites.
For example, Swedish clothing company H&M includes extensive messaging on their website about climate change and their ambitions to address it. And in their 2019 CDP response to the question (C2.2d), they include promising strategic goals:
“We have a very ambitious sustainability strategy in place, aiming to become climate positive in our whole value chain by 2040 and becoming 100% circular including the use of 100% recycled and other sustainably sourced materials by 2030.”
Yet we didn’t observe any mention of this in earnings calls of the same reporting period. The strategic direction described was quite different in the 2019 Q3 call where CEO Karl-Johan Persson noted:
“We continue driving change through our strategic focus areas […] to create the best customer offering for all our brands, which includes investments in the assortment, in physical stores, or online stores and the integration of stores and online.”
Given the transformation required to close the loop on 100% of materials flowing through the company over the next decade, while net-sequestering CO2 in the next 20 years, one would expect this “ambitious sustainability strategy” to be of interest for investors. Their most recent investor materials, a 2019 Q4 presentation deck, includes no further mention of these goals although it includes a final slide with bullet points noting they are on CDP’s A-List and are ranked as one of the 30 most sustainable companies by Corporate Knights.
This strategic inconsistency issue is not unique. US sports apparel giant Nike gives scant mention of their climate-related efforts in their fourth quarter 2019 earnings call. After walking investors through numerous operational, financial and strategic initiatives, the CEO at the time, Mark Parker, briefly notes:
“We’re also minimizing our environmental footprint with a target of 100% renewable energy globally by 2025. We are driving sustainability at scale through recycled material in our Air Soles, which is diverting 50 million pounds of waste from landfills each year.”
Meanwhile the company’s 2019 CDP response references a diverse, if somewhat scattered, array of initiatives from product innovations to operational efforts, noting that the “Purpose Committee provides direction and oversight” on issues including climate change (hold that thought on purpose for a moment). There is no mention of Air Soles’ impact on landfill, nor on climate change, which left us wondering why the half-recycled shoe merited the attention of investors on the call. Or, if it is layered somewhere in the CDP response, where? The word “shoe” only appears once, in the introduction explaining what the company sells.
Form issues one and two converge: convoluted inconsistency
Nike’s corporate sustainability landing page boldly presents the company’s “Move to Zero,” their journey toward zero carbon and zero waste. Attempting to follow the trail of Air Soles from Mark Parker’s investor comments, a few layers deeper into the website one finds a brief paragraph stating all Air Soles are made with at least 50% recycled material and with 100% renewable energy. Does that mean 50 million pounds of waste goes to landfill (while the other 50 million are diverted, as mentioned to investors)? And how much went to landfill for all the other products, since the company sells thousands of different products across six categories? And how does this relate to the company’s core business strategy?
The company’s 2020 Impact Report (on page 38) repeats the 50% recycled material data for Air Soles and notes that 90% of the materials used in the process are turned into new cushioning materials. This sounds like progress. But by this point we’ve consulted four different sources to look into one shoe and we still don’t really have a clear picture of its climate impacts in context of the whole company.
This common, convoluted inconsistency in the format of climate-related strategy is problematic enough. But it turns out we have much more than a form issue.
We’re sensing something about the core business is missing…
We noticed another more fundamental disconnect. It’s what we might call the substance problem. If we don’t examine and make progress on this, all manner of more consistent climate-related financial disclosures will be for naught.
The lack of clarity in relation to the scope of the challenge (or, the opportunity as we might see it) is glaring. The goal isn’t to measure emissions, nor to reduce materials flowing to landfill. The goal isn’t to “move to a low-carbon economy” either—which sounds a bit like a low-carb dieting fad, doomed to fail. Though we do see these terms being used a lot, so it’s not just you, Mr. Fink.
The goal is to allow all life on Earth to flourish for present and future generations. This entails a paradigm shift in industrial systems so they operate in support of life, healing communities and regenerating ecosystems. It entails a business thriving by becoming an integral contributor to living systems. People want it to be simple, but life (and business) is actually quite complex and we should be accurate about the goal or we will all end up applauding Nike’s financial returns while wearing 50% recycled Air Soles as we run ourselves off a climate cliff.
The real risk that your letter underscores isn’t simply that a company might see profits diminished if a carbon tax affects their balance sheet or if they have to leave fossil fuel assets in the ground. The risk is that a company might no longer have a community to hire from, a water system to draw on, a customer to sell to, or a product that is valued in the future.
As those striking school kids like to remind us, there is no Planet B. Let’s transition the conversation from “transitioning to a low-carbon economy” to one about the needed transformation, not buffered by interns or a badly cut jigsaw puzzle of reports. As you note, “disclosure should be a means to achieving a more sustainable and inclusive capitalism.” Agreed! And for it to be so, we must be deliberate about transforming our businesses and—as a result—our disclosures. Transparency only serves if it is a feedback loop that brings business in alignment with purpose.
Oh, did I say, “Purpose”?
Purpose, meet climate reality. Climate reality, meet purpose.
In your letter of 2019 you wrote about purpose. These ideas are directly related. You stated so clearly:
“Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being.”
Later in that same letter you mentioned:
“It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders.”
It is definitely not in stakeholders’ interest that catastrophic effects from climate change come to pass. Climate risk is indeed real but not as a numerical exercise, rather as an exercise connected to a purpose. There is plenty of well-supported, science-based evidence to suggest that far more radical, rapid action is required. But before grasping for more data and organizing frameworks — and there are many resources to help, from the Deep Adaptation Agenda, to the more investor-oriented Future-Fit Business Benchmark — we need to recognize a healing-oriented, life-supporting purpose as a core function of business. Otherwise it’s just another set of boxes to check as we lace up those cliffward Air Soles.
Even the approach to climate scenarios being applied is locked up in a “less bad” mindset. Where it could potentially be one of the TCFD’s most powerful recommendations, the scenarios we saw, fall short. For example, scenarios cited in several CDP responses we viewed — using the International Energy Agency’s analysis — drew on forecasts about energy supply and demand. These scenarios have useful data, but they miss basics about the living systems involved. While there is a saying that goes, “all models are wrong,” ideally they are not applied with willful blindness and then considered adequate.
This is a massive, existential disconnect.
It’s certainly true that there are companies making serious, ambitious announcements and showing progress towards their stated goals. For example, Alphabet (aka Google) offers promising targets and performance data in their 2019 CDP response (C4.1a):
“Every year, we have a goal of being carbon neutral. As of December 31, 2018, we reached carbon neutrality for 100% of our FY2018 operational emissions […]. We committed to being carbon neutral in 2007 and we have achieved this goal each year since then.”
In the same section they also report 100% absolute emissions reductions on a 2015 baseline year.
This sounds impressive and in some ways, it is. But what the company actually does to create value has next to nothing to do with energy use. As they report in the introduction of their CDP response:
“Alphabet is a collection of businesses — the largest of which is Google. It also includes businesses that are generally pretty far afield of our main internet products in areas such as self-driving cars, life sciences, internet access and TV services.”
Alphabet is also one of the largest companies in the world based on market capitalization. With all that influence, how are they helping to create the conditions that enable life on Earth to thrive? According to page 10 of their annual report the company earned the majority of its $161 billion in revenue in 2019 from “advertising solutions helping millions of companies grow their businesses.” Their success may be the worst thing that ever happened to our climate if those businesses are, on net, increasing their emissions and causing more harm to ecosystems. And, on net, that’s what has been happening with both emissions rising and ecosystems failing.
At the moment all of Alphabet’s climate-related disclosures focus on energy use. But the company is profitable because its advertisers pay them. And the impact of its users (i.e. all of us) is mind-bending to contemplate. For goodness’ sake, Google is a verb. Surely there is more to its climate impacts than so-called carbon neutrality.
Your 2020 letter notes:
“We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future.”
The key word there is “adequately.” We will know we are on the right path when the Googles of the world are rewarded not for being good housekeepers of their energy bills, but for aligning purpose and core business with the generation of healthy communities, enhanced biodiversity and more widespread knowledge about what it means to thrive on Earth, through their “collection of businesses”—which will be consistently apparent in their investor-facing disclosures.
Mr. Fink, it seems we have sufficient disclosure tools to get there. Now we need to shed the layers and actually go there, to allow the disclosures to transform us in our hearts and minds where the healing needs to happen. Only then can we grasp the risks and turn them into exponential, visionary and nature-inspired opportunities, and truly prosper.
To borrow from that 50% recycled shoe maker, let’s Just Do It.
PS Thank you, Sam Greenwood, for your help with the data collection, analysis and crafting of this letter.
* The full set of companies and data points are viewable here.
[The banner art is an original chalk drawing by me, tinkered with in PowerPoint.]