Laurence Douglas Fink: Why BlackRock is focusing on sustainability

CNBC Exclusive: CNBC Excerpts: BlackRock Founder and CEO Laurence Douglas Fink Speaks with CNBC’s Andrew Ross Sorkin in Interview Airing on CNBC’s “Squawk Box” Today

WHEN: Interview aired today, Tuesday, January 14, 2020

WHERE: Interview aired on CNBC’s “Squawk Box” – Interview taped at BlackRock’s HQ in New York, New York

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The following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with BlackRock Founder and CEO Laurence Douglas Fink and CNBC’s Andrew Ross Sorkin which aired on CNBC’s “Squawk Box” (M-F 6AM – 9AM) today, Tuesday, January 14th. The following is a link to video of the full interview on CNBC.com:

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BlackRock CEO Laurence Douglas Fink’s full interview on shifting strategy to focus on sustainability

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ANDREW ROSS SORKIN: We have some major news that’s taking place in the world of business overnight. Laurence Douglas Fink, the Founder and CEO of BlackRock, the world’s largest asset manager with nearly 7 trillion dollars under management, announcing today that the firm will make investment decisions with environmental sustainability as its core throughout the firm.

Now, Fink’s annual letter as CEO is closely watched, of course. And this is considered a water shed in the world of business, oftentimes changing the conversation and dialogue with these letters. Did it with purpose over profit, if you remember, two years ago, which turned into the Business Round Table letter earlier last year and sort of dominated the conversation for so very long. In the letter, Fink writes, quote, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” He continues to say, quote, “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

As the letter declines, BlackRock will make a series of changes, including: ‘Making sustainability integral to portfolio construction and risk management.’ It’s going to be ‘Exiting investments that present high sustainability-related risk.’ ‘Launching new investment products that screen fossil fuels’ and ‘Strengthening commitment to sustainability and transparency in investment stewardship activities.’

It plans to be voting against, by the way, boards and managements that don’t disclose their sustainability, their sustainability goals, the fossil fuels that are going to be screened out of – that are going to include target date, retirement programs. So, you’re going to be starting to see, over the next year and two, 401k programs, if you had a target date fund.

BECKY QUICK: --But does this mean they’ll sell off all of their assets in coal miners, or ExxonMobil or Chevron?

ANDREW ROSS SORKIN: If you are in an actively managed fund, they are going to get out of thermal coal and some other related items – right now.

BECKY QUICK: But not all of the big oil majors, yet.

ANDREW ROSS SORKIN: Most of the actively managed stuff, I think you are going to see a gradual move out unless you see a path, if you will, for them in a sort of major renewable-like way. They are not – we are going to talk about it, because you’re going to see the interview that we sit down with Laurence Douglas Fink to talk about all of this. But you’re, obviously, in the past and stuff–in the S&P—if you own the S&P 500, or the client still owns the S&P 500, you still owned it.

BECKY QUICK: You still own it.

ANDREW ROSS SORKIN: I think his view is that over the next five years, there is going to be a meaningful shift amongst all investors, such that it--and we talked about it. It may very well be in the next five to ten years, the thing on our screen, on “Squawk Box” in the morning that shows the futures of the S&P 500, there will be a different version of the S&P 500. There will be a different version of the Dow Jones.

Let me show you what happened during our conversation. We’re going to be showing it to you throughout the next three hours. But I asked him what went through his mind in writing this year’s letter. One that he said was the hardest one he’s ever written. Here it is.

LAURENCE DOUGLAS FINK: Well it was the hardest letter I’ve ever written. And I do believe I became more emotional as I wrote it, about what we need to do. More importantly, the reflection on my 40-odd years of being in finance. And I was thinking about all the different crises we’ve dealt with in my career. And it is very clear to me, the physical changes that we may see with climate change are more permanent.

We can’t – 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 of finance. This is bigger, it requires more planning, it requires more public, private connections together to solve these problems. And I do believe many of these problems could be solved but the actions have to begin now.

ANDREW ROSS SORKIN: There have been a lot of big companies and big investment firms that talked about sustainability and climate change. But none of the largest money managers in the country, thus far, have made sustainability and climate change a central core tenant of their investing thesis. Why do you think that had been, up until now?

LAURENCE DOUGLAS FINK: Well, I think--many reasons. One, you could debate whether the science was real or not real. Really, you could debate whether the science was more accurate. And I think, over time, we are seeing more evidence that the science is real.

Two, we are hearing from more and more of our clients worldwide, and I’m talking about clients from the Middle East, our clients from South of the United States to the North of the United States to the, China, all throughout Europe, clients are now asking us more and more questions about climate change, sustainability and the physical impact of how should they think about it?

And so, as the largest investment firm in the world, it was very clear to me that more and more clients were looking for more advice from us. We needed to really focus on how this is going to change. And, quite frankly, in the last year, we actually have seen more and more sustainable products and more and more demand. So, probably the most important inference from my observations is that I believe we are just beginning a major reallocation of capital.

ANDREW ROSS SORKIN: What do you mean by that?

LAURENCE DOUGLAS FINK: I believe more of our clients worldwide believe in some form of the science, if not all the science, of climate change. And they are asking how should they be better prepared in their investment criteria.

More and more clients are looking for a more sustainable portfolio to be more prepared. The other thing that I’ve made elusions to in my letter was, I believe this is going to change the municipal bond market, areas that are more impacted by climate change will have a harder time to finance their debt, if they don’t focus on the impact of climate change in their district, their region and their cities.

I believe countries who don’t focus on it could have serious impact related to climate change. Unfortunately, from what I see, we don’t have a loud enough conversation.

We are now focusing on this redistribution of capital. And I believe we are going to see more and more investors looking for advice, where should they invest their money.

To help us in this process though, we need more transparency at the corporate level. This is one of the key things. You know, for over eight years, I have been writing CEO letters about long-termism. And nothing can be more long-termism than climate change. And so, we are asking every public company to report under SASB [Sustainability Accounting Standards Board] and report under the TCFD [Task Force on Climate-related Financial Disclosures guidelines], so we can have better granularity at the company-level to see how they are performing.

I truly believe the purposeful companies that I write about for the last few years are going to be the companies that are focusing not only on their stakeholders but they are going to be focusing on the long-term impact on climate change and how it impacts their company.

ANDREW ROSS SORKIN: Do you believe in the science?

LAURENCE DOUGLAS FINK: 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. And more importantly through that is to provide them with an investment portfolio that will outperform.

ANDREW ROSS SORKIN: And you can watch the entire interview with Laurence Douglas Fink on CNBC.com. And we’ll of course bring you more excerpts from it throughout the next couple of hours.

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ANDREW ROSS SORKIN: Welcome back to “Squawk Box.” And big news from BlackRock this morning. The company’s CEO Laurence Douglas Fink’s annual letter is out and the world’s largest asset manager now announcing the firm will make investment decisions with environmental sustainability at its core. This annual letter from the CEO is the subject of my column this morning. In that letter, Fink writes the following. He says: the evidence on climate risk is now compelling investors to reassess core assumptions of modern finance.

In the near future, and sooner than most anticipate, there will be a significant reallocation of capital. Yesterday I sat down with Laurence Douglas Fink and talked to him about why he is doing this now and what it means for municipalities, some of which may be his clients, where fossil fuels are a major component of the local economy. Here’s what he had to say.

LAURENCE DOUGLAS FINK: The climate change is going to require a huge energy transition. It’s going to be 40 or 50 years. So, we’re not running away. We need to have an organized plan. For those countries—there are countries too that are heavily based on hydrocarbons. For those countries, for those states, for those municipalities, our job is to inform them what we’re seeing as an asset allocation.

We’re not running away from all hydrocarbons, because we do believe they play a role. We believe natural gas plays a very large role in the energy transition. And so, we believe this is a process. Not just -- we’re not stopping. We are -- we did make a statement that coal is not a good investment now. But the most important thing is through that transparency, our job is to provide better risk analytics, better risk adjusted returns with a sustainability--

ANDREW ROSS SORKIN: But your letter effectively suggests that long-term fossil fuels will not be a good investment.

LAURENCE DOUGLAS FINK: We believe, in most cases, fossil fuels will not be a good investment. But, we are not saying—they are not a bad investment today either. We believe overtime we are going to see this energy transition. And some of the biggest energy companies are at the forefront of the – of renewables, and working towards that. So, this is not a black or white and we’re not making a black or white statement related to any of the – I would say, the fossil fuel companies. What we want these companies to do is to provide more transparency and move forward towards that.

ANDREW ROSS SORKIN: The Trump administration has a very different view about climate change. It doesn’t believe it, right now. What do you tell members of the administration, politicians who don’t believe in climate change about what you’re now trying to do?

LAURENCE DOUGLAS FINK: I believe we need to have a conversation with every government in the world, including our government, to better prepared for this. I believe we need to be spending large sums of money on infrastructure to better prepared for this. And I believe there is more and more science that is proving that climate change is real and having a very large impact. And I also believe that if we are going to be fair and just, we need to also focus on this transition. Many people are going to be left behind with this transition.

We need to make sure, and this is unfortunately with government officials, they’re focusing on more of the short-term at times, than the long-term. What I’m talking about is a long-term trend that is going to have a remarkable impact on valuations of companies, valuations of industries. And we believe there are going to be some industries that are going to be better prepared.

Some companies in the energy mix will be better prepared. And those are the type of companies we’re going to be investing in. So, we’re not running away from the companies. But we want better transparency and our companies are becoming more prepared for this.

ANDREW ROSS SORKIN: Typically, the day after your letter is released you get sometimes on the order of hundreds of phone calls and e-mails and other correspondence.

LAURENCE DOUGLAS FINK: Yes.

ANDREW ROSS SORKIN: What kind of reaction are you planning for, perhaps bracing for, this year?

LAURENCE DOUGLAS FINK: Well, I mean, you know, you have to have a thick skin for this. You know, I don’t do this because I want to be yelled at, but we’ll have some components of people who are not going to be happy with the letter.

On the other hand, I do believe most of our clients, you know, the majority of our clients or more, are going to be thankful we’re moving this. They’re going to be looking for us to be helping them think about these issues. That being said, you know, I have been doing this a long time.

There’s been years where I would say 70% of the people loved it, 30% hate it. I’m not here to tell you whether it’s going to be 70/30 or 30/70. And I can’t tell you if the far left or far right is going to hate it more or love it more. You know, I’m doing this pretty blind right now. You read it. What do you think?

ANDREW ROSS SORKIN: Do you expect CEOs to look at this and say thank you Larry, you’re now going to give us cover to make some of the changes we want, even if it’s going to hit our own short-term profits? Or do you think they’re going to call you and be furious?

LAURENCE DOUGLAS FINK: I would say the majority will be thankful. I mean, I’m not doing this in a vacuum. Because as I said, I have been interviewing and talking to many people about -- many CEOs about how they see climate change impacting their business. I’m not here to represent that I’m going to have 100% love and kisses. But I’m not -- I didn’t write it with that in mind. I wrote it in mind to -- as the world’s largest asset manager -- to try to inform more people of where we believe asset allocation is going, where we believe the world of finance is moving towards. And we all need to be better prepared.

ANDREW ROSS SORKIN: And for the full interview, you can see it, with Laurence Douglas Fink, on CNBC.com.

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ANDREW ROSS SORKIN: BlackRock’s CEO, Laurence Douglas Fink, annual letter is out this morning. And the world’s largest asset manager is announcing the firm will make climate change the focus of all of its investment strategy. Fink’s annual letter to CEOs is also the subject of my DealBook column this morning. In that letter, Fink, writes, quote, “The evidence is compelling investors to reassess core assumptions of modern finance.” He also says, “In the near future – and sooner than most anticipant – there will be a significant reallocation of capital.” Yesterday, I sat down with Laurence Douglas Fink at BlackRock’s headquarters right here in New York. And I asked him about the eureka moment over the past 12 months that made him decide to make this fundamental shift.

LAURENCE DOUGLAS FINK: I think it was just overtime reading more--more science. More research. Listening to my team. My team came out with a really remarkable study with physical impact on climate change in Fall. And that left a big impact on me.

And then, from reading our own internal document that we have distributed and published, in Fall when I was at the U.N., in Fall when I was at the IMF, and all of my travels, three times to China this past six months, every conversation—whether it was 20% or 100%, was related to how should I think about climate change in my portfolio? Or how should -- I met with governments, even governments in the Middle East were asking, you know, how should they navigate more solar and more wind.

Because for OPEC countries, the movement towards renewables is very powerful for them. Because their OPEC ceiling on production is only based on production and not how much they sell. And some of the countries use 20-40% of their domestic production for domestic uses. So, if they could reduce the amount of domestic need, they could actually sell more. And so, this is -- so in every area, Andrew, more and more people are asking us, how should they be more prepared?

ANDREW ROSS SORKIN: What do you tell people who will look at this and say ‘This is just marketing?’ There was a hedge fund manager in the UK last month who said that BlackRock’s record was appalling. That called of this green washing.

LAURENCE DOUGLAS FINK: I read that. I would like to challenge that person because he doesn’t know what we’re doing. We have not been that transparent about what we are doing. And we have 4,800 companies where we had to change -- where we voted against board people. We don’t publicize things like that. He’s responding to a few proxy votes because that’s all that’s been public.

ANDREW ROSS SORKIN: You have seen outside organizations that rank financial institutions based on how they have voted. And BlackRock has ended up at the bottom of the list.

LAURENCE DOUGLAS FINK: We have had more engagement with more companies in our corporate stewardship team than anybody. We have the largest corporate stewardship team. In many cases, what people don’t see, we had them change their views before they published their proxy. The one thing that I have said in all of my CEO letters, be engaged with us. Have a conversation.

Do not wait until there’s a proxy season. So, there’s very few points where the proxy is the big point. I am very proud of many of our records. Because I know, which is nonpublic all the time that we changed management’s position on so many things.

But what we’ve announced—what we are announcing also is much greater transparency. So, we’re willing to live with more transparency. And we’ve announced we are going to be announcing how we’re voting on every quarter. We’re going to create much greater transparency. So, for all of those people who are questioning what they do, they are going to have much more to see how we do it. And I’m very proud of how we look at this.

ANDREW ROSS SORKIN: How much of this though is driven by investment itself, getting ahead of the narrative, if you will. Or what some climate advocates would say should be the goal, which is to save the planet from burning?

LAURENCE DOUGLAS FINK: Well, I, as a fiduciary, and especially in the United States living under the rules of ERISA, where you’re required to only focus on the maximization of return, those climate people who believe we have to save the planet, I understand what they’re saying. But we’re living under a different rule in this country and we have to live under that rule.

ANDREW ROSS SORKIN: Do you think that should change?

LAURENCE DOUGLAS FINK: I have an advocating for that rule to change quite considerably. It actually started changing under President Obama and it reversed itself under President Trump, So, this is something that I do believe needs to be relooked at. But what we are saying here, we believe under ERISA and maximization of return, we believe it will be -- a portfolio that focuses on sustainability and climate change will be a portfolio that will outperform. So, the main component of the letter is saying this is going to be a great investment over the next ten years. And it will also help the planet.

ANDREW ROSS SORKIN: And For the full interview with BlackRock’s Laurence Douglas Fink go to CNBC.com. And we’ll continue to talk about this topic, I imagine. I imagine this is going to be a big topic this year.