On Tuesday morning, January 16, Laurence Fink—founder and CEO of the investment firm BlackRock—sent an important letter to the CEOs of the world’s largest companies. In that letter, he explained, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” BlackRock is the largest investor in the world—thereby giving Fink’s voice a great deal of power and influence. But what exactly do his statements mean?
Put simply, Fink’s letter advocates for Environmental, Social and Governance criteria, which is commonly referred to as ESG. Investopedia defines ESG as “a set of standards for a company’s operations that socially conscious investors use to screen investments.” The environmental element examines how a company is handling their impact on the natural environment. The social portion of the criteria scrutinizes how the company handles its relationships—with employees, partners, customers, its local communities, and more. The governance component analyzes exactly what you’d expect: executive leadership as well as pay, auditing processes, shareholders rights, etc.