Larry Fink’s Letter to CEOs – How it Pertains to Tobacco

In his annual letter to CEOs, Larry Fink, CEO of BlackRock, positions climate change as a defining factor in the fundamental reshaping of finance. He outlines several important facets of this shift, including sustainability investing, improved disclosure, advances in technology, not leaving developing markets behind, and ultimately the benefits and risks to the companies. These factors, along with the arguments made by Mr. Fink (encapsulated in quotes below), are well aligned with the Foundation’s Industry Transformation strategy and its first action, the Tobacco Transformation Index (“the Index”).

The Index aims to stimulate corporate action toward a world free of combustible cigarettes and other high-risk tobacco products. Its goal is to dramatically reduce the incidence of disease and premature death caused by smoking—specifically, by motivating the tobacco industry to accelerate the phasing out of these products. This initiative aligns with the factors cited by Fink in the following areas:

  • Sustainability investing.Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”

Tobacco is the archetypal dirty industry, but company managers—particularly those of publicly traded companies—are incentivized to minimize their cost of capital, which is an important driver of company value and stock price. Therefore, they will be encouraged by capital markets to respond accordingly over time.

  • Improved disclosure.We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions.”

We concur with Mark Kramer in his commentary on the Fink letter, which states: “If Fink is correct in predicting that capital will increasingly be allocated to those companies with the most sustainable business models, then investors will need new sources of data to understand and anticipate the economic significance of sustainability strategies.” The Index aims to serve as such a data source, so that stakeholders, such as investors and public health professionals, will be better informed and able to demand necessary action.

  • Advances in technology. “Despite recent rapid advances, the technology does not yet exist to cost-effectively replace many of today’s essential uses of hydrocarbons.”

This is an important difference between the energy and tobacco sectors. In the latter, new technologies can now deliver nicotine without most of the health risks that come with combustible cigarettes. For more than a century, the cigarette has not changed much. However, technological disruption is now well underway that is increasing current smokers’ non-combustible options.

  • Developing markets. “We cannot leave behind parts of society, or entire countries in developing markets.”

The Index intends to measure whether potentially reduced-risk products are developed and marketed as responsibly as possible. This action applies both to high-income countries and to low- and middle-income countries (LMICs), with the ultimate goal of eliminating premature deaths due to smoking. The Index’s key premise is that by actively encouraging and monitoring this transition, it will over time compel industry players to act more quickly and responsibly than they otherwise would. This action is particularly vital in LMICs, where most of the world’s smokers live, and where corporations may be subject to relatively little scrutiny.

  • Company risk. “In the discussions BlackRock has with clients around the world, more and more of them are looking to reallocate their capital into sustainable strategies. If ten percent of global investors do so – or even five percent – we will witness massive capital shifts.”

Company managers are rational beings, and Mr. Fink reminds us that investors have enormous power to influence them. The Index will help to quantify and expose differences across companies in the tobacco industry to compel even the worst actors to improve their practices. To be clear, the objective of the Index is to highlight the journey from “bad” to “less bad,” not to reward the sale of deadly products. Lives can be saved by influencing even the worst companies toward transformation and by demonstrating to them how the “less bad” players are able to operate. In this manner, the Index can accelerate the transition to a world free of combustible cigarettes and other high-risk tobacco products. Divestment alone will not achieve this goal.

Climate change affects all of us. Tobacco products directly impact more than 1 billion smokers globally, plus many others indirectly through the effects of secondhand smoke exposure as well as the premature death and disease of smokers. Larry Fink argues that global climate change brings us to the “edge of a fundamental reshaping of finance.” The Foundation’s Tobacco Transformation Index is one tool, compatible with many of the arguments made by Mr. Fink, in the effort to marshal forces to drive the transformation of tobacco companies.

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