BlackRock's Larry Fink takes on SVB ripple effect, energy transition in annual letter

BlackRock CEO Larry Fink on Wednesday issued his widely read annual letter, this one combined to both CEOs and shareholders, and said it's "too early to tell" how the failure of Silicon Valley Bank will ripple into the financial markets.

"This past week we saw the biggest bank failure in more than 15 years as federal regulators seized Silicon Valley Bank. This is a classic asset-liability mismatch," he wrote. Two smaller banks failed in the past week as well, he added, and "It's too early to know how widespread the damage is."

He does think it is inevitable some banks will pull back on lending and that stricter capital standards for banks are likely.

Amid growing political anti-ESG backlash, Mr. Fink took a more measured approach in his letter when it came to environmental, social and governance investing. Notably, he did not use the acronym ESG once in his letter, with more of a focus on investor choice around sustainable investing and the energy transition.

"Many of our clients also want access to data to ensure that material sustainability risk factors that could impact long-term asset returns are incorporated into their investment decisions," he wrote. "This is why we partner with other companies and provide insights into how a changing climate and the transition may affect portfolios over the long term."

It's not the role of BlackRock or other asset managers to "engineer a particular outcome in the economy" or act as "environmental police."

"Government policy, technological innovation, and consumer preferences will ultimately determine the pace and scale of decarbonization. Our job is to think through and model different scenarios to understand implications for our clients' portfolios," he said. "That's why BlackRock has been so vocal in recent years in advocating for disclosures and asking questions about how companies plan to navigate the energy transition. As minority shareholders, it's not our place to be telling companies what to do. My letters to CEOs are written with a single goal: to ensure companies are going to generate durable, long-term investment returns for our clients."

He pointed out that oil and gas still have a "vital role in meeting global energy demands," and that BlackRock continues to invest in fossil fuels during the energy transition.

"We are working with energy companies globally that are essential in meeting societies' energy needs. To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas, with steps taken to mitigate methane emissions, will remain important sources of energy for many years ahead. BlackRock is also investing, on behalf of our clients, in responsibly-managed natural gas pipelines. For example, in the Middle East, we invested in one of the largest pipelines for natural gas, which will help the region utilize less oil for power production."

For asset owners such as pension funds and retirement plans, Mr. Fink warned, "years of lower rates had the effect of driving some asset owners to increase their commitments to illiquid investments – trading lower liquidity for higher returns. There's a risk now of a liquidity mismatch for these asset owners, especially those with leveraged portfolios," he added.

BlackRock remains the world's largest asset manager, with $8.6 trillion under management at the end of 2022, despite falling from a record $10 trillion the prior year.

And the firm continues to win new business: Royal Mail in the U.K. recently signed an OCIO agreement with BlackRock, hiring three staff away from Royal Mail, for a $10.8 billion mandate.

Mr. Fink acknowledged in his annual letter that the firm had as hard a year as many other money managers in 2022, as both stock and bond markets posted losses in the double digits. Market declines over the year took $1.7 trillion from BlackRock's AUM.

Despite a market collapse last year, the firm attracted long-term net asset inflows of $400 billion last year, he noted, including $230 billion of long-term net inflows in the U.S. Mr. Fink said BlackRock recorded a record $192 billion of long-term net inflows from institutional clients in 2022.