The Clarion Call for ESG.

• Author: Rock, Robert H.

Large asset managers, notably BlackRock, Vanguard and State Street, strongly support the notion that corporations should pursue a social purpose, particularly sustainability, and they are looking to make investments that deliver value to a broad array of stakeholders. They point to studies showing consumers are more likely to base buying decisions, job-hunters more likely to seek employment, and investors more likely to invest in companies they believe to be environmentally friendly. Thus, being green is increasingly being seen as a commercial imperative.

In the institutional asset world, socially responsible investing nearly quadrupled over the past year. In response to surging investor interest as well as to more companies trumpeting their ESG metrics, mutual and exchange-traded funds are increasingly referencing ESG in their prospectus documents. Demand appears strong, especially among women and the millennial generation. But for ESG to go mainstream, it will have to overcome obstacles, including confusion about what it means, how it can be measured, and whether it's compatible with the historic goal of most advisers and investors, namely to maximize returns.

In his 2020 letter to CEOs of the world's largest corporations, BlackRock's Larry Fink announced that his firm will make investment decisions with environmental sustainability as a central component of its investment strategy. With $7 trillion under management, BlackRock's decision could not only shift its own investing policy but also fundamentally reshape modern finance and thereby the very nature of how corporate America does business.

In his letter, Fink emphasizes the clear and present danger of climate change, and thus is committing BlackRock to exiting certain investments that "present a high sustainability-related risk." He is calling for all companies, not...