Each year, BlackRock CEO Larry Fink’s annual letter to public company CEOs presents a call to action, which has frequently led to direct changes at the world’s global corporations – from formally stating (and supporting with actions) a company’s social purpose to showing finite plans around “long-termism” to increasing diversity.
This year, after criticisms that the world’s largest asset manager wasn’t doing enough on climate change, Fink announced in his annual letter, titled “A Fundamental Reshaping of Finance,” that tackling climate change is a critical focus area for BlackRock in 2020, and it will be in the years ahead. (Notably, last week BlackRock also joined Climate Action 100+, the world’s largest group of investors – by assets – that pressures companies to act on climate change.)
In an interview with Andrew Ross Sorkin, Fink stated that he “wrote BlackRock’s annual letter as a capitalist, not as an environmentalist.” In it, he predicts that “we are just beginning a major reallocation of capital, which is being driven by more and more clients looking for sustainable portfolios.” He cites the September 2019 global climate strikes as evidence that awareness on climate change is increasing globally, and that citizens everywhere, and of all ages, are demanding that action be taken to address this urgent issue.
As a fiduciary, BlackRock views climate risk as an investment risk. This includes not only physical risks associated with climate change, but also risks related to how climate policy will impact prices, costs, and demand across the economy.
In the absence of robust disclosures by companies on climate risks and other broader ESG risks (including social and governance risks), BlackRock will conclude that these companies are not adequately managing risk.
What do CEOs and Boards at public companies need to do this year to be “compliant” according to Fink’s criteria?
- Improve ESG disclosures and use defined reporting frameworks: By year-end, BlackRock wants public companies to report broad sustainability issues under the Sustainability Accounting Standards Board’s framework (SASB) and disclose climate-related risks under the Task Force on Climate-related Financial Disclosure’s framework (TCFD), which includes outlining a two-degree scenario per the Paris Agreement.
- Consider sustainable strategic alternatives: By mid-2020, BlackRock will remove from its active investment portfolio the debt and equity of companies generating more than 25% of their revenues via thermal coal production.
- Improve investor engagement: To enact change at companies in BlackRock’s passively managed index funds where the firm cannot selectively sell securities, BlackRock will intensify its engagement efforts on climate change and sustainability issues.
- Identify ESG weaknesses before a shareholder proposal: For public companies BlackRock invests in, whether through passive or active management, BlackRock will be “increasingly disposed” to vote against management and board directors that are not doing enough at their companies to disclose their efforts to address climate change or other material, sustainability-related issues.
- Prioritize ESG communications: Fink says investors need a clearer picture of how companies are managing sustainability-related questions beyond climate change, such as workforce diversity, supply chain sustainability or how customer data is protected.
- Ensure the company’s social purpose is supported by its actions and is linked to long-term strategy: Fink warns against companies that believe profit and purpose aren’t inextricably linked, saying “A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term…But actions that damage society will catch up with a company and destroy shareholder value.”
In closing, the world’s largest asset manager has announced that it views how a company handles climate change, such as carbon efficiency, and broader sustainability issues, such as diversity, as a signal of management quality. Will your company pass BlackRock’s test?