Wednesday, May 29, 2019

BlackRock's Revolutionary Prioritization of Climate Disclosure

With assets worth $6.52 trillion, BlackRock is the world’s biggest fund manager and they are using their considerable might to advocate for corporate climate disclosure. They have made it clear that they expect to see companies factor climate risks into their strategies.

They have called the lack of climate disclosures a "systemic problem" and they want to compel companies to be more transparent. "There are firms where we think they’re probably not moving fast enough given the risks to the business," Michelle Edkins Global Head of BlackRock’s Investment Stewardship Team told Reuters. This is a game changer. as no company has more ability to augur such change than BlackRock.

Black Rock has also challenged political leaders. Vice Chairman Philipp Hildebrand told the Trump administration not to rescind Obama era regulations. "Rolling back regulation at this point with this much liquidity in the system strikes me as a very bad idea," he said.

BlackRock's prioritization of climate-risk disclosure has been adopted by the Financial Stability Board, the international body that monitors and makes recommendations about the global financial system. The board published recommendations in the areas of governance, strategy, risk management, metrics and targets. BlackRock is a participating member of the board.

BlackRock has been criticized for owning carbon-heavy companies and fossil fuel stock in particular. They have also been called out for their preference for private meetings over proxy resolutions. However, BlackRock supported a shareholder resolution demanding ExxonMobil disclose climate change risks and they have indicated that they expect all directors in sectors associated with climate risk to have "demonstrable fluency in how climate risk affects the business" as well as how they will address it. 

BlackRock is supporting boardroom diversity including the inclusion of more women. They also champion the value proposition associated with higher wages.

In 2018 BlackRock's CEO Larry Fink published a letter to CEOs titled "Purpose and Profit" in which he urged companies to create positive social value. If they fail to do so Fink warned them they may lose their license to operate.  Here is an excerpt of that letter:
"Indeed, the public expectations of your company have never been greater. 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. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate. Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders."
Fink has also urged CEOs to avoid the dangers of short term thinking and the BlackRock Institute has published a couple of papers to help guide companies to address their climate risk. The Price of Climate Change is a guidance paper that explores what a warming climate means for industry and why companies need to factor extenuating issues into their disclosure statements and related governance issues.

Adapting Portfolios to Climate Change is another guidance paper and it anticipated regulations that would enable companies to meet the goals of the Paris Agreement which aims to keep temperatures below the upper threshold limit of 2 degrees Celsius above pre-industrial norms. This paper bluntly sates, "climate factors have been under appreciated and under priced...Our research suggests there can be little downside to gradually incorporating climate factors into the investment process — and even potential upside."

BlackRock's efforts are having a ripple effect throughout the investment community and they are inspiring changes in other big fund firms. The New York Times' Andrew Ross Sorkin suggested that Black Rock's actions "may be a watershed moment on Wall Street, one that raises all sorts of questions about the very nature of capitalism."

If we are to achieve the goals laid out in the Paris Agreement we will need to see transformative change.  To succeed within the limited time frames we have we will need activist investors like BlackRock who have the clout to promote strong sustainability agendas.

No comments: