In the same week President Trump moved towards climate change denial by proposing to eliminate funding for a wide variety of climate change programs – from regulatory programs at the U.S. EPA to science and research programs at NASA – the world’s largest asset manager took a huge step towards climate reality.
BlackRock, Inc. is a global investment management company with over $5.1 trillion in assets, representing mostly institutional investors.
And wow, BlackRock just “threw down the gauntlet” on corporate governance teams across the world, by issuing its 2017-2018 engagement priorities, complete with key points on climate change risk disclosure.
The engagement priorities help companies understand what BlackRock will be expecting from corporate leadership (i.e. Board of Directors) if and when BlackRock becomes an investor. The priorities demand companies go beyond minimal risk disclosure to meet regulatory compliance and instead enhance disclosure in order to better inform investors about environmental, social, and governance (ESG) factors that meaningfully impact effective management and long-term opportunities and challenges.
Specific to climate change, the priorities note two publications from BlackRock related to climate change:
- “The Price of Climate Change: Global Warming’s Impact on Portfolios” which, among many other things, notes that the biggest polluting companies provide the greatest opportunity for improvement, and engagement with corporate management can help effect positive change.
- “Adapting Portfolios to Climate Change” that explains both gradual and immediate pathways to integrating climate risks into portfolios.
In addition, BlackRock released a March 2017 letter identifying how the company engages on climate risk. The letter generally states BlackRock will seek to engage and educate Boards on climate risk (especially with those companies most exposed to climate risk) and will encourage greater climate disclosure. BlackRock sets an expectation that for some climate-exposed companies, Boards must demonstrate fluency on how climate risks impact the company and management’s strategies to ameliorate. Ultimately, BlackRock notes it will vote against the re-election of Board members that fail to protect the long-term interests of shareholders, for example, by inadequately addressing climate risks.
The letter refers to comments made by BlackRock CEO, Larry Fink, stating the company doesn’t seek to micromanage company operations, but that BlackRock’s “…long-term approach should not be confused with an infinitely patient one.”
The 2017-2018 engagement priorities assert climate risk is a systemic issue and enhanced, meaningful climate risk disclosure standards should be developed and required for listed companies in each market. Specifically, BlackRock encourages the use of voluntary and preliminary recommendations from the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, chaired by Michael Bloomberg.
In order to increase transparency and avoid misallocation of capital, the recommendations report focuses on four key areas of organizational operations: governance, strategy, risk management, and metrics and targets.
Back in August 2016, I highlighted the SEC’s exploration of enhanced corporate disclosure, include greater transparency on climate risk. Trump’s pick to chair the SEC, Jay Clayton, has encouraged clients to increase climate change disclosure in the past.
So, with BlackRock and Clayton’s leadership, for the investment community the question may be, will reality trump denial on climate change?