Larry Fink, the Chairman and CEO of BlackRock, yesterday sent his annual letter to CEOs – A Fundamental Reshaping of Finance – focused on sustainability and climate change. The letter frames climate risk as investment risk and predicts that "[i]n the near future – and sooner than most anticipate – there will be a significant reallocation of capital" as investors broadly incorporate the impact of sustainability on investment returns. It also reiterates the theme of prior letters that long-term profits cannot be achieved "without embracing purpose and considering the needs of a broad range of stakeholders."
Perhaps most significantly for corporate issuers, the letter calls upon portfolio companies to improve their sustainability-related disclosures. In order for investors, as well as regulators, insurers and the public at large, to understand how companies are managing sustainability matters, BlackRock believes disclosure should "extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects customers' data."
Specifically, it is asking companies to:
- Provide disclosure in line with industry-specific SASB1 guidelines, or disclose a similar set of data in a manner relevant to a company's specific business, by year-end, and
- To disclose climate-related risks in line with the TCFD's2 recommendations, including scenario analysis for operating in line with the Paris Agreement's goal of limiting global warming to well under two degree Celsius.
To the extent that companies do not effectively disclose and manage material sustainability matters, the letter warns that "[BlackRock] will be increasingly disposed to vote against management and board directors." In its companion letter to clients, it explicitly notes it will be increasingly likely to vote in favor of sustainability-related proposals where it finds companies have not made sufficient progress to disclose and manage sustainability matters.
BlackRock also announced several sustainability initiatives, and a general shift to place sustainability at the center of its investment approach. These letters follow on the heels of BlackRock's January 9th announcement that it has signed on to Climate Action 100+.
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1 The Sustainability Accounting Standards Board has developed standards covering 77 industries across 11 sectors, identifying for each industry a set of topics it deems to be financially material.
2 The Task Force on Climate-Related Financial Disclosures framework provides recommended climate-risk disclosures structured around four thematic areas – governance, strategy, risk management and metrics/targets.
BlackRock has pledged to:
- Make sustainability integral to how it invests, manages risk, constructs portfolios, builds products and conducts company engagements
- Integrate ESG considerations into all active management decisions in 2020
- Exit thermal coal producers, removing from active discretionary portfolios by mid-2020 fossil fuel companies that generate more than 25% of their revenues from thermal coal, and ceasing direct investment in such companies within the alternatives business
- Publish details on the sustainability profile of every mutual fund by the end of 2020
- Begin offering sustainable versions of its model portfolios
- Double its number of ESG ETFs to 150 by the end of 2021
- Expand it dedicated low-carbon transition-readiness strategies
- Disclose its voting records on a quarterly, rather than annual, basis, and disclose “key high-profile votes” promptly, along with an explanation of the decision
- Disclose the topics discussed during each company engagement