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BlackRock Letter to CEOs: Focus on Sustainability for Long-term Value

Tuesday, March 3, 2020

EQ’s Peggy O’Keefe, Managing Director, Corporate Governance, summarizes BlackRock’s annual letter to CEOs, and how it relates to the market’s current appetite and understanding of environmental, social and governance (ESG) criteria.

Is climate risk investment risk?

Larry Fink, Chairman & CEO of BlackRock, the world’s largest global asset management firm, recently sent his annual letter to CEOs. In the letter, Mr. Fink discussed BlackRock’s increased focus on climate change and how long-term sustainability will affect the firm’s overall strategy, starting this year. Mr. Fink stated that investors worldwide increasingly believe that “climate risk is investment risk,” with their concerns ranging from specific impacts of climate change, such as flooding or droughts that affect the cost of food and insurance, to the difficulty of predicting longer-term secondary effects on global industry and finance. He believes that climate risk will soon have a considerable effect on capital reallocation.

Portfolio alignment with climate change in mind

To this end, BlackRock also sent a letter to its clients, describing their plan to take into account risk management associated with climate change, stating that it will no longer invest in companies associated with high sustainability risk, including companies whose revenue is derived from more than 25% from thermal coal.

BlackRock’s planned portfolio alignment is mirrored by some, but not by all ESG-focused funds. Not all investments promoting sustainability are actually encouraging reduction of climate change risk, or other sustainability efforts through their investments. Akane Otani of The Wall Street Journal recently wrote a piece called “Big Technology Stocks Dominate ESG Funds.” In the article, Otani discusses how many ESG funds promoting themselves as sustainability-based are primarily invested in big-tech companies, paralleling the S&P 500 – not companies that are necessarily focused on sustainability efforts, such as improving climate change or promoting workforce diversity.

Understanding a company’s social responsibility strategy

However, CNBC’s Squawk Box recently hosted Ken Taubes, CIO of Amundi Pioneer, discussing that divesting in energy companies may not ultimately be helpful in promoting low carbon emissions. Divesting will raise the cost of capital for these companies, which they need to research and institute methodologies to reduce carbon emissions. Mr. Taubes discussed that some developing countries rely on fossil fuels as energy sources, and that it is not Amundi Pioneer’s intent to cripple the industry that these countries need. He stressed the importance of having his analysts engage with energy companies to understand their strategy toward reducing carbon emissions.

Mr. Fink is aware that the ultimate goal of low-carbon energy usage globally is not going to happen quickly – developing countries are dependent on it, cannot afford to switch yet, and believes the needs of these countries should not be ignored. His point is that governments, investors and companies worldwide should have an interactive and integral part in the pathway to low-carbon economies, for global energy transition to work.

Standardized disclosures on climate-related data

Aiming towards the larger goal of assisting society as a whole, achieving company purpose and long-term value, BlackRock believes that standardized disclosure on climate-related data, and more broadly, on sustainability metrics - including employee data, supply chain and cybersecurity - will benefit all stakeholders. The Sustainability Accounting Standards Board (SASB) has developed guidelines for disclosure of the latter metrics. BlackRock was one of the founders of the Task Force on Climate-Related Financial Disclosures (TCFD), developed to assist companies with voluntary disclosure of climate-related financial risks, as well as company plans to attain the Paris Agreement’s global temperature goals.

Takeaways

BlackRock has discussed with companies whether their sustainability risk management is appropriate, and wants to see both the TCFD-type disclosure and SASB-type reporting from all companies in which it invests. If companies do not appear to be making an adequate effort toward this disclosure, or do not have adequate policies in place to handle sustainability risk, Mr. Fink stated that BlackRock may vote against management and directors. As BlackRock invests in most companies, this policy should be taken into consideration by company boards and management, as this may affect voting at their shareholder meetings.