In his 2021 letter to CEOs, BlackRock CEO Laurence Fink asked companies to disclose a "plan for how their business model will be compatible with a net zero economy"—that is, "one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC." (See this PubCo post.) Now BlackRock Investment Stewardship has posted a powerpoint presentation that sets out BIS's expectations in greater detail. The presentation concludes with a caution that, "where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy, including short- medium- and long-term targets, we may vote against the directors we consider responsible for climate risk oversight."
Fink has long argued that climate risk is investment risk and that the transition to sustainability is "a historic investment opportunity." In his view, to achieve a net zero economy, the entire economy must be transformed. Every company will be "profoundly affected by the transition," but those companies that have articulated strategies and plans to achieve that transition "will distinguish themselves with their stakeholders."
The BIS powerpoint highlights a recent report by the Intergovernmental Panel on Climate Change showing that, to mitigate the worst effects of climate change, "steep GHG reduction efforts are necessary to limit warming to 1.5°C to achieve an ultimate goal of net zero GHG emissions by mid-century." To that end, "[b]oth the private and public sectors have important roles to play." BIS advises that companies will need to "provide adequate disclosure and articulate strategic changes that may impact progress, either negatively or positively." BIS observes that the methods of achieving the goal of net zero GHG emissions varies across industries and can be attained
"by eliminating GHG emissions via renewable (solar, wind, hydro, etc.) energy in place of carbon-intensive fossil fuels. Companies might also augment their existing processes and retrofit equipment with carbon capture and storage capabilities, sometimes using industrial off-gasses to fuel additional energy needs....We recognize that companies may use carbon offsets in the near- and medium-term as they innovate to develop the technology that will support further reductions in their overall GHG emissions. We see carbon offsets as an interim complement, though not a replacement for, substantive and sustained long-term emissions reductions plans aligned with science."
Develop and articulate a plan. BIS indicates that it expects companies to disclose a plan, integrated into company strategy, for how their business models will be compatible with a low-carbon economy, i.e. where global warming is limited to well below 2° C. More specifically, to allow investors to track progress, companies will need to disclose short-, medium- and long-term targets, including "scope 1 and scope 2 emissions and accompanying GHG reduction targets. Companies in carbon-intensive industries should also disclose scope 3 emissions."
Board fluency. Having a single director with environmental expertise that takes on all the board's responsibility for environmental oversight is not satisfactory, in the view of BIS. Instead, BIS expects "directors to have sufficient fluency in climate risk and the energy transition to enable the whole board—rather than a single director who is a 'climate expert'—to provide appropriate oversight of the company's plan and targets. Members of the board and management team should have climate expertise appropriate to the company's business model to ensure adequate consideration of these risks and opportunities in strategy and operations."
A study from the NYU Stern Center for Sustainable Business, U.S. Corporate Boards Suffer From Inadequate Expertise in Financially Material ESG Matters, analyzed the credentials of the 1188 Fortune 100 board directors, based on company bios and Bloomberg bios, to assess the level of board expertise. The study "found that very few sectors and very few companies were adequately prepared at the board level for issues that were already affecting their performance." In the "environmental" category, the study found "very little director expertise." Only 1.2% of directors had expertise in energy and land/conservation—the highest showings in this category—with backgrounds in renewables, nuclear power and utilities (energy) and service on conservation boards (land/conservation), as well as some public policy and/or regulatory experience. The study observes that, although energy is an important issue for most companies, generally only energy companies had directors with energy expertise. Notably, the study found that, in general, a number of industry sectors that faced material environmental challenges "did not reflect that materiality on their boards." (See this PubCo post.)
Disclosure. The company should provide disclosure regarding how climate risks and risk mitigation affect its business, including sea level rise and extreme weather events, as well as national emissions goals, carbon taxes, regulations and investment in alternative energy. Disclosure should also demonstrate the company's "preparedness to operate in a low-carbon economy." Companies should also disclose how they are capitalizing on operating efficiencies that may result from the company's evaluation of its GHG footprint, including "decreased energy use, streamlined manufacturing processes, and technology enhancements to reduce waste—each of which can ultimately increase long-term shareholder value." In addition, to the extent that the company has introduced any solutions, they may have an opportunity to "capture additional market share as consumer preferences, regulation, and global demand shift."
Consistent and comparable reporting. BIS advises that "comparable, consistent, and comprehensive information" is necessary to allow investors "to assess companies' long-term transition plans and near-term actions," to make informed asset allocation decisions and to more accurately price in the impact of climate change. BIS advocates use of the reporting frameworks developed by the Task Force on Climate related Financial Disclosures (TCFD) (see this PubCo post) and the Sustainability Accounting Standards Board (SASB) (see this PubCo post) and believes that they elicit "financially material and decision-useful information that is comparable within each industry." BIS considers the two frameworks to be complementary. BIS also expects that "climate risk will become a key financial reporting matter at companies with carbon-intensive business models or that otherwise have a material exposure to climate risk."
Specific factors to be considered. BIS identifies the following as factors it may consider in conducting its company assessments:
- "How the board and management are considering the physical and transition risks of climate change on the company, alongside opportunities for energy efficiencies and use of renewable resources
- How the company is adjusting its strategy and/ or capital allocation plans to address the risks and opportunities identified
- How the company is assessing the potential for changes in demand for goods or services due to climate change (including consumer preferences)
- How the company has assessed its current emissions baseline, set rigorous targets, and evaluated whether it is aligned with net zero GHG emissions by 2050
- Whether the company is stress-testing its assets and assessing the resilience of its strategy under a less than 2° C scenario; including the impacts of policies, such as a carbon tax, fuel selections, and/ or efficiency standards, on profitability
- How the company may be harnessing sustainable solutions to take advantage of new investment opportunities, business lines, or products and access to capital
- How the company is monitoring the regulatory landscape and whether it is participating in relevant policy discussions, including international, national, and local requirements and trends"
Accountability. In addition to potential votes against directors noted above, BIS indicates that it may also support certain climate-related shareholder proposals where BIS sees "a lack of urgency and progress in a company's actions around climate risk," or even where BIS believes a proposal might accelerate attention to the issue.
As discussed in this Bloomberg article, some "climate experts" continue to pressure BlackRock, contending that its actions still don't go far enough. Last year, BlackRock voted against directors at 69 companies, but activists argue that, while voting against boards is an important step, "without the actual threat of exclusion, this policy update remains yet another paper tiger." However, BlackRock is somewhat handcuffed in that regard; much of its assets are in passive index funds, making the threat of divestment difficult. Another activist argued that risk disclosure was important, but insufficient, contending that BlackRock needed to ensure "that companies
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