Money talks (about climate risk and how to manage it)

Week of 15 February 2021

Money talks (about climate risk and how to manage it)

Last month, BlackRock’s Chairman and CEO Larry Fink cautioned CEOs that tectonic shifts are happening and now is the time to prepare for a net zero transition that is just, equitable, and protects people’s livelihoods. This month, BlackRock publishes detailed expectations for investees to address their climate risk. BlackRock emphasizes the economic value of a just transition, the need for ambitious emissions targets, and the need to ensure offsets are not a replacement for emissions reductions. The world’s largest asset manager also expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy – with a specific expectation on directors across the board to have sufficient fluency in climate risk and the energy transition. If action doesn’t take place, BlackRock will use the tools at its disposal: voting against directors and supporting shareholder proposals.

Global investment manager BlackRock—the world’s largest asset manager with around $8.67 trillion in assets under management—put out a new position paper, Climate Risk and the Transition to a Low-Carbon Economy, to outline its approach and expectations for investee companies on handling the climate transition in line with its Global Principles for Investment Stewardship.

We’ve highlighted below some of the most interesting points and extracts from the paper:

    • “Climate Risk and the Energy Transition as an Investment Issue”: “Climate risk presents significant investment risk—it carries financial impacts that will reverberate across all industries and global markets, affecting long-term shareholder returns, as well as economic stability. As BlackRock’s Chairman and CEO, Larry Fink, wrote in his 2021 letter to CEOs, “there is no company whose business model won’t be profoundly affected by the transition to a net zero economy…”
    • “Climate Transition and the Role of Private and Public Sectors”: “Climate risk is global, requiring the adaptation and resilience of companies world-wide. As the global economy transitions to a low-carbon future, it is in the best interests of companies and markets that the transition is orderly and just.”
    • The just transition “is likely to result in a net economic gain”: “Equally, we acknowledge that there are varying levels of dependence on carbon in different economies. In order to implement a just and equitable transition to a low-carbon economy, countries around the world will need to re-allocate labor resources from carbon-intensive industries to cleaner alternatives in order to preserve economic opportunities and mitigate downstream community impacts. However, the loss of fossil fuel intensive jobs does not necessarily equate to absolute economic loss. Rather, the transition to renewable energy is likely to result in a net economic gain for our global economy. Careful consideration of human capital in this transition, including training and re-tooling, will allow for a more just and equitable shift.”
    • Carbon offsets are “not a replacement for” emissions reductions: “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.”
    • “Rigorous targets”: “The path towards net zero may not be linear or streamlined; however, companies should provide adequate disclosure and articulate strategic changes that may impact progress, either negatively or positively. Short-, medium-, and long-term targets allow investors and other stakeholders to track progress and identify innovative leaders. […] We believe that the companies that critically evaluate their current baseline, set rigorous GHG emissions reduction targets, and act on an accelerated timeline are those most likely to avoid operational disruption in the future. For some companies, a careful consideration of the evolving market and changing global economy may dictate the need for a shift in business plan and strategic direction.”

Expectations of Boards and Management Teams

    • BlackRock “expects companies to disclose a plan for how their business model will be compatible with a low-carbon economy, i.e. where global warming is limited to well below 2° C. The plan should be integrated into company strategy and include short-, medium-, and long-term targets and goals. We expect 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.”
    • BlackRock highlights in particular an inherent linkage between innovation and opportunity. “Companies that produce viable solutions to address changing market demands are best poised to capture additional market share as consumer preferences, regulation, and global demand shift. Companies also have an opportunity to utilize, and contribute to, the development of current and future low- carbon transition technologies, which are important components for the rate at which emissions can be reduced.”

Holding Boards Accountable

    • “As explained in BIS’ market-specific voting guidelines, 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. We may also support shareholder proposals that we believe address gaps in a company’s approach to climate risk and the energy transition. We view this as the appropriate escalation where we see a lack of urgency and progress in a company’s actions around climate risk. In some instances, we may also support shareholder proposals where a company is moving in the right direction, but we feel attention to the issue could be accelerated.”

Read the full paper here: BlackRock, Climate Risk and the Transition to a Low-Carbon Economy (February 2021)

“Underlying our desire for greater disclosure on emissions baselines, GHG reduction targets, and transition plans, is our conviction that climate risk is investment risk. Solutions to climate change and the transition to a low-carbon economy require concerted effort on the part of companies, including assessing their operations and adapting their businesses to remain resilient. Through our engagement and voting, we aim to continue to advance the management and reporting of climate-related risks, and to encourage companies to harness opportunities presented by the transition to a low-carbon economy. We believe that these efforts are a crucial component of our fiduciary duty to our clients to deliver sustainable long-term financial returns.”