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BlackRock ups warning to corporate leaders on climate risk management

23 February 2021 Karin Rives

In its most explicit warning to corpo­rate management to date on the need for effective climate risk management, BlackRock said it may vote for shareholder proposals that seek action on "gaps" in energy transition planning if it determines that companies are not taking sufficient steps toward reducing emissions or shifting to low-carbon strategies.

The investment firm—the world's larg­est with $8.7 trillion in assets under man­agement—also said it may vote against individual members of boards of directors if it believes they are responsible for a company's failure to fully disclose climate risks or for not developing a "credible" plan to move away from fossil fuels.

In its five-page statement addressing companies worldwide on February 17, BlackRock suggested it may act against corporate leaders unless they demonstrate that their business models will be compat­ible with Paris Agreement emissions goals and develop "fluency" in climate and energy transition risks.

These latest instructions provide substantially more detail about what BlackRock will expect as it implements new policies aimed at ensuring better cli­mate risk management by the companies in which it invests. Analysts said the initiative also appears designed to bolster BlackRock's credibility with its investors that it is fol­lowing through on commitments to use its leverage with companies to force more effective corporate action on climate risks.

The action also dovetails with pressures coming from across the financial industry and, likely, from the Biden administration to push companies to act more aggressively on climate change. For example, on 11 February, the Environmental Defense Fund and New York University School of Law's Institute for Policy Integrity released a report that found that publicly traded companies' climate risk disclosures are not at the same level as other forms of risk disclosure, and called on the Securities and Exchange Commission to require better disclosure (see IHS Markit coverage here).

BlackRock and net zero

BlackRock's executive committee sent a letter to investors in January outlining steps it's taking to help it position their portfolios for a net-zero economy by 2050. In an accompanying letter to CEOs, Black­Rock chief executive Larry Fink wrote about a "tectonic shift" of capital flowing toward low-carbon investments.

In its latest missive, BlackRock made clear it was prepared to join with activ­ist investors to force corporate action on climate risk management if necessary.

"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," the firm wrote. "We may also support share­holder proposals that we believe address gaps in a company's approach to climate risks and the energy transition."

After the firm drew criticism in recent years for not using its influence more, some watchdogs noted last week that BlackRock's stance is changing. "BlackRock must follow [through] now and go further, but fossil boardrooms should be worried," Ben Cushing, the Sierra Club's financial advocacy campaign manager, said in a tweet.

In its new instructions to companies, BlackRock said it expects them to disclose any Scope 1 and 2 emissions stemming from their operations and energy use and what reduction targets they set for such pollution. But they will also be expected to report metrics for their Scope 3 emis­sions, which are related to company activi­ties such as procurement and employee travel that contribute to emissions from external sources, and thus are harder to control.

"A significant portion of the transition to a low-carbon economy hinges on the eventual retirement of fossil fuels, and it is particularly important for investors to understand the Scope 3 emissions profile of oil, gas and coal companies as the primary source of fuel transitions from carbon-intensive solutions to cleaner alternatives," BlackRock wrote.

The asset manager also said it will also look at how a company is "stress-testing" its assets and strategy to see how they match up to emission reduction goals of the Paris Agreement, such as holding global temperature increase to less than 2 degrees Celsius, as well as impacts from policies like carbon taxes, fuel economy mandates, or energy efficiency standards.

Companies also will be expected to monitor and engage in national regulatory and policy discussions, which that requires broader knowledge across the boardroom. "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," Black­Rock wrote. "Members of the board and management team should have climate expertise."

Posted 23 February 2021 by Karin Rives, Senior Journalist, IHS Markit

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