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E-MailBetty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).
[On January 26, 2021], BlackRock released its annual Letter to CEOs, which is also commonly referred to as the “Fink Letter.” With the firm managing approximately $9 trillion in assets, this open letter is widely read by public companies, market participants and other stakeholders to better understand the mega investor’s outlook. This post boils down BlackRock’s 2021 letter to what we think is its essence. Not surprisingly, climate risk remains a top focus area. “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day,” explains Larry Fink, Chairman and CEO of BlackRock.
The Letter to CEOs provides what we believe are some valuable insights to companies seeking to implement disclosures or take action related to climate change, diversity, equity and inclusion (DEI), and environmental, social and governance (ESG) matters. For further consideration, we’ve included some of BlackRock’s own disclosures.
Executive Summary
- BlackRock calls for a global uniform ESG disclosure standard. In the interim, the investor continues to endorse the framework of the Sustainability Accounting Standards Board (SASB) and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). BlackRock continues to ask all public companies to report in alignment with both;
- BlackRock believes large private companies should adopt TCFD and issuers of public debt should disclose how they are addressing climate-related risks;
- BlackRock expects all public company boards to incorporate climate risk as part of their oversight of long-term strategies;
- As a matter of talent strategy, BlackRock asks companies to disclose in their sustainability reports their respective long-term strategies for improving DEI, as appropriate by region; and
- BlackRock believes the COVID-19 pandemic accelerated a “tectonic shift” toward sustainable assets and anticipates that over time a broader group of investors (beyond the largest investors) will demand more customized index portfolios with sustainability-focused companies.
What’s BlackRock Really Telling Companies and Boards?
ESG Disclosure Generally. BlackRock strongly supports moving to a single global standard for ESG disclosure. In the interim, BlackRock continues to endorse TCFD- and SASB-aligned reporting and directs readers to its own reports, including the 2020 TCFD report, 2019 SASB report and others.
Climate Change. The key takeaway is that all boards must now oversee climate risk as part of their respective company’s long-term strategy. BlackRock asks each investee company to articulate a plan explaining “how their business model will be compatible with a net zero economy.” BlackRock further states that a company’s “net zero economy” plan should be reflected in the company’s long-term strategy that is reviewed by the board. BlackRock believes large private companies should adopt the TCFD, and issuers of public debt should disclose how they are addressing climate-related risks.
BlackRock calls TCFD the global standard for disclosing “material climate-related risks” and how the risks are managed. In addition, BlackRock points to its 2020 TCFD report. There are various climate scenarios that any company can use to stress test what risks climate change could pose to its business. BlackRock’s inaugural 2020 TCFD report describes the three scenarios it considered, but ultimately analyzed only against one. The report references the International Energy Agency (IEA) Sustainable Development Scenario (SDS), which it characterizes as the most widely adopted by peers. This scenario was designed to align with the UN Paris Agreement and the United Nations Sustainable Development Goals and looks to limit global warming to a 1.7°C increase. BlackRock also considered the scenario by the Intergovernmental Panel on Climate Change (IPCC) Representative Concentration Pathway 2.6 (RCP 2.6), widely used by the climate scientific community, but RCP 2.6 has limited energy data and infrequent updates. Lastly, the one BlackRock selected, the UN Principles for Responsible Investing’s (UN PRI) Inevitable Policy Response (IPR) scenario, contemplates a temperature increase below 2°C and in the investor’s view, was most appropriate for an investor.
DEI. BlackRock asks that talent strategy disclosure in a company sustainability report fully reflect the company’s long-term plans to improve DEI, as appropriate for the region. In addition, BlackRock’s Letter to CEOs directs readers to its racial equity and inclusion disclosure on its website. By 2024, BlackRock’s goal is to double representation of Black senior leaders and increase overall representation by 30% (currently only 3% of senior leaders and 5% of the workforce in the United States is Black). BlackRock outlines the following 5 actions needed to meet this goal:
- Actively guiding and developing the careers of its Black Professionals;
- Focusing on people manager development and rewarding proactive inclusion and improved diversity outcomes;
- Increasing its commitment to recruiting and onboarding Black Professionals;
- Raising awareness of racial equity issues and resetting behavioral expectations; and
- Embedding accountability and improving tracking and measurement of diversity metrics.
A subset of the Global Executive Committee oversees the progress.
