Climate Risk Brings a Fundamental Reshaping of Finance

Sustainability Disclosure
June 16, 2020

It’s being called a “fundamental reshaping of finance”. Climate risk is forcing investors and money managers to rethink investments in a world of unprecedented biophysical disruption to the planet. This warning does not come from climate activists like David Suzuki, James Hansen, or Bill McKibben, but from the largest asset manager in the world: BlackRock.

Each year, Larry Fink, the Chairman and Chief Executive Officer of BlackRock, pens an annual letter to CEOs. The letter is highly influential. BlackRock’s colossal US$6.84 trillion of assets under management is not to be ignored. Chances are, if you work at a publicly traded company, BlackRock owns a stake. When Larry speaks, CEOs take notice.

This year, the annual letter was focused entirely on sustainability issues. This is fascinating to consider given all the potential risks facing investors. The letter was penned early in the year, before the COVID-19 crisis had become a full-fledged global pandemic. Still, there were many issues facing global investors at that time that were highly significant: political dysfunction in the UK, the rise of socialism in the US primaries, unrest in the streets of Hong Kong, a growing corporate debt binge, and an 11-year bull market that was starting to look wobbly. But it was the issue of corporate sustainability that BlackRock chose to highlight above all else.

So why exactly is sustainability so important? What does this mean for managers of publicly traded companies? What does my company need to do with respect to sustainability? This blog post sets out to answer each of these questions.

Sustainability in the Spotlight

To understand why BlackRock has pushed sustainability to the top of the agenda for CEOs in 2020, it can be boiled down into three key messages:

  1. Climate risk is investment risk. BlackRock notes that as a fiduciary, they have a responsibility to ensure that clients can navigate this transition.
  2. BlackRock notes the inadequacy of disclosure on how companies are managing sustainability-related issues. To achieve more standardization, companies should adopt: 1) the Sustainability Accounting Standards Board (SASB) standards for reporting sustainability; and 2) the Task Force on Climate-related Financial Disclosures (TCFD) for evaluating and reporting climate-related governance and risks issues.
  3. BlackRock warns that a significant reallocation of capital is coming as a result of climate change policy and investor pressure. As the low-carbon transition takes hold, BlackRock expects that sustainability- and climate-integrated investments will provide better risk-adjusted returns for investors.

Managers Need to Take Notice

The measures that BlackRock discusses are not optional. Sustainability will be placed at the center of their investment approach. This includes integration into portfolio construction and risk management, new investment projects that avoid investing in fossil fuels, and shareholder engagement activities with a commitment to sustainability and transparency. Additionally, and most significantly, BlackRock will divest of investments that are deemed to present a high sustainability-related risk.

If a company fails to provide a robust disclosure on sustainability-related risk, BlackRock will assume that the risk is not being adequately managed. To compel a company to provide adequate risk disclosure, BlackRock will vote against management and board directors that are not making progress on sustainability-related disclosures. In short, sustainability disclosure is no-longer voluntary so long as BlackRock is holding a stake in your company.

Get Started on Sustainability Disclosure

Companies should start now and use this time to work out the kinks before full compliance with sustainability disclosure standards is required.

So, what do sustainability managers need to start doing in 2020? We suggest the following:

  • Ensure your organization has the proper risk management and governance process in place. Sustainability-related risk is not unlike the other diverse risks your business faces. Seek to integrate sustainability into your company’s existing risk management framework.
  • Get familiar with SASB and TCFD disclosure standards. Make sure you understand the questions that are applicable to your organization. It is good to have the end in mind from the outset.
  • If you are using other sustainability standards in your corporate disclosure, now is the time to think about migration to SASB and TCFD.
  • Sustainability is about more than just disclosure. Going through the SASB materiality assessment and TCFD scenario analysis could reveal significant gaps in risk management process or business decision-making.
  • Robust disclosure requires good data. Have the right tools in place to measure and track performance on key sustainability metrics.
  • As BlackRock has already signaled, it’s not just about sustainability-related disclosures but also the underlying business practices. Once investors are satisfied with corporate disclosures, their attention will quickly turn to sustainability performance metrics. Think about how to improve sustainability performance now, so you can lap the competition in the coming years.

Author

Andrea Korney

Andrea Korney

Vice President - Sustainability, Frostbyte Consulting