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30 Jan. 2020 | Comments (0)

This article features commentary from Paul Washington, the Executive Director of the ESG Center at The Conference Board. It was initially published in Westlaw by CQ Roll Call reporter Laura Weiss.

When the head of the world's largest asset management firm announced that he expects companies to consider their business in the context of climate change and that sustainable investments are the way forward, he added to mounting pressures on corporations to address environmental, social, and governance issues, experts and investor advocates said.

BlackRock Inc. CEO Larry Fink's annual letter to chief executives carries the weight of the New York-based firm's almost $7 trillion in assets under management and its status among many publicly traded companies' top shareholders. Investors long concerned with ESG and climate issues greeted this year's letter with cautious praise, while experts said it could lead to greater boardroom discussions about sustainability and climate risk.

Larry Fink's letters have a real impact," said Paul Washington, executive director of The Conference Board's ESG Center and a former corporate secretary, in an interview. "They do show up as discussion items in boardrooms — whether it's the nominating committee, the compensation committee, or the full board. When he speaks, people listen."

Fink's 2020 letter says every government, company, and shareholder must confront climate change and work together to transition to a low-carbon economy. He adds companies must consider the physical risks of climate change and those related to the economic transition. Significant shifts in capital allocation that fund more sustainable business are coming, Fink says.

The letter came alongside commitments from BlackRock to oppose management at corporate annual meetings more often when a company hasn't shown enough progress on sustainability, press for disclosure on ESG and climate matters, and increase sustainable investment offerings, among changes.

A spark for debate

Fink's letter is likely to spur at least some conversation in some corporate boardrooms, according to interviews with experts. While companies have been confronted with questions on ESG and climate risk already, BlackRock's endorsement of the topics as key focus areas for corporations heightens pressure.

"It's good for executives to think through what the letter means to their particular company and in particular to think through how they are thinking about three issues: How they are thinking about environmental impact on their company because it's not just for carbonintensive corporations; to think through how they are addressing their sustainability reporting; and to think about where they sit on the sustainability spectrum in terms of what could be a shift over time of capital to those industries and those companies that are perceived as more sustainable," said Washington of The Conference Board, a think tank with corporate members.

Washington said he'd expect Fink's letter to appear on board agendas and noted that he expects it to spark thorough discussions for companies outside of fossil fuel-heavy industries like oil and gas and utilities. Fink's message is that all corporations must seriously assess potential climate-related impacts, Washington said.

Peter Gleason, president of board member group the National Association of Corporate Directors, said he expects Fink's letter and ensuing conversations to lead to greater transparency. Particularly for large companies where BlackRock is a top investor, he noted the firm's emphasis on climate risk will now have to be considered as a risk or opportunity in board reviews of strategy.

"The action you're going to see is more pointed disclosures coming out of the company really taking a hard look at what are the climate risks they're facing, and how are they addressing them, and what are they doing to mitigate some of those changes that may impact them as an organization," Gleason said.

Some, though, are more skeptical of the potential immediate impact of Fink's letter.

David Larcker, an accounting professor at Stanford Graduate School of Business and director of its corporate governance research initiative, conducted a survey with colleagues last year that found half of boards that received Fink's 2019 letter discussed it and almost half of companies didn't make changes as a result of it. The survey polled 209 CEOs and CFOs at S&P 1500 companies.

The 2020 letter includes more concrete changes to BlackRock's investment and engagement practices than last year's letter, which focused on companies' role in society and serving various stakeholders.

Larcker said in an interview that while climate change is a pressing societal issue, BlackRock's stance may or may not fall in line with its fiduciary duty to the people whose money the firm manages. How adjusting for climate risk impacts corporate value is still unknown and research in the area is lacking, he added.

While he expects few if any immediate changes from companies, Larcker said the firm's shift and a larger move in capital toward ESG may trigger long-term change. Fink's letter sparks a debate on climate change and ESG that smart, powerful people should be engaged in, he added.

"It's a long game, right?" he said "They're pushing this idea, and it may well be over time it has some impact."

A potential ally

Investors that have long pressed companies to share information on and make changes related to climate change and other ESG issues — such as human rights and board diversity — are welcoming Fink's latest letter. Public support from the world's biggest asset manager alone buoys their cause.

The letter sends a message to ESG-focused investors that they clearly have BlackRock on their side, Washington said.

Still, some are following praise by cautioning that they're waiting to see whether BlackRock will follow through on its commitments and if it will take further action. That could include voting in support of advocates' shareholder proposals related to climate change, which the firm has only occasionally voted for in the past.

Among the steps BlackRock is taking, the firm highlighted that it joined the Climate Action 100+, an investor coalition targeting key greenhouse gas emitters. Ceres, a corporate sustainability advocate that is among the coalition's founders, is praising BlackRock's decision to join the group as well as Fink's letter as a whole.

"It's not just words," said Ceres President Mindy Lubber. "It's words and deeds."

She said Fink's letter marks a defining moment to which governments and financial actors must pay attention and that it adds weight to the voices of investors pressing companies on climate issues because of BlackRock's size and Fink's status as a thought leader.

Lubber says she believes the letter will make a significant difference for investors and advocates when they ask the most difficult companies — particularly those deeply invested in fossil fuels — to set precise goals with clear implementation plans and provide transparency on climate change-related matters.

Other groups seeking corporate change were welcoming the letter, but said they'll be watching BlackRock's actions moving forward.

"I really wish that BlackRock had taken this position 10 years ago and had been really pushing," said Christina Cobourn Herman, program director for climate and the environment at the Interfaith Center on Corporate Responsibility. "But here we are in 2020 and it's good that they're doing that, but I really fervently hope they are forceful in their engagements."

ICCR is a faith-based coalition of investors managing more than $400 billion that presses companies on ESG issues. Members frequently submit shareholder proposals at companies.

Rachel Curley, a democracy associate at consumer watchdog Public Citizen who works with investor partners to push for transparency and reform in corporate political spending, credited activists with pushing the firm for change.

"While we're glad to have them (BlackRock) at the party, they're certainly late," she said.

Whether investors or activists, groups will be watching BlackRock's moves as they assess the full scope of change at the firm.

Curley will be monitoring BlackRock to see whether its commitment to addressing climate change translates into changes in how the firm addresses lobbying and election spending issues and watching other large asset managers like The Vanguard Group Inc. to see if they respond with their own changes. Curley has pressed Vanguard to support shareholder proposals on lobbying and political spending.

ICCR CEO Josh Zinner said the coalition wants to see BlackRock change its proxy voting record and support more shareholder proposals related to ESG and climate risk specifically, as well as collaborate more often with other investors.

Ultimately, Herman said that ICCR will wait to see how the firm defines materiality for ESG issues and how robustly it carries out its sustainability commitment.

"'Is the urgency there?' I guess is my question because we really are out of time on this issue," Herman said. "It has become so expensive to deal with the climate issue — even if we can do it. That's a big question."

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