One of the most formative conversations I ever had about business was with an oil company executive back in the early 2000s. Amid a political shakeup in Washington, his industry was about to see a big shift in the way it was regulated—likely to his benefit. Yet he was hardly joyful. His company had just spent a decade—and billions of dollars—struggling to comply with the last set of regulations. Now, he feared, they’d need to start the process all over again. “The truth is,” he said, “we really don’t care what the regulations are. We care more about stability. We need to figure out how to make long-term bets.”
That conversation came to mind this week reading BlackRock CEO Larry Fink’s letter to CEOs. In what’s become an annual ritual, Fink—understandably recognized by directors for his Impact in the Boardroom at Corporate Board Member’s Boardroom Summit last year—once again prodded public company CEOs and directors about their responsibility to society. This year his focus was business’s role in halting climate change.
“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” wrote Fink. In other words, to stay in BlackRock’s good graces you’ll need to accelerate your work on ESG disclosure in the coming months, work that is already underway at many public companies, but likely bedeviling many more.
BlackRock, you of course know, represents some $7 trillion in AUM, and Fink has actively used his firm’s primacy among investing companies to cajole business leaders to create more “purpose-driven” enterprises that help society as a whole, rather than just garner returns.
But while having any single investor create a new, de-facto layer of global corporate regulation—one with a tight, arbitrary deadline—will hardly invite applause in most boardrooms, there is a silver lining. It could finally help business settle on standards for ESG disclosure. And as that oil company executive would tell you, anything that adds long-term stability is good news for CEOs and boards, even if it adds paperwork.
ESG Confusion? Engage directly with leaders of BlackRock, The Business Roundtable and the S.E.C. at Corporate Board Member’s 16th Annual Boardroom Summit. Learn More >
The Leading Educational and Networking Event For Public Company Directors. April 1-3, 2020 | New York City
So what is BlackRock looking for from all of you this year? Specifically, Fink asks for publication of disclosures in line with industry-specific guidelines set up by the Sustainability Accounting Standards Board by year-end, “if you have not already done so.”
Again, while BlackRock’s officious tone can get your back up, it’s worth moving past that. By naming SASB as his go-to, he’s helping VHS topple Betamax in the market for disclosure frameworks. Already, State Street has listed SASB as their preferred ESG disclosure framework, joining a host of other asset managers, including CalPERS, CalSTRS, AXA, Bank of America, Fidelity and Goldman who SASB says are using their methodology. Accelerating SASB as the standard—and eliminating some of the confusion about what to disclose and how—is a good thing.
SASB, despite its flaws, has built an insightful, industry-specific framework for what and how to disclose that standardizes reporting, cuts out a lot of confusion and makes benchmarking simpler. The big upside here is that SASB doesn’t try to measure pipeline companies against windmill companies. It lays out standards for what various industries should measure on an assortment of environmental issues, so companies can be fairly benchmarked against each other. If SASB does become the standard, it will be a huge step forward from our current Wild West era, with few standards and unending bespoke requests for ESG information.
Fink’s other demand is a bit more complex. He wants companies to disclose their “climate related risks” that are in line with the Task Force on Climate-related Financial Disclosures. “This should include your plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized,” Fink writes. This is a huge, high-profile coup for the TCFD, especially since the U.S. pulled out of the Paris Agreement. BlackRock is effectively stepping in to replace the Trump Administration’s policy with its own.
Politics aside, as with SASB, the TCFD recommendations (available here) are different for different industries, and even if you’re a regional bank and not cracking ethane for plastics, there are specific disclosures you’ll need to report out. “Since these disclosures should be included in annual financial filings, the governance processes should be similar to those used for existing financial reporting and would likely involve review by the chief financial officer and audit committee, as appropriate.”
Broadly, the TCFD recommends that the disclosures include discussions about governance, (“understanding the role an organization’s board plays in overseeing climate-related issues as well as management’s role in assessing and managing those issues…”); Strategy (“Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning where such information is material.”); Risk Management (“Disclose how the organization identifies, assesses, and manages climate-related risks.”) and Metrics and targets (“Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.”).
Fink says he’s serious about his demands. “We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future,” he writes. “In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.”
We’ll see. Obviously, the devil is in the details, and there are plenty of those. But one can only hope that BlackRock’s muscle will at least help create some clarity—and unity—about what the investment community is looking for, so boards and CEOs can get back to all the other things they need to do. Like keep their companies growing.
