Companies should disclose a plan explaining how their business model will operate in a net-zero carbon economy, says Larry Fink, CEO of BlackRock, in his annual letter to business leaders.
The boss of the world’s largest asset manager said companies reacting slowly to climate change will see their valuations suffer and could be dropped from BlackRock’s active portfolios.
His comments will further push companies to announce net-zero emissions targets, which have surged in number over the last year.
Businesses are under pressure from regulators, investors and other stakeholders to show how they are aligned with the Paris Agreement climate goals, which call for global warming to be restricted to well under 2ºC this century.
BlackRock’s roughly $8.7 tn in assets makes it a major influence on public companies worldwide. As a result, Fink’s annual letter to CEOs has become a key reference point for corporate boards as they assess investor attitudes to sustainability.
‘Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net-zero greenhouse gas emissions by 2050,’ writes Fink in the letter.
‘We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.’
In a separate letter to clients, Fink outlined some of the changes taking place within BlackRock’s investment business to support the move to a low-carbon economy. Among the measures, he announced a ‘heightened-scrutiny model’ for active portfolios.
This model will include a focus group of companies considered to have ‘significant climate-related risk’ due to high emissions, a lack of preparation for net-zero goals or low engagement with BlackRock’s stewardship team.
‘Where we do not see progress in this area, and in particular where we see a lack of alignment combined with a lack of engagement, we will not only use our vote against management for our index portfolio-held shares [but] we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns,’ says Fink.
In the letter to CEOs, Fink also backs a move to a single global reporting standard for sustainability disclosures. ‘We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns,’ he writes.
While such a standard is being developed, Fink says BlackRock will continue to endorse companies’ use of the recommendations of the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board (SASB).
Reporting and standard-setting organizations are already making progress toward a more unified approach to sustainability disclosure.
Last September, five bodies – CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council and SASB – pledged to work together for a comprehensive solution.
In December they released a prototype climate-related financial disclosure standard – using inputs from their different frameworks and standards – to demonstrate how sustainability can affect enterprise value.
Alongside climate change, Fink’s 2021 letter addresses the increased focus on social issues brought about by the Covid-19 pandemic and Black Lives Matter protests. He requests that companies disclose information on how their hiring processes support building a diverse and inclusive workforce.
‘While issues of race and ethnicity vary greatly across the world, we expect companies in all countries to have a talent strategy that allows them to draw on the fullest set of talent possible,’ he writes.
‘As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity and inclusion, as appropriate by region.’