Each year, Laurence Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, sends an open letter to corporate CEOs. Last year, in his 2020 letter to CEOs, Mr. Fink asserted that “[c]limate change has become a defining factor in companies' long-term prospects” and that “sustainable investing is the strongest foundation for client portfolios going forward.” He called on the companies that Blackrock invests in on behalf of clients to make disclosures in accordance the Sustainability Accounting Standards Board (SASB) standards for their industry and to disclose climate-related risks in line with the recommendations of the Task Force on Climate-Related Disclosures (TCFD). See BlackRock’s CEO Calls for Portfolio Companies to Make SASB and TCFD Disclosures January 2020 Update.
This year, Mr. Fink has a step gone further. In his 2021 letter to CEOs, he asks that companies “disclose a plan for how their business model will be compatible with a net-zero economy” by 2050. (A net-zero economy is an economy that emits no more carbon dioxide than it removes from the atmosphere.) “We expect you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.” He also reiterates the importance to investors of disclosure concerning company ESG performance: “Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them. (While the world moves towards a single standard, BlackRock continues to endorse TCFD- and SASB-aligned reporting.)”
Blackrock has signaled that it is prepared to use its leverage as an investor to back up Mr. Fink’s requests. Blackrock’s 2021 letter to clients (released simultaneously with Mr. Fink’s letter to CEOs) states: “Where we do not see progress in this area [i.e., the 2050 net-zero economy plan], 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, 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.”
Because of BlackRock’s importance as an institutional investor, public company boards need to seriously consider Mr. Fink’s requests. Transition to a net-zero economy, even over a 30-year period, will have major ramifications for the business models of most companies. For audit committees specifically, BlackRock’s insistence on SASB and TCFD disclosures may significantly affect their work. Demands for more ESG disclosure are increasing, and some form of regulatory mandate is likely. Audit committees should review their company’s ESG disclosures and discuss with management bringing the company’s reporting into conformity with SASB and TCFD. They should also consider management’s plans to implement procedures and controls to ensure the accuracy of these new types of disclosures.