GILES RAFFERTY, Corporate Communications and Media Advisor

Every Government, company and shareholder must confront climate change according to Larry Fink, CEO and Chairman of BlackRock, the world’s largest asset manager. In his annual letter to CEO’s, Mr Fink says a rapidly growing awareness amongst investment market participants of the risks climate change poses to economic growth and prosperity will drive “a fundamental reshaping of finance”.

The BlackRock CEO believes investors are increasingly recognising that climate risk is investment risk and are looking to understand how changing climate policy will impact on prices, costs, and demand across the entire economy. According to Mr. Fink these questions will lead to a significant reallocation of capital in the near future.

Climate change and sustainability

In his letter, the BlackRock CEO says companies should address climate change as a key part of the broader reporting around how they manage sustainability issues to serve their full set of stakeholders. The broader reporting should extend to issues such as workplace diversity, sustainability of supply chain and data protection.

Mr Fink’s letter follows the publication last year of the fourth edition of the ASX Corporate Governance Council Principles and Recommendations. The updates to which call for the Boards of companies to ensure their risk management frameworks take account of Climate Change and that they make disclosures around all material exposures to environmental and social risks and how they are being managed.

Purpose driving performance

The updated ASX Principles and Recommendations also call for Boards to take responsibility for defining values that link a company’s purpose to its strategic goals and for preserving and protecting a company’s reputation with key stakeholders, such as customers, employees, suppliers, law makers and regulators. This recommendation is aligned with findings from the Hayne Banking Royal Commission which say that to preserve and enhance its reputation an entity must seek to do ‘the right thing’.

The BlackRock CEO also links a strong sense of purpose and a commitment to a broad range of stakeholders to a company’s prospects for growth, stating “purpose is the engine for long-term profitability.” FIRST Advisers has written several blogs on Purpose. Our most recent being ‘Corporate Purpose’.

The letter goes on to say that while no frame work is perfect, BlackRock believes the Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues. And when evaluating and reporting climate-related risks and how they are being managed the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on disclosure are valuable.

Sustainability standards

Mr. Fink says BlackRock will be asking the companies they invest in to publish a disclosure in line with industry-specific SASB guidelines by the end of the year or disclose a similar set of data. It is worth noting BlackRock is a founding member of the SASB Investor Advisory Group and also that there are 116 SASB Alliance members holding over $40 trillion in assets that support SASB’s standards¹.

SASB has developed a Sustainable Industry Classification System covering 77 industries with standards covering the ESG issues most likely to be material to investors in that industry. Within most industries covered by SASB there are about five or six ESG issues that have a meaningful impact on shareholder value creation, which lessens the burden of disclosing ESG risks.

The way SASB links material ESG issues and financial performance makes it a good framework for investors. FIRST Advisers has compared other reporting frameworks to SASB in a previous blog ‘ESG is mainstream on Main street’.

Reporting on Climate Change

The Task Force on Climate-related Financial Disclosures (TCFD) is developing voluntary, consistent climate-related financial risk disclosures across industries that allow companies to provide information to investors, lenders, insurers, and other stakeholders.

The Task Force considers the physical, liability and transition risks associated with climate change to help companies understand how to meet the growing demand to deliver decision-useful, climate-related financial information to investors. The evidence for this demand can be found in more than 370 investors, with more than $35 trillion in assets under management, that have committed to engage the world’s largest corporate greenhouse gas emitters² to strengthen their climate-related disclosures by implementing the TCFD recommendations.

Sustainable inclusive capitalism

In order to respond to this challenge from BlackRock, which is likely to be echoed by other investors, companies need to identify the ESG issues most likely to have material financial impacts on their business, identify the financial drivers relevant to each issue and provide solid guidance to investors on how their management of ESG risks will impact the company’s financial performance. As an integrated Investor Relations and Corporate Communications firm FIRST Advisers is well positioned to help companies with their ESG disclosures.

In the conclusion to Mr Finks letter to CEO’s he makes it clear the goal cannot be transparency on questions of sustainability for transparency’s sake. Disclosure should be a means to achieving a more sustainable and inclusive capitalism one where companies must be deliberate and committed to embracing purpose and serving all stakeholders in order to enjoy greater long-term prosperity.

^{1 https://www.forbes.com/sites/bobeccles/2020/01/22/understanding-the-financial-intensity-of-industry-specific-material-esg-issues/#48c9304c21b5}

^{2 https://climateaction100.wordpress.com/progress-report/}