In January, BlackRock CEO Larry Fink’s annual letter to company investors took on an unambiguous climate twist. At the time, that letter looked to us at Adamantine like the global tipping point for investor prioritization of climate — and it still does. Since January, the world has been upended; but BlackRock has stayed the course set in Fink’s letter. Our crystal ball says that oil and gas companies need to know how BlackRock is thinking about climate to stay ahead of the returning ESG pressure.
And, as we discussed in our last installment, racial equity and justice are now top of mind for your investors. BlackRock has made significant commitments to change their internal and external accountability — as befits the largest asset manager in the world — on diversity, equity, and inclusion. Even if BlackRock doesn’t invest in you – this still matters: the crystal ball says your investors will soon follow suit with similar expectations.
Both of these things are true:
- Investors in both public and private companies are focused on value and returns.
- The pressure from investors on climate and carbon is going to return soon and get real — and there will be no turning back.
What you need to know:
So much has subsequently happened in 2020, that it’s worth looking back at BlackRock’s January announcement to assess the key pieces of information you need to know.
The letter and where it came from. First, what the letter said:
- BlackRock asked the companies they invest in to do the following in 2020:
- Publish a disclosure in line with SASB guidelines by year-end;
- Disclose climate-related risks in line with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations; and,
- Include a plan for operating under a Paris Agreement scenario (i.e., policy that limits mean global warming to less than two degrees Celsius from preindustrial times).
- Quote of note from the letter: “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.”
This letter didn’t come out of a black hole. BlackRock had been both signaling this move and falling under increasing external pressure. Highlights include:
- BlackRock a) was a founding member of the TCFD, b) was also a signatory to the United Nations’ (UN) Principles for Responsible Investment, c) signed the Vatican’s 2019 statement advocating carbon pricing regimes, and d) participated in the founding of the Climate Finance Partnership.
- In conjunction with the January announcement, BlackRock joined Climate Action 100+.
- There had and has been a focused activist campaign targeting BlackRock’s investments and shareholder votes: BlackRock’s Big Problem. There’s also been a long list of other pressures, including protesters outside their London office, nuns filing a joint shareholder motion before their annual meeting, a letter from Congress … and the list goes on.
- BlackRock isn’t alone. In February, Barclays is facing its own investor revolt over climate.
How BlackRock has since operated. In recent months (in the middle of the pandemic), BlackRock began implementing their emerging sustainability strategy, including increasing pressure on major U.S. oil companies:
- In May, because of Exxon’s “insufficient progress” on climate-risk reporting and related action, BlackRock voted against the reelection of two Exxon board members and for the establishment of an independent chair. Citing Exxon’s deficiency in climate risk management as a governance issue undermining “long-term financial stability,” BlackRock said: “Voting against the re-election of the responsible directors is often the most impactful action a shareholder can take.”
- Against the recommendations from Chevron’s board, BlackRock voted in favor of a successful resolution obligating the company to disclose their political and lobbying spending related to climate change. According to BlackRock, Chevron must provide greater transparency to “help articulate consistency between private and public messaging for managing climate risk and transition to a lower-carbon economy.”
- Just last week, BlackRock voted to remove the chief of AB Volvo for the company’s failure to adequately disclose its climate risks.
BlackRock’s amplified expectations on racial equity. More recently, BlackRock has made announcements amplifying its expectations that portfolio companies will foster racial equity, diversity, and inclusion:
- In a LinkedIn post, Fink reaffirmed BlackRock’s commitment to fostering a more inclusive work environment and stated the company’s and their client’s responsibility to “work together to build a more fair and just society.”
- Along with other prominent investment firms and major oil companies such as Shell Canada, BlackRock signed a letter from the Business Council of Canada condemning racism and declaring each signatory’s commitment to promoting inclusion and diversity in their company.
- In late June, BlackRock released the firm’s three-area action plan for promoting diversity and inclusion. After citing research showing that companies with strong sustainability ratings and diverse workforces deliver better returns, BlackRock declared the firm’s commitment to social justice and racial equality through their “investment and stewardship activities.”
- This fall, BlackRock will assess how their portfolio companies have responded to the pandemic as well as the associated issues of racial equality. They have foreshadowed that they will refresh their expectations “for human capital management and how companies pursue sustainable social practices” by portfolio companies.
- These two documents include numerous areas relevant for your leadership:
- Linking performance to executive compensation to promote board accountability;
- Voluntary and involuntary turnover on various dimensions, including the factors that may drive that turnover;
- Efforts in place to recruit diverse talent and create an inclusive workplace for all individuals; and
- Statistics on gender and other diversity characteristics as well as promotion rates for and compensation gaps across different employee demographics.
It matters because:
Investment in your company is happening amid this increasingly climate-dominated financial conversation. Your investors are still focused on returns. And they are now going to look at social risks from two fronts: 1) how they affect your bottom line, and 2) how they affect their ability to secure their own investors.
Your proactive management of climate and racial equity — or lack thereof — are now front and center.
The critical mistakes not to make:
Moving too slowly and making too many excuses. The juggling act of pandemic logistics, cash flow, and new racial equity and justice priorities are testing leadership. Our crystal ball says that the energy future leaders are rising to meet this moment now, not when the price of oil recovers.
Seize the day: Successful companies will:
- Lead from the C Suite. BlackRock aggressively followed up on their January ESG announcements, even mid-pandemic. We expect it to do the same on racial justice and equity. That means you now — urgently — need to get one step ahead of your investors’ demands. Don’t leave this to IR or EHS — this work needs to be executive driven, with full board support.
- Accelerate your ESG strategy. At Adamantine, we have been advising ESG baby steps for companies not quite ready to take the leap — in particular, recommending the installation of a three-year strategy to get to full ESG analysis and sustainability commitments. The BlackRock announcement really does change everything. We suggest accelerating to a two-year strategy — meaning, spend 2020 preparing for your first full report and 2021 moving into ESG leadership. Reach out if you need help developing a pragmatic, proactive strategy.
- Get serious about racial equity, justice, and inclusion. We heard back from many of you after our last installment focused on this issue, and we know that companies are working on these efforts in earnest.
- Talk to your institutional investors. Reach out to those private equity funds backed by Institutional Investors. They are sorting out these pressures too — which gives you the opportunity to work with them to craft an ESG strategy that will meet their needs as well as those of your other stakeholders.
Investor pressures are coming in hot. So reach out: We can help your team devise your comprehensive strategy. As always, hit reply and let me know what your investors are saying. If this post was forwarded to you, you can subscribe here.