Dear CEOs: The Clock Is Ticking – 4 Actions to Take Now in Response to the New BlackRock Letter

Written By Elizabeth Saunders, Partner

January 27, 2021

Corporate executives tend to approach Larry Fink’s annual letter with some wariness. These notorious communications hit the mainstream when the BlackRock chairman somewhat controversially called for the end to short-term guidance and corporate “near-termism” in 2016. And Mr. Fink was the first to broadly introduce the idea of a “corporate purpose” that looks beyond the bottom line and expands a company’s raison d’être to encompass much more than shareholders’ returns.

Last year, Mr. Fink turned his attention to ESG and, in his typical style, began taking the key issues head-on. Now, in his newest letter released on January 26th, he has doubled down on his no-nonsense position on sustainability, laying out the most aggressive stance on climate change taken by any investment management CEO, ever. BlackRock is holding its portfolio companies – which include some 94% of all public companies in the U.S. – to the highest climate standards out there, specifically requesting that companies:

  • Report aligned with both the TCFD framework and SASB standards, a clear deviation from Mr. Fink’s traditional endorsement of single standard reporting.
  • Disclose specific plans for achieving net zero greenhouse gas emissions by 2050 including details on how the business model will be compatible with a net zero economy.
  • Increase stakeholder engagement around critical environmental goals and risks.

The “sustainability premium” keeps driving the stricter mandates.

BlackRock’s research illustrates that companies that articulate and act on a corporate purpose that maps back to sustainability ultimately perform much better than those that do not. During 2020, 81% of a globally-representative selection of sustainable indexes outperformed their parent benchmarks.  And the performance gap was even more pronounced during the first quarter downturn.

Furthermore, it is not just that broad-market ESG indexes are outpacing their non-ESG counterparts. The differential is happening within industries, from automobiles to banks to oil and gas companies. Individual companies with good ESG profiles are consistently showing up their less socially conscious peers, demonstrating that the sustainability premium1 is both real and significant.  

Start improving your ESG communications today.

Given the proof in the pudding, BlackRock likely will not be the only institutional investor to increase its expectations around ESG reporting and action. And for many investors, the grace periods for providing enhanced disclosure are coming to end. Companies of all sizes and across all industries need to move quickly to meet the new mandates. Here are four essential steps you can take right away:  

  1. Conduct a formal or informal materiality assessment during the first quarter of this year. Do not waste any time when it comes to determining what factors are most material to your stakeholders. At a minimum, talk to your employees, executives, investors, and top customers to gauge the issues you should prioritize. Your material topics list should also include factors that will impact your ability to meet lofty 2050 emissions goals.
  2. Get up close and personal with your reporting framework of choice. Determine how your company will report aligned with established frameworks. CDP, GRI, TCFD, and SASB are the frameworks most used by investors today. You can choose a single framework to shape your reporting. Better yet, take Mr. Fink’s direct advice and adopt both SASB and TCFD. Set a goal that is one or two years out to become fully aligned with the standard, and start making progress toward your goal every day. 
  3. Appoint and empower a sustainability committee. Put a team in charge of all things ESG, including meeting the requirements of your chosen reporting framework or frameworks. The committee should include a cross section of HR, legal, and operations professionals and it should have the authority to act on all ESG issues. An IRO is usually a great person to manage and motivate this team. As a first order of business, the team can get to work gathering the detailed information you will need to disclose.
  4. Give your ESG agenda some teeth with board oversight. Remember that this has to be more than lip service. And, do not assume this topic is covered under umbrella risk or corporate responsibility language. You will need to explicitly describe in your board charter the board’s role in linking ESG strategy to operations. Remember that many investors will want to see change before your company can reasonably accomplish it. In these cases, well-defined board oversight statements can help instill confidence that your organization is moving in the right direction. It can also help prevent votes against board directors, which many large institutional investors have stated will be forthcoming for organizations that lack proper board oversight of material ESG topics.

ESG expectations are only moving in one direction.

It is no longer reasonable to think ESG is a fad that will pass. Instead, more and more investors will issue more and more stringent mandates as it becomes increasingly important for companies to mitigate their risks and optimize their opportunities around critical environmental, social, and governance issues. Put your disclosure infrastructure in place now. And be well prepared to continuously improve both your ESG actions and your ESG communications in the months and years ahead.

If you are interested in learning more about how Clermont Partners can help prepare your company’s ESG disclosures, contacts us today.

1 BlackRock: Based on a comparison between the MSCI ACWI Focus ESG Index and the MSCI ACWI Index from January 2020 to November 2020. The return analysis attributed outperformance to the ESG index’s increased exposure to companies with high ESG scores and reduced exposure to companies with low ESG scores, within each industry. This ESG index was selected for its industry-neutral construction and global exposure. Results may vary for other index comparisons.

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