World’s largest investor to vote out directors failing to act on climate risks and mitigation

BlackRock, which is accountable for assets totalling £4.2trn, has published its engagement priorities for the next two years covering governance, corporate strategy, compensation, human capital and climate change. The firm has stated that it will base re-election decisions of certain directors based on a company’s ability to mitigate associated risks.

“For directors of companies in sectors that are significantly exposed to climate risk, the expectation will be for the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk,” a company statement reads. “Assessments will be made both through corporate disclosures and direct engagement with independent board members, if necessary.

“Ultimately, the board is responsible for protecting the long-term economic interests of shareholders and we may vote against the re-election of certain directors where we believe they have not fulfilled that duty, particularly in markets where shareholder proposals are not common.”

Blackrock documents associated with engagement priorities cite letters to chief executives in both 2016 and 2017 from BlackRock’s CEO Larry Fink, in which Fink stated “while we are patient investors, we are not infinitely patient”.

BlackRock has warned that companies failing to adopt climate risk awareness strategies could be subjected to “material economic disadvantage”, which would likely impact shareholders. The firm claims that, if these disadvantages aren’t addressed, it will consider voting against the re-election of certain board directors.

Climate risk has been identified as one of the “key” risks that BlackRock’s Investment Stewardship team will focus on in 2017. The team engages with about 1,500 companies annually on mitigation strategies and has contributed to former New York City Mayor Michael Bloomberg’s Task Force on Climate-related Financial Disclosures (TCFD).

In December, the TCFD published its recommendations on how businesses should disclose climate-related information alongside traditional financial filings. Notably, the TCFD called on businesses to promote senior management engagement on climate-related issues.

BlackRock has outlined its willingness to engage with companies over the TCFD recommendations in an attempt to encourage more climate-related disclosures. The investor believes that “climate risk is a systemic issue”, and that “disclosure standards should be developed that are applicable to listed companies across each market and, ideally, that are globally consistent”.

Taking stock

As fears mount that next financial crisis will be climate-related, Blackrock is calling for companies to build environmental, social and governance (ESG) management into their business models.

External pressure from stock exchanges could soon enhance climate-reporting standards. The London Stock Exchange (LSE) is among 21 of the world’s stock exchanges that were rumoured to introduce sustainability reporting standards last December.

For the European market, the Directive on disclosure of non-financial and diversity information looks set to come into force in 2018. That legislation would require around 6,000 companies listed on European Union (EU) markets, or operating in banking and insurance sectors, to disclose environmental information on a regular basis.

Matt Mace