In his annual letter to CEOs in 2020, Larry Fink, BlackRock’s CEO, wrote that “climate change has become a defining factor in companies’ long-term prospects…..investors are increasingly….recognizing that climate risk is investment risk.” He called this “A Fundamental Shaping of Finance.”
Unfortunately, since then, BlackRock has backpedaled its position on climate change in reactionary response to backlash from fossil fuel interests. In 2022, rather than integrate climate risk management strategies across its portfolios, it launched its Voter Choice program, a system that offers eligible clients the opportunity to opt into alternative proxy voting policies. We felt it was an excuse to abdicate responsibility for climate risk management under the guise of increasing client customizations.
This summer, in response to outcry from investors concerned about climate risk and the low carbon transition, BlackRock has launched a decarbonization proxy voting and engagement policy for clients “who explicitly direct BlackRock to invest their assets with decarbonization investment objectives.” We believe that this policy will be a BlackRock-owned climate-focused policy option available within the Voter Choice platform.
The policy differs from BlackRock’s benchmark approach to voting and engagement in a few key areas: it accounts for value chain (Scope 3) emissions in determining the biggest emitters, outlines measures for keeping directors accountable on corporate climate strategy, highlights that it may engage on issues like natural capital and community impacts, and assesses a company’s alignment with 1.5C. While these metrics are a notable improvement compared to BlackRock’s benchmark policies, questions remain about how BlackRock actually plans to execute some of the outlined principles. For example, what metrics will BlackRock use to assess 1.5C alignment? When and how will BlackRock engage regarding impacts to communities and nature?
The policy also falls short on several key climate metrics. Most notably, the policy seems to maintain BlackRock’s benchmark approach to stewardship, which focuses on governance-based processes and improving disclosures, shying away from calls for the adoption and implementation of specific climate strategies. For a stewardship policy intended to advance clients’ explicit decarbonization objectives, failing to hold companies accountable for developing transition plans, setting comprehensive (ie inclusive of Scope 3) greenhouse gas reduction targets, and supporting shareholder resolutions that ask companies to adopt decarbonization strategies significantly undermines those client-directed objectives.
Similarly troubling, the policy maintains BlackRock’s focus on idiosyncratic (or company-specific) risks, rather than addressing risks to entire portfolios. The financial risks posed by climate change are systemic, portfolio-wide, and un-diversifiable. Therefore, mitigating climate-related risks for investors comprehensively requires evaluating, engaging, and voting in ways that protect the value of portfolios overall, more than maximizing the returns of every single company. In the low-carbon transition, some companies or sectors may need to shrink or accept lower margins for the sake of overall financial stability and long-term market performance. However, BlackRock’s policy focuses on minimizing disruption to individual companies to ensure they can “deliver financial returns throughout,” rather than focusing on prioritizing decarbonization and risk mitigation, which clients for this policy need.
In short, the policy has some major shortcomings, but the advent of any policy is perhaps the first step in BlackRock bringing responsible climate risk management to its investment and stewardship strategies. It should be noted, that while BlackRock brands these as “decarbonization” strategies, we – and scores of responsible investors – firmly see these measures as responsible strategies for risk management for growing idiosyncratic and systemic climate-related risks. These approaches should be part and parcel of BlackRock’s benchmark policy, not relegated to an opt-in strategy for certain clients.
Clients of BlackRock should, at a minimum, seek clarity from BlackRock about why key metrics or accountability measures were built into an explicit decarbonization strategy and, at best, should engage with BlackRock to strengthen the policy for future interactions. For those interested in reading a more in-depth analysis of the policy or who are seeking recommended engagement questions, please read our memo.