BlackRock’s New Push for Standardized ESG Disclosure
By Daniel L Goelzer
Disclosure concerning environmental, social and governance (ESG) performance has become routine for most public companies. The problem is that there is little standardization. Each company is free to disclose whatever it thinks most relevant — or that puts its management in the best light. As a result, investors who want to use ESG factors in their decision-making — and that is the publicly-stated intent of virtually all major institutional investors — find existing disclosures difficult to integrate into their models. Consistency and comparability across companies, which are essential to decision-useful disclosure, are too seldom features of today’s ESG reporting landscape.
However, the movement toward more investor-friendly, standardized, corporate disclosure has just received a major boost. On January 14, Laurence Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, released his 2020 letter to CEOs. In the letter, he announced that BlackRock, which has nearly $7 trillion in assets under management, expects the companies it invests in to conform their disclosures to the recommendations of the Sustainability Accounting Standards Board (SASB) and of the Task Force on Climate-Related Financial Disclosure (TCFD). This is not just a friendly suggestion. BlackRock will use its formidable proxy voting power to encourage companies to comply.
BlackRock’s position rests on its view of investment fundamentals. The theme of Mr. Fink’s letter is that climate change is “a defining factor in companies’ long-term prospects” and that, as a result, “we are on the edge of a fundamental reshaping of finance.” Therefore, as a fiduciary to its clients, BlackRock believes that it has an obligation to consider the impact of climate change (and other ESG issues) in its investing. “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
Putting this thesis into practice requires that BlackRock have access to material information regarding the risks and opportunities that ESG issues present to the companies in which it invests. In Mr. Fink’s words, investors “need a clearer picture of how companies are managing sustainability-related questions.” While emphasizing the importance of climate change data, he wants these disclosures to also encompass “how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data.”
To provide this clearer picture, Mr. Fink expects companies to follow SASB’s ESG disclosure standards and the TCFD’s climate disclosure recommendations. SASB is an independent, non-profit standard-setter. Its mission is to facilitate disclosure by companies to investors of material, decision-useful ESG along five dimensions — environment (which includes climate change); social capital; human capital; business model and innovation; and leadership and governance. SASB has issued industry-specific disclosure standards for 77 industries.
The TCFD was formed by the Financial Stability Board (FSB) to address the impact of climate change on companies and on the global financial system through disclosure. In 2017, the TCFD issued recommendations intended to help companies identify and disclose the potential financial impacts of climate-related risks and opportunities on their businesses. The SASB standards are complementary to the TCFD recommendations, and SASB has published a TCFD implementation guide.
Although many groups have issued disclosure recommendations that address particular ESG issues, SASB and the TCFD are the most closely aligned with the needs of investors. Mr. Fink observes that, “While no framework is perfect, BlackRock believes that [SASB] provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework.”
BlackRock wants companies it invests in on behalf of clients to publish disclosure in line with SASB’s industry-specific guidelines before the end of 2020. BlackRock will use these disclosures to evaluate how well its investees are managing and overseeing ESG risks and planning for the future. “In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk.” In those cases, BlackRock will seek to hold directors accountable. “Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, 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.”
The commitment to use BlackRock’s voting power to compel companies to enhance their ESG reporting — and specifically, to implement the SASB and TCFD recommendations — will add considerable momentum to the adoption of these investor-oriented disclosure frameworks. Sustainability reporting is, and for the foreseeable future will probably remain, voluntary. However, public companies that fail to report against a widely recognized set of ESG standards like SASB’s are likely to attract unwanted attention as outliers. In addition, if BlackRock has its way, their directors may have difficulty in keeping their board seats. As a result, the days of sustainability disclosures that aren’t comparable or consistent across companies may be waning.
The author is a member of the Sustainability Accounting Standards Board.
