GC Insights: BlackRock Issues Letter to CEOs

Many of our attorneys have served as General Counsel to public and private companies and other organizations. This is part of a series written by our former GCs. The series will explore issues of practical significance to GCs and others responsible for an organization’s legal affairs. Please send us your feedback and topic suggestions.

John B. Wright, II was Senior Vice President, General Counsel, and Secretary of the Triumph Group, Inc.—an NYSE-traded supplier of aerospace systems and support—for 15 years.

BlackRock’s Chairman and Chief Executive Officer Larry Fink issued his annual letter to CEOs and a letter to clients on January 14, 2020. Both letters focused on the importance of climate change and sustainability in the evaluation of the companies in which BlackRock invests, asserting that the rapidly changing awareness of the significance and lasting impact of climate change is leading to “a fundamental reshaping of finance” and “a significant reallocation of capital.”

In his letter to CEOs, Fink calls out several initiatives BlackRock is pursuing to respond to these changes:

• Making sustainability integral to portfolio construction and risk management;
• Exiting investments that present a high sustainability-related risk, such as thermal coal producers;
• Launching new investment products that screen fossil fuels; and
• Strengthening BlackRock’s commitment to sustainability and transparency in its investment stewardship activities.

To provide investors and others with a clearer picture of how companies manage matters related to sustainability, BlackRock is calling for improved disclosure as well as action. In particular, BlackRock endorses the disclosure frameworks set out by the Sustainability Accounting Standards Board (SASB) for sustainability-related information and the Task Force on Climate-related Financial Disclosures (TCFD) for climate-related risks. Moreover, this year, BlackRock is asking the companies they are invested in to do the following, if those companies have not done so already:

1. Publish a disclosure in line with industry-specific SASB guidelines by year-end (or a similar set of data relevant to the particular business); and
2. Disclose climate-related risks in line with the TCFD’s recommendations.

The letter to CEOs acknowledges that response to these concerns will require time, but suggests the implementation will be quicker than currently expected. To lend force to these recommendations, the letter further states: “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.”

In view of BlackRock’s significant equity ownership position across the economy and the likelihood that other significant investors may follow suit, we believe companies would be well-advised to become familiar with the SASB and TCFD disclosure frameworks, be prepared to explain their approach to such disclosure, and consider whether further responsive action or disclosure is appropriate. 

Private companies should also consider such sustainability and climate-related issues in strategic planning and risk management, not only for their intrinsic value but also because doing so could help improve the company profile in the event of a transaction.