Comment: BlackRock’s wording change on climate change

Policy changes on climate risk at the world’s largest asset manager reflect a changing global landscape on sustainability in the industry, says Morningstar's Lindsey Stewart.

Lindsey Stewart, Morningstar

BlackRock recently published its global stewardship principles for 2024, indicating how the world’s largest asset manager will address key governance and sustainability topics at thousands of its investee companies.

In recent years, intense scrutiny has fallen upon the firm generally – and its CEO Larry Fink personally – on sustainability topics, particularly climate change. Claims that BlackRock is overprioritising climate and social issues have intensified, and over the last two years the firm has increasingly emphasised that it does not wish to be seen to micromanage companies in this regard.

The firm’s falling support for environmental and social shareholder resolutions in the last two years occurs alongside a proliferation of such proposals, and similar declines in support by several large US asset managers.

As we enter the 2024 proxy season, the latest strong wording in its stewardship principles reads: “As one of many shareholders, and typically a minority one, BlackRock does not tell companies what to do. It is the role of the board and management to set and implement a company’s long-term strategy to deliver long-term financial returns.”

Of course, there are also those who believe the firm should be doing more on climate change and other sustainability issues, many of whom are unimpressed with what they perceive to be the firm’s backtracking, after putting “climate risk is investment risk” at the centre of its stewardship policy at the start of the decade.

Key themes unchanged, but subtle adjustments matter

This year, BlackRock has communicated that it continues to prioritise five key stewardship themes.

The firm has emphasised its engagement on “strategy, purpose, and financial resilience”, amid geopolitical tensions and a higher-interest rate environment. But it continues to highlight its other priorities: board quality, executive pay, company impacts on people, and climate and natural capital.

Wording changes in the firm’s policy on the latter are often subtle but give important signals. There is often much to digest in evaluating policy wording changes, and Morningstar will publish a study of several managers’ updated policies in the coming weeks.

But I have picked out some changes to one equivalent paragraph on climate risk in the last three years’ policies from BlackRock, which give important clues as to how asset managers’ stance on climate more generally is evolving.

A focus on investor preferences on climate two years ago

Here are BlackRock’s expectations on companies’ climate target-setting at the start of 2022: “We look to companies to set short, medium and long-term science-based targets, where available for their sector, for greenhouse gas reductions and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders.”

Two years ago, it was largely left to institutional investors to decide what material information to request from companies on climate matters. General requests for disclosure of greenhouse gas emissions and reduction targets were the norm, and requests for “science-based” assurances were becoming more common.

Over the course of 2022, there were major consultations on climate regulations and standards from the European Commission, the US Securities and Exchange Commission and the International Sustainability Standards Board (ISSB), prompting many asset managers to get much more specific about their climate expectations.

Refining climate expectations in 2023 as regulation develops

Reflecting this, BlackRock’s position had developed further by 2023.

“We look to companies to disclose short, medium and long-term targets, ideally science-based targets where these are available for their sector, for Scope 1 and 2 greenhouse gas emissions (GHG) reductions, and to demonstrate how their targets are consistent with the long-term economic interests of their shareholders.”

Notably, BlackRock – like many large US managers – decided not to insist on “Scope 3” disclosures covering emissions in a company’s value chain, due to “methodological complexity, regulatory uncertainty, concerns about double-counting, and lack of direct control by companies”.

Scope 3 remains the area of least agreement among regulators and the finance sector to this day.

The now-published European and international climate standards require Scope 3 disclosures. The SEC’s climate rule is delayed and there remains much doubt over whether the rule will mandate Scope 3 disclosures.

As a result, shareholder proposals requesting Scope 3 target-setting continue to divide opinion, with more to come in 2024.

Switching from investor preferences to regulatory expectations in 2024

That said, having finalised climate standards on the books has prompted an important change to BlackRock’s 2024 climate policy.

The new version reads: “Consistent with the ISSB standards, we are better able to assess preparedness for the low-carbon transition when companies disclose short, medium and long-term targets, ideally science-based where these are available for their sector, for Scope 1 and 2 greenhouse gas emissions (GHG) reductions, and to demonstrate how their targets are consistent with the long-term financial interests of their investors.”

While the thrust of the policy is largely unchanged this year, it is the first time the policy has been framed in terms of compliance with international standards, rather than merely institutional investor preference, as has been the case for the last four years.

This can be seen as a victory for the ISSB, with its first two standards having replaced the TCFD climate reporting framework that started becoming popular with investors five years ago.

But also, at a time of high politicisation of climate and sustainability matters, it is reasonable to expect that asset managers will seek to rely more heavily on the requirements of new standards and regulations rather than risk being perceived to tell companies what to do.