BlackRock was busy this week, publishing its 2022 Engagement Priorities. Liz provided her thoughts on these here, so I am going to focus on their commentary on Climate Risk and the Global Energy Transition. As has been expressed directly by BlackRock CEO Larry Fink himself previously, the firm’s investment and engagement strategy for climate is focused on the long term and through a transition lens:
“We recognize that the energy transition will not happen overnight, and that it is already uneven… we seek to understand companies’ plans for how they intend to deliver long-term financial performance through the energy transition, consistent with their business model, sector and geography.. At BlackRock, we expect to remain long-term investors in carbon-intensive sectors because these companies play crucial roles in the economy and in an orderly energy transition…
Equally, we are interested in hearing from companies on their decarbonization investment opportunities. For some, this may mean meeting a growing consumer demand for low-carbon versions of products and services. For others, it may mean investing in and developing current and future low-carbon technologies. Such emerging technologies are critical to the rate at which emissions can be reduced and may well provide fresh opportunities for companies to expand on business lines, grow resources, and provide clean energy aligned with net zero goals. Companies that can effectively realize such opportunities are likely to better navigate the energy transition…”
The firm also laid out a list of considerations for all companies, and additional ones for companies in carbon intensive industries. The top three general considerations reflect board oversight and business opportunity development:
“- The board and management assess climate risk and possess knowledge appropriate to the company’s business to ensure adequate consideration of climate-related risks and opportunities in relation to the company’s strategy and operations
– The board and management consider the impacts of climate risk and the energy transition on the company’s long-term performance, including opportunities to consider energy supply, innovation, and diversification of energy sources
– The company considers shifting demand for goods and services due to changes in regulation, technology, and/or consumer preferences that may result from the global energy transition”
Our view: Too many companies are grasping at near term marketing and risk mitigation approaches trying to “sprinkle ESG fairy dust” on their shares (my phrase). BlackRock is going to evaluate Board accountability/participation on climate matters and business transition opportunities that show up as fundamentals, not fairy dust.
CDP. This article from Clermont Partners provides a quick summary of CDP’s changes for this year.
“Below are 6 main updates to the 2022 CDP Climate Change Questionnaire that companies should take note of this year:
1. Climate Oversight on the Board
2. 1.5 Degree Scenario Analysis
3. Climate and Supply Chain Management
4. Target Setting
5. Scope 3 Emissions
Specific to point #1, Clermont says
“CDP added a new question to section C1 – Governance. This new question asks if the organization has at least one board member with competence on climate-related issues. Though CDP leaves the definition of competence open for interpretation and explanation by the reporting company, what they are requesting is a sign of the company’s commitment to understanding and responding to climate-related risks, opportunities, and impacts. Many boards boast diversity of skill, but CDP has given another area of expertise for them to consider when selecting new director nominees.”
Not only is CDP adding this question to their surveys, they present evidence of the need in their new report Are Companies Being Transparent in Their Transition? Among CDP’s major conclusions indicating the corporate climate planning needs a bit more knowledgeable internal professional skepticism and oversight:
“In 2021, 13,100+ organizations disclosed to CDP and our analysis found that only one-third of these (4,002) reported developing a low-carbon transition plan…
About 4,800 organizations disclosed how climate-related risks and opportunities influenced their strategy, but only about half of these companies also reported that they have developed a low-carbon transition plan…
While almost all organizations disclosed emissions reduction targets, less than 35% are credible or validated by the Science Based Targets initiative (SBTi).”
Our view: While many companies are focused on Board diversity, expertise (or at least “competence”) of Directors in technical ESG topics is becoming more of an issue and gaps will be more apparent. Looking at what CDP is asking for this year, along with BlackRock’s expectations of Board participation in ESG oversight, companies need to consider prioritizing credible and substantive ESG capacity building for Directors. A 30-minute on-line course may not be sufficient.