BlackRock Envisions a Net-Zero Future: How Can Boards Prepare?

Last spring, many wondered whether climate change would take a back seat to the urgent concerns of the COVID-19 pandemic. Instead, as BlackRock chief executive Laurence D. Fink wrote in his Jan. 2021 letter to CEOs, just the opposite took place.

Investment in sustainable assets skyrocketed, and those assets substantially outperformed market and industry averages over the past year. Indeed, in his latest letter, Fink doubled down on BlackRock's assertion that climate risk is investment risk.

For many, living through 2020's transformative global crisis was what finally brought home the existential threat of climate change. The pandemic showed just how vulnerable our economy and society are to systemic shocks—shocks that can send the global economy into the worst depression since the 1930s, lay bare the holes in our social safety nets, and exacerbate economic and social inequality.

And many companies responded to the growing climate crisis. Throughout 2020, the number of the world's largest companies who adopted net-zero emissions targets tripled from the end of 2019 to 1,500. In Jan. 2020, BlackRock itself joined the Climate Action 100+, the biggest global investor engagement initiative, which currently comprises 545 investors with a collective $52 trillion in assets under management and calls on the world's biggest climate emitters to become net-zero businesses.

Now, in his 2021 letter, Fink calls on companies to do more than set net-zero targets—he challenges them to plan for a net-zero future. Portfolio companies were asked to disclose plans for how their business models will thrive in a net-zero economy and to disclose the role of the board in reviewing such plans. Disclosure standards embraced by BlackRock include those from both the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board, though Fink hopes that a single global standard will eventually prevail.

Moreover, for the coming year, BlackRock will continue to put sustainability at the center of its investment practices by doing the following:

• releasing a “temperature alignment metric” for public equity and private bond funds, so that investors can ensure their portfolios are consistent with specific climate scenarios, such as limiting warming to 1.5 degrees Celsius;

• incorporating climate impacts into capital market assumptions when building portfolios;

• implementing a “heightened scrutiny model” for carbon-intensive investments in actively managed portfolios, closely monitoring these companies for climate-related risks and flagging vulnerable assets for potential exit;

• developing new investment products with explicit temperature alignment goals;

• supporting shareholder proposals that seek to improve climate-risk management; and

• holding laggard companies accountable by voting against director reelection.

The role of corporate directors is central to BlackRock's increasingly active stance on climate change, and on environmental, social, and governance (ESG) issues more broadly. In its 2021 Stewardship Expectations, the investing giant emphasized that it will “expect boards to shape and monitor management's approach to material sustainability factors in a company's business model.”

What is a board to do? Clearly, climate change is no longer a niche issue. Mr. Fink's letter puts directors on notice that they are responsible for proactive oversight of a company's climate strategy and disclosure. While they have always had a fiduciary duty to oversee material risks, responsibility for climate risk is even clearer now that major investors have so explicitly called for it.

To respond to these investor mandates, boards must build their climate competence—and more broadly their ESG competence—quickly, before shareholder resolutions remove members from their posts. As detailed in the Ceres report Lead From the Top, an ESG-competent board is one that:

1. integrates knowledge of material sustainability issues into the board nominating process to recruit directors that ask the right questions,

2. educates all directors on material sustainability issues to allow for thoughtful deliberation and strategic decision-making at the board level, and

3. engages regularly with external stakeholders and experts on relevant sustainability issues.

It is important to make the distinction between an ESG-competent director and an ESG-competent board: An ESG-competent director has relevant expertise in or exposure to the material environmental, social, and governance issues that affect the company. The distinguishing feature of an ESG-competent board, on the other hand, is its ability to engage thoughtfully on material social, environmental, and governance issues as one cohesive deliberative body.

To achieve ESG competency at the full-board level, all directors need to be educated on material sustainability issues. This could include attending conferences, reading reports, participating in executive education programs (such as those offered by Ceres and NACD), and inviting experts to present at board meetings.

Ongoing education may seem daunting for directors who lead busy lives and have many urgent priorities, but board-level ESG competence forms the backbone of ESG risk management. As we have witnessed during the COVID-19 pandemic, a social issue such as public health can quickly become a systemic market risk—one that deeply impacts corporate strategy and operations, and demands the attention of all directors.

The COVID-19 pandemic caught the world off guard. Society has since mobilized to produce multiple effective vaccines in less than a year, but millions of lives were lost in the meantime. Climate action demands a similar level of urgency if we are to achieve climate stabilization with minimal environmental, economic, and even human life losses along the way. Every corporate board should be thinking about how to contribute to a net-zero future, and how to thrive within one. That world is coming, whether we are ready for it or not.