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Climate Change Hero

Climate Change Blog

  • 29
  • March
  • 2017


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Corporate Boards Keep Watch: BlackRock Again Emphasizes Linkages between Climate-Friendly Policies and Market Value

Institutional investors are increasingly emphasizing linkages between protection of the environment and long-term shareholder value in an effort to both strengthen shareholder value and to encourage other investors to seek more environmentally-conscious policies in the companies in which they invest. These large asset managers are paying attention to environmental factors in their portfolio management and engagement decisions not just to benefit the world, they say, but to protect and increase company value. For the moment, climate-related aspects of environmental protection are receiving a particularly high degree of attention from environmentally-focused asset managers and investors.

The world’s largest asset manager, BlackRock, Inc., recently released a white paper titled “Adapting Portfolios to Climate Change” urging that “all investors should incorporate climate change awareness into their investment processes.” BlackRock has also published a report entitled “Engagement Priorities for 2017-2018,” in which improving climate risk disclosures made BlackRock’s “engagement priority list” alongside of more traditional areas of focus such as governance and corporate strategy. The white paper argues for prioritizing environmental issues in investments, not merely or even primarily to promote the welfare of the environment, but to improve the value of companies and the broader market over the long term. As institutional investors increasingly delineate value-related rationales for seeking environmentally protective policies, corporate boards should keep watch.

Putting considerations of climate change (and even divestment) to the fore

BlackRock’s white paper puts forth a number of important arguments about linkages between climate change and market value, all of which could spark newfound interest in these issues for investors. The chief ideas are as follows:

  • climate factors have been under-appreciated and underpriced;
  • climate change presents four market risks: physical, technological, regulatory and social;
  • the longer an asset owner’s time horizon, the more climate-related risks compound;
  • even short-term investors can be affected by regulatory and policy developments, the effect of rapid technological change or an extreme weather event;
  • all asset owners should take advantage of a growing array of climate-related investment tools and strategies to manage risk, seek better returns and improve their market exposure; and
  • investors should prepare for a future where governments have put a price on carbon emissions.

To “smooth the transition to a lower-carbon world” the white paper recommends that investors and asset managers seek lower carbon portfolios and consider engaging in divestment campaigns. BlackRock notes that “as a large asset manager, we prefer dialogue over divestment. The biggest polluters have the greatest capacity to move the dial if they modify their behavior.” BlackRock has signaled that it wants to engage companies on environmental issues, but will not rule out voting with its feet.

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Taking climate change seriously as a value detractor

BlackRock opens its white paper by setting out the premise that climate change will be a long-term detractor for the value of companies and industry if not proactively addressed by companies. Conspicuously expressing environmental issues in financial terms, the white paper avers that “The world is rapidly using up its carbon budget” and that the “sums at risk are enormous.” Urging investors to become more alert to new realities, the white paper cautions that climate change has been “underpriced.” BlackRock argues, in other words, that the market has not yet realized the risks posed to long-term value of companies by climate change, and investors have not yet sufficiently appreciated potential rewards to be gained by investing in new infrastructure and technology that will mitigate and proactively improve the environment.

“This does not mean giving up returns.”

The white paper maintains that investment managers should integrate environmental criteria into their investment criteria as a part of a long-term strategy to maximize returns. “Benchmarks that take climate into account,” the white paper argues, “have the potential to perform in line with or better than regular counterparts.” BlackRock concludes that global companies that have reduced their carbon footprints will outperform their competitors. The white paper notes that a company’s carbon footprint can be hard to measure because “[d]ata on climate factors are often incomplete, self-reported and not comparable.” This kind of observation helps to explain why investors are increasingly pushing for companies to disclose more information about greenhouse gas emissions and related environmental topics.

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BlackRock also created the following “rulebook” on making a corporate bond portfolio more climate friendly, which discourages investment in coal, fossil fuel reserves, and industries with high carbon or toxic emissions.

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Corporate boards should be paying attention

The fact that the leading institutional investor in the world by size of assets under management is now taking a more public position to assert a linkage between climate protection and shareholder value indicates that the trend of proactive, environmentally-focused company engagement by investors large and small is just beginning. Corporate boards must pay attention to these developments and be ready to manage them where they pose concerns. On the one hand, public companies need to be preparing for the prospect that investors will be studying environmental aspects of a company’s business beyond the bottom line and other business fundamentals. Companies in this situation need to make strategic decisions not only about how they conduct their operations, but also how they make disclosures about these operations.

On the other hand, public companies will need to keep watch over the specter of alignment between the preferences of top institutional investors and those of smaller shareholders that have been regularly petitioning corporations for environmental causes, for example through the mechanism of shareholder proposals submitted to company proxy statements through the Rule 14a-8 process. Public companies are already beginning to receive more and new kinds of demands from their smaller shareholders related to environmental protection initiatives and enhanced environmental disclosures. Shareholder proposals focused on environmental issues and placed on a company’s annual proxy statement have historically failed at annual meeting ballot boxes by significant margins, in large part because those proposals do not receive sufficient support from institutional investors. If more asset managers begin to take more seriously assertions about linkages between climate change and long-term company value, then shareholder proposals and other initiatives of shareholders, including those with comparatively small stakes, will almost inevitably have greater chances of success. It is also conceivable, if not more probable, that in the future, leading institutional investors will increasingly bring these environmental proposals to shareholder meetings themselves, without waiting for the smaller shareholders who have brought such proposals to meetings most often in recent years.

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Margaret E. Peloso

Margaret E. Peloso Partner