Every January, the business press eagerly awaits BlackRock CEO Larry Fink’s annual missive to clients. And each year, pundit interpretations range from labelling it as mere marketing hype to deeming it profound.

Usually I side with the skeptics, but this year’s letter is different. This one backs its words with specific action — and then some. It is indeed the “biggest news in a long time,” as climate activist Bill McKibben has called it. Here’s why.

This year the letter was in fact two letters, one from Mr. Fink to CEOs about the importance of sustainability and climate change to investment outcomes, and one from BlackRock’s Global Executive Committee to its clients. The latter explained BlackRock’s actions to integrate sustainability more deeply into its investment and risk management processes.

The shock value of the letters derived from their contention that the world is on the verge of a climate-driven “fundamental reshaping of finance,” as Mr. Fink’s letter was entitled. Some new measures to be incorporated into the investment and stewardship process also created shock value, as they represent radical departures from BlackRock’s previous policies, some dated as recently as last August.

The letter to clients discusses BlackRock’s 2020 priorities for engaging on various topics with companies and voting on resolutions at corporate annual meetings. This year, engagement priorities will be mapped to specific United Nations Sustainable Development Goals, such as Gender Equality and Affordable and Clean Energy.

These priorities are a far cry from those highlighted in BlackRock’s August 2019 Investment Stewardship Report. Just five months ago, climate risk came in fourth, behind such traditional governance topics as board effectiveness and diversity, corporate strategy and capital allocation, and executive compensation.

Earlier in January BlackRock announced that it would join a coalition focusing on sustainable investment, known as Climate Action 100+. Only last August BlackRock had issued a public explanation that it would not join Climate Action 100+ because it “duplicate[s] our own efforts or … may cause confusion for issuers.”

BlackRock has also willingly handed a victory to some of its toughest critics. The company has been lobbied lately by a grassroots group that calls itself “BlackRock’s Big Problem,” a coalition of organizations including Amazon Watch, Friends of the Earth, and Sierra Club. The group has demanded that BlackRock divest from fossil fuel companies that won’t change their practices, prioritize fossil fuel–free and deforestation-free funds, push investee companies to align their goals with the Paris Climate Agreement, and pressure industry laggards for greater transparency. The letter to clients outlines the steps that BlackRock will take to address, at least partially, all these demands.

Finally, and perhaps most importantly, the client letter contains a guide for climate and social activists to leverage the enormous financial power of large asset managers like BlackRock. Fink’s statement that it will seek more transparency with issuers by requiring that they make disclosures according the intergovernmental Task Force on Climate-related Financial Disclosures (TCFD) and the non-profit Sustainability Accounting Standards Board (SASB) shows the way.

But Fink’s letter goes even further. It puts TCFD and SASB disclosure front and center in BlackRock’s corporate engagement and voting policies. Essentially, BlackRock threatens to vote against management when shareholders file resolutions and against board directors standing for election if companies have not progressed on sustainability-related disclosure.

Forcing disclosure may seem innocuous, but the information thereby made public moves markets and provides ammunition for activists to sway public opinion. The prospect of flipping BlackRock to support human rights and environmental justice is a huge strategic opportunity for activists. For years they have tried unsuccessfully to get large asset holders to back their campaigns at corporate annual meetings.

Now that BlackRock will base its voting decisions, at least in part, on SASB and TCFD disclosure, shareholder resolutions can be crafted that hold the firm accountable to those commitments. This is already happening.

On February 13, the climate-related commitments in Fink’s letter will be tested. A shareholder resolution filed at the poultry processing firm Sanderson Farms will come up for a vote. The resolution asks for SASB-compliant reporting on the company’s climate-related water management risks. According to Sanderson’s annual meeting announcement, BlackRock has a 10% stake in Sanderson, making it the company’s largest shareholder. All eyes will be on BlackRock to see if it supports the resolution.

Since 2018, I have assisted the non-profit shareholder representative As You Sow in submitting proposals calling for companies to report on their social and environmental risks and progress in a SASB-compliant format. And it is working. Of sixteen proposals submitted, seven have already resulted in improved disclosure on topics such as diversity and inclusion, labor practices, conflict minerals policies, and water risks from climate change.

More civil society groups — from environmental NGOs to labor unions — should follow suit and take advantage of this opportunity by filing TCFD and SASB-based resolutions that BlackRock is on record as prioritizing.

In reaction to Fink’s letter, Anand Giradharadas, the silver-tongued public commentator, was particularly dismissive, tweeting this:

Until I see otherwise, here is the real significance of BlackRock’s announcement yesterday: It used a great splash of PR to reduce the social and reputational costs of its fossil-fuel investments, thus making those investments marginally more lucrative.

This time, Giradharadas may be missing the point. Of course, Fink’s letter may in part be just another piece of marketing collateral. But it also has the potential to alter the path of sustainable investment globally. And in this respect, it is a very big deal indeed.

 

Photo by Jacky Watt on Unsplash