In the Shadows of the COVID-19 Pandemic – BlackRock’s ESG Expectations

Although the COVID-19 pandemic and the resulting sharp economic pullback has caused BlackRock to temporarily pause the prioritization of its ESG focus for issuers on climate change and related risk, Public Company boards should not assume that the pandemic gives them a permanent reprieve from BlackRock’s expectations of enhanced climate-related reporting.  BlackRock CEO Larry Fink’s January announcement naming climate change as a “structural, long-term crisis” requiring “[c]ompanies, investors, and governments [to] prepare for a significant reallocation of capital” has not been rescinded, but simply paused to allow companies to best respond to any immediate needs related to the pandemic.

Fink’s January announcement has caused many companies to wonder exactly what BlackRock expects to see in climate-related disclosures and reports. While BlackRock has identified the Sustainability Accounting Standards Board (“SASB”) sustainability accounting standards and the Task Force on Climate-related Financial Disclosures (“TCFD”) framework as the formats to utilize, and has provided key performance indicators for its priorities, most companies are still looking for more direction on what is feasible in the current environment for Environmental, Social and Governance (“ESG”) disclosure targets by the end of 2020. In light of the pandemic and the resulting economic issues, companies should enhance their reporting to include public health issues. While the SASB and TCFD standards do not focus specifically on public health risks, they provide a useful framework for a company to use to address its strategy relating to pandemics and public health.

Companies may be tempted to delay addressing BlackRock’s ESG concerns in light of the COVID-19 pandemic and the resulting economic crisis. However, at the beginning of this proxy season, BlackRock did withhold voting for board members of the most relevant board committees or the most senior, non-executive director in order to hold boards accountable for certain companies with inadequate disclosures on climate or sustainability issues. Companies would be well served to continue their sustainability and similar reports regarding climate change and other ESG matters and should consider addressing public health issues if possible. Since companies must articulate their strategy for addressing COVID-19 in the MD&A discussions of their quarterly reports on Form 10-Q, if a company believes their ESG strategies are giving them a competitive advantage with regard to responding to COVID-19 and its aftermath, such advantage should be noted. Such disclosures should be well received by BlackRock and other ESG-concerned investors.

While BlackRock stated in its January of 2020 guidance that it expects all board members to be able to speak to its business-relevant climate risk, including considering the financial risks of climate change and its plan to transition to a lower carbon economy, board members need to quickly add COVID-19 to this list. Even if a company has not addressed these topics in prior reports or disclosures, companies would be wise to get these topics onto the board agenda sooner rather than later. Breaking down the monumental question of how a given enterprise plans to address, adapt, and survive climate change as well as other risks, including public health issues, can be divided into the four categories identified in the TCFD: governance, strategy, risk management, and metrics and targets. Further, transition and physical risks should be evaluated. Entities scoring these disclosures, including BlackRock, will likely use such criteria to determine who is “leading or lagging” in ESG disclosures.

Governance

Governance revolves around an organization’s structural approach to tackling climate-related risks and opportunities and its approach for addressing public health and safety. Regarding disclosures, companies should be prepared to describe their board’s oversight and management of these topics. Governance topics companies should consider:

• Whether the board and/or board committees consider climate-related issues or public health concerns when reviewing and guiding strategy, e.g. regarding: business plans; setting performance objectives; overseeing major capital expenditures/allocation decisions, acquisitions, and divestitures.
• What metrics are the board using and what is their confidence in the ability to score progress against targets? Consider what the appropriate climate-related risks and public health goals are that can be managed and ensure a corporate governance strategy is in place that is consistent throughout.
• How the board monitors and oversees progress against goals and targets for addressing climate-related and public health topics.
• Does the board have a specific committee tasked with assessing and tracking climate-related risks or does it fall to the board as a whole.
• Does the board have a specific committee tasked with assessing and tracking public health-related risks or does it fall to the board as a whole.
• The processes by which management is informed about public health risks and climate-related risks and opportunities.

Strategy

Strategy addresses how climate will affect an organization’s businesses, strategy, and financial planning over the short, medium and long term. In addition, strategy informs how an organization plans to address public health-related risks, such as a pandemic. Strategy includes the process by which to determine what risks could have a material financial impact on the company and any relevant timeframes. Companies should consider the need for consistency in how goals and metrics are addressed. Strategy topics companies should consider:

• How the company is adjusting or altering its business or capital allocation plans (if appropriate) to address climate-related and public health risks.
• How the company is assessing the potential for changes in demand for goods or services due to climate change (including consumer preferences) and the potential for changes in demand in light of a public health crisis.
• Whether the company is stress-testing its assets and the resilience of its strategy under different low-carbon scenarios and projected sea-level rise scenarios.
• Whether the company has identified, invested in, or deployed climate adaptation efforts.
• How the company is monitoring the regulatory landscape and participating in relevant policy discussions including international, national and local requirements and trends (including the potential for a price on carbon, increased flood control, and related relocations and governmental mandates relating to public health and safety).

Risk Management

Risk Management asks how climate and public health-related risks are identified, assessed, and managed and whether those processes are integrated into existing enterprise-level risk management. BlackRock has noted that companies should be mindful that many climate risks are not currently priced adequately by the market. In addition, swift changes in the market resulting from the global COVID-19 pandemic have presented risks that organizations have never encountered before. Integrating the lessons from the COVID-19 pandemic into future risk management will position individual corporations to better weather similar disruptions in the future. Organizations that position themselves to manage and adapt will be the ones who survive. Risk Management topics companies should consider:

• The organization’s processes for identifying and assessing climate-related risks and public health emergencies
• How organizations determine the relative significance of climate-related risks and public health-related risks in relation to other risks and what informs those assumptions
• How processes for identifying, assessing, and managing climate and public health-related risks are integrated into the organization’s overall risk management framework

Metrics and Targets

Both the TCFD and SASB standards address metrics and targets, which allow investors to assess an organization’s potential risk-adjusted returns, ability to meet financial obligations, general exposure to climate-related issues, and progress in managing or adapting to those issues. In addition, organizations should consider setting metrics and target goals that can be implemented in case of a public health emergency. On climate, while the TCFD requirements apply broadly to any type of company, the SASB standards provide detailed climate metrics for 77 specific industries. Metrics and target topics companies should consider:

• The targets used by the organization to manage climate-related risks and opportunities and performance against targets. In describing their targets, organizations should consider:
  • Whether the target is absolute or intensity based;
  • Time frames over which the target applies;
  • The base year from which progress is measured, and why;
  • Key performance indicators used to assess progress against targets; and
  • If similar targets should be developed for public health-related risks.
• Any metrics or targets the company has set with regard to:
  • Reduction in GHG emissions (both absolute and intensity);
  • Reduction in methane emissions or other criteria pollutants;
  • Water usage or water recycling targets;
  • Energy efficiency and energy reduction targets;
  • Waste management efforts; and
  • Land-use practices and deforestation prevention.
• Whether the company has applied an internal price on carbon;
• Whether the company has tied reduction targets to executive compensation.  
• Whether the company has a plan in place for addressing issues relating to public health crises, such as:
  • The company’s ability to relocate or disperse the workforce in order to reduce exposure and spread of a contagious disease;
  • The company’s healthcare plan coverage; and
  • The company’s ability to shut down and restart operations based on governmental directives.

Transition and Physical Risks

Finally, companies should consider the transition and physical risks of climate change and pandemics on its specific industry and location. Physical risks may include issues like extreme weather events, drought, or flooding and the long-term impact of increasing average global temperatures. Transitional risks may include risks the company faces in the global transition to a low-carbon economy, new regulations, and innovations in energy efficiency. Transition and physical risks topics companies should consider:

• Physical risks such as exposure to hurricanes, fires, sea-level rise, deforestation and how they are monitored and managed, including through resilience strategies.
• Stranded assets and total reserves, for example:
  • Construction costs that may not be recouped.
  • Capital that has to be retired before being amortized.
  • Loss of premiums or loss of insurance coverage.
  • Oil and gas resources that are owned but are no longer profitable to extract.
• Technological disruption, e.g. electric vehicle penetration rates; the need for evolving skillsets amongst employees (including retraining).
• Legal and reputational risks (both domestic and international).

While ESG as a whole can seem overwhelming, especially in the midst of a global pandemic, the business world has been rapidly shifting its focus to spotlight the importance of being prepared for the reality of climate change. Now, the business world must also add coping with a pandemic and planning for its aftermath. The tools provided by the SASB and TCFD standards can help guide a company’s ability to adapt to other big picture threats, such as global pandemics. By adhering to these standards and by utilizing the guidelines to address other existential threats an organization may face, companies can break down these issues into discreet parts. Even if a company decides to use a variation or different set of ESG reporting criteria for the immediate future, any kind of disclosure and reporting mechanism can prevent a company from being seen as “lagging” behind its competitors. 

If you are interested in learning more, Foley is uniquely positioned to help walk through your company’s operations and governance structure to ensure adequate and efficient ESG reporting in the coming year. To find out more about this topic and what we can offer, please contact your Foley attorney or one of the authors.

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