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BlackRock unveils climate disclosure expectations, engagement plan for companies

BlackRock Inc. has offered more details about its climate-related expectations of companies this year in a paper that ranges from disclosure expectations to setting targets and the factors that may cause the firm to vote in support of shareholder resolutions.

The investment stewardship report offers new insights into how the firm intends to carry out the expectations BlackRock CEO Larry Fink outlined in his late-January letter for companies on climate change. Fink pressed companies to start planning for a net-zero future and also committed the firm itself to pursuing such a goal.

To learn more about BlackRock's net-zero plan, listen to the latest episode of the S&P Global's "ESG Insider" podcast on Spotify, SoundCloud or Apple podcasts.

On the topic of climate disclosures, BlackRock's new climate investment stewardship document acknowledged that "the path towards net zero may not be linear or streamlined" but that companies still need to articulate how they plan to make progress. Climate change disclosures should include short-, medium- and long-term targets to allow investors and others to track that progress.

Carbon offsets should not replace emissions cuts

But BlackRock also cautioned companies against using carbon offsets as a permanent replacement for lowering their overall emissions.

"We recognize that companies may use carbon offsets in the near- and medium-term as they innovate to develop technology that will support further reductions in their overall (greenhouse gas, or GHG) emissions," the firm wrote. "We see carbon offsets as an interim complement, though not a replacement for, substantive and sustained long-term emissions reductions plans aligned with science."

In addition, companies should disclose their direct emissions known as Scope 1 and semi-indirect Scope 2 emissions such as those associated with power purchases, BlackRock wrote. And given that "a significant portion of the transition to a low-carbon economy hinges on the eventual retirement of fossil fuels," companies in carbon-intensive industries such as fossil fuels should disclose Scope 3 emissions associated with the production or use of their products.

For oil majors, the vast majority of their emissions occur when customers burn their fuels for transportation, home heating and industrial processes. As such, disclosing only Scope 1 and 2 emissions for these companies would provide relatively little useful information to investors.

But BlackRock also acknowledged that not all parts of the world are as far along in curbing emissions. For example, China has said its emissions levels will continue to grow for at least several years but has promised to begin to decrease those levels sometime before 2030.

In these emerging markets and in Asia, "the corporate dialogue around curbing GHG emissions is earlier and engagement on climate risk and the energy transition is more nascent. As such, our expectations for these countries are proportionate," BlackRock wrote. The firm asked companies in those countries to begin disclosing the emission reduction targets and "consider physical and transition risks, such as stranded assets, in their long-term capital expenditures and planning" in anticipation of future policy changes.

Expectations for boards and proxy voting

As for company boards, BlackRock said it expects companies to ensure that multiple directors — not just one board member — are climate experts with an understanding of the topic as is appropriate to the company's business model. Expertise should include mitigating risk, capitalizing on efficiencies and the potential for innovation and other opportunities. Moreover, the firm said consistent reporting and disclosure "is critical."

When it comes to holding boards and companies accountable, BlackRock said it will act in cases where corporate disclosures are insufficient to make a thorough assessment or the company has not provided a "credible" transition plan with targets. For companies found to be lacking, in addition to voting against directors that BlackRock considers responsible for climate risk oversight, the company may support shareholder proposals "that we believe address gaps in a company's approach to climate risk and the energy transition."

The firm may even vote in support of climate resolutions when a company is moving in the right direction if BlackRock feels attention to the issue "could be accelerated."

"We believe that these efforts are a crucial component of our fiduciary duty to our clients to deliver sustainable long-term financial returns," BlackRock wrote.