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BlackRock advances climate competency in boardrooms worldwide

? Board members on notice that understanding and articulating climate risks to business a necessary step to retaining board seats.

? Natural gas recognized as low-carbon fuel for energy companies amid longer term industry transition.

? Renewable energy procurement an identifier that management teams acknowledge long-term climate risk mitigation and economic opportunities.

Michelle Edkins is global head of investment stewardship and managing director at BlackRock Inc., the world’s largest asset manager. In this role, Edkins oversees BlackRock's global proxy voting activities and efforts to engage corporate boards and management teams on environmental, social and governance, or ESG, issues. Edkins is spearheading BlackRock's latest engagement campaign to make climate disclosures and board gender diversity among the chief action items posed to corporate boardrooms across North America, Europe and Asia through 2018. In this interview, edited for length and clarity, Edkins discusses her team's push to instill a culture of climate change risk competency in corporate boards, how the energy sector specifically can expect BlackRock to react to capital allocation toward certain energy resources and the broader adoption of recommendations offered by the Task Force for Climate-related Financial Disclosures.

S&P Global Market Intelligence: What has been the reaction since unveiling engagement priorities?

Michelle Edkins: Clients find it helpful to have a sense of what we are focused on. In addition to climate disclosures and gender diversity, we make a point on having a climate competent board. That point is about where climate risk is material to a company, we expect the whole board to be fluent on the issue. That is, you could pick any board member at random and they should be able to explain how climate change affects the company's business, what management is doing to manage that risk, and how the board assesses management effectiveness in mitigating climate risks. We are bit concerned that some of the focus in the investor community is to get one climate specialist on the board, but it is more than one board member's responsibility.

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Edkins

What counts as climate competency?

We expect that all board members will have a clear sense of how climate risks specific to their company would affect the business model. This is not just about the carbon intensity of energy companies, for example, but also about food producers and the severe weather that can affect their supply chains. So it is company- and sector-specific in what we would expect them to talk about. They do not necessarily have to be climate scientists, but they should understand the issues, and know how they can be addressed in a management system. We are trying to build a level of understanding in how these management issues are being addressed and then providing our feedback and perspective.

Is voting against certain directors the logical outcome of not demonstrating climate fluency?

Yes. One of the reasons we think voting against directors is the right way to address concerns of board effectiveness is because that is what directors are there to do: oversee management and ensure the interests of the corporation and investors are protected. Boards that are not ensuring management is anticipating the future are probably not doing a good job. We are looking at it from the shareholder perspective. The point about voting against directors is not that we believe our vote would necessarily lead to them being ousted, but we think reflecting our views in terms of board effectiveness is important.

What can energy companies do specifically to better address climate?

It is about what they are doing on energy efficiency measures, production efficiency, preventing methane emissions and transitioning the business more broadly. A lot of large energy producers have moved away from oil sands because of the carbon-intensity of those assets, and into lower carbon production. We are trying to assess how a company is thinking about that transition. These are very long-term businesses, and the CapEx takes 20 or 30 years to pay off. So we are trying to understand how a company is anticipating the future in relation to where they invest and which areas they may be choosing to sell or de-prioritize.

Does BlackRock recognize natural gas as a so-called lower carbon fuel?

This is where we take company guidance, but yes. We are very alert to the fact that this is a multi-decade transition, so right now it is about companies managing that process rather than expecting a major change overnight. The transition takes time, and it is much less stressful on the company and less costly if managed over time. The most expensive transitions are those done abruptly because a business model becomes obsolete. There are different views in the energy sector about what the right mix is, and that is perfectly appropriate because that is what a market is: people reading situations differently and taking different approaches. We are trying to understand what the proper approach is and why a company's board and management think they have the right approach.

Do you view corporate renewable energy procurement as consistent with climate competency?

That looks like a company is anticipating the future and managing the business long term. The other component is that they are seeing operational efficiencies in that transition, either with lower costs or by locking in the supply. There is a business opportunity for them too. If they are innovating and inventing products around energy efficiency, for example, that is the kind of long term thinking we are looking to affect when we talk with companies. In our space, we so often look at the ESG factors as risks, because handled poorly, risks is what they are, but in many areas, ESG represents an opportunity. Talking to companies about how they are scoping for different opportunities is a big part of our dialogue.

What is BlackRock's role in promoting the recommendations in the TCFD?

This is one of the areas where we are taking the framework, once it is finalized, and talking to companies about the recommendations and whether they intend to report under it. We are also looking at how the recommendations differ from existing reporting measures, and what kind of time frame it might take for companies to report consistently with recommendations of the task force. That is the discussion we are going to be having over the next 18 months with companies where we believe climate risk is material.

What has been the feedback from companies in adopting the TCFD recommendations?

The informal feedback we are getting is that a lot of companies like the globally consistent framework, but they also want to manage expectations because it is a long journey, simply because companies are at different places on these issues up to now. The reporting is about climate risks, not just carbon risk for the energy sector. BlackRock is looking at this as a more widespread reporting initiative, because climate affects every sector of the economy, and that is why I think the TCFD recommendations are so relevant. Although they are initially focused on high risk industries like energy and materials, they do have application across all sectors.