The Sustainability Accounting Standards Board (SASB), a non-profit organization has developed industry-specific standards across environmental, social, and governance topics, working toward a consensus on the sorts of disclosures that the issuers of securities should and will make to their investors. In November 2018, SASB released complete standards for 77 industries.
A separate source of guidance on the subject of part of the broad issue of ESG disclosure, the specific issue of climate-related transparency, is the Task Force on Climate-related Financial Disclosures (TCFD), which was created under the umbrella of the Financial Stability Board in 2016.
Larry Fink’s Letter
These two standard-setters seek to be part of the solution, but in a sense they are both part of a related problem: there is no uniform agreed-upon standard or even a way of arriving at uniform standards that would parallel the work of the Financial Accounting Standards Board (FASB).
In his latest annual letter to CEOs, signed on January 14, the chairman and CEO of BlackRock, Larry Fink, made a case that climate change has become “a defining factor in companies’ long-term prospects.” This, companies ought to be in communication with their stockholders on the subject. “Every government, company, and shareholder must confront climate change,” Fink writes.
BlackRock is the fiduciary for $7 trillion of assets, so its view on this matter is no small detail.
How will this confrontation happen? It requires transparency, and that requires disclosure standards. Accordingly, Fink writes that BlackRock believes that the two organizations just mentioned have between them begun the crystallization of the necessary consensus. “While no framework is perfect, BlackRock believes that the [SASB] provides a clear set of standards for reporting sustainability information.” It also believes that TCFD is a valuable supplement.
Accordingly, if you manage a corporation of which BlackRock is a stockholder, you ought to bring that corporation in line with the SASB/TCDF combination. Or else.... Fink puts the following words in bold type: BlackRock “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
Fink reminds us that his career has seen a number of financial crises. He started his career at First Boston in 1976. He recalls the inflation danger of that era, as well as the Asian financial blow-ups of 1997, the dotcom bubble and burst of 1998-2000, and the global financial crisis less than a decade later. It is with some sense of perspective, then, that he writes that climate change is different from any of those crises. This is a structural, long-term crisis that will result in a “significant reallocation of capital.”
Fink looks forward to the changes that could come about if only 10%--perhaps if only as little as 5%--of the investment capital around the globe is re-allocated into strategies aimed at sustaining the ecosystem of which humans depend. Further, he thinks the positive dynamic will pick up steam as young people now committed to such shifts rise into decision-making positions in corporations and governments.
More About the TCFD
The TCFD recommendations fall into four categories: governance; strategy; risk management; metrics and targets.
Governance: Issuing corporations should disclose the organization’s governance around climate-related risks and opportunities. This should include, for example, describing the board’s oversight role as well as management’s assessment of climate-related risks and opportunities.
Strategy: Issuers should disclose the actual and potential impacts of climate-related risks and opportunities.
Risk Management: They should disclose how they identify, assess, and manage climate-related risks, including for example how they are integrated into overall risk management.
Metrics and Targets: Finally, they should identify the metrics and targets they use in setting such strategies and managing such risks, which may include for an industrial firm how they measure the amount of greenhouse gases emitted by their industrial processes, and their targets for reduction of the amounts.