BlackRock Chief’s Letter, CDP Climate Disclosure Drive, and More 

March 17, 2023

The top five climate risk and disclosure stories this week.

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BlackRock chief renews climate disclosure call

The CEO of the world’s largest asset manager told investors that many clients want data on the “material sustainability risk factors,” like climate change, that can impact returns. However, he also said “it’s not our place” to tell companies to take certain sustainability actions or to push for the low-carbon transition.

Every year, BlackRock head Larry Fink writes two separate letters to both CEOs at investee companies, as well as investors and clients on major investment themes. Each of these is scrutinized by financial institutions and real-economy companies for insights into the CEO’s thinking. 

In 2020, Fink made waves in his letter to CEOs when he asked companies to report information on their climate risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Since then, the asset manager has come under attack from Republican politicians for allegedly imposing a liberal climate agenda on investors. Last year, states including Texas and West Virginia placed BlackRock on a list of companies that have been accused of boycotting energy firms. These states are also forcing state-controlled entities to sever ties with the asset manager. In December, Florida pulled USD$2bn from BlackRock funds, with the state’s top financial official accusing the firm of focusing too much on environmental, social, and governance (ESG) factors to the detriment of investment returns.

In this year’s investor letter, Fink said his firm partners with companies to provide insights into how climate change and the low-carbon transition can impact investment returns at clients’ request. “These clients track the transition to lower carbon emissions just as they track any other driver of investment risk. They want our help to understand the likely future paths of carbon emissions, how government policy will impact these paths, and what that means in terms of investment risks and opportunities,” he wrote.

Fink also stressed that BlackRock sees climate risk as an investment risk. “Anyone can see the impact of climate change in the natural disasters in California or Florida, in Pakistan, across Europe and Australia, and in many other places around the world. There’s more flooding, more wildfires, and more intense storms. In fact, it’s hard to find a part of our ecology – or our economy – that’s not affected. Finance is not immune to these changes,” he wrote.

However, Fink clarified that BlackRock will not demand investee companies take particular climate actions: “As minority shareholders, it’s not our place to be telling companies what to do. My letters to CEOs are written with a single goal: to ensure companies are going to generate durable, long-term investment returns for our clients.”

Financial firms join CDP in urging environmental disclosure

Investors, development banks, and pension funds responsible for a collective USD$136trn in assets have launched a campaign to get 15,000 companies to report data on their environmental impacts.

The effort is being coordinated by CDP, a global disclosure system for climate, water, and deforestation information. Over 18,700 companies reported through CDP in 2022. The nonprofit’s annual questionnaire is aligned with the Task Force on Climate-related Financial Disclosures (TCFD), making it the largest repository of climate risk disclosure data in the world.

This year’s disclosure drive is the CDP’s largest ever, with 746 financial institutions involved. “Disclosure is already mandatory or soon to become so in most major economies including the UK, EU, Brazil, Japan, and the US,” said Paul Dickinson, the founding chair of CDP. “Companies still lagging behind are simply out of touch with market reality and are overestimating their own resilience. They must act now to get ahead of governments and market regulations, and to future-proof their operations.”

For the first time this year, CDP questionnaires will ask companies to disclose how their activities align with the European Union’s Sustainable Taxonomy, the green investment rulebook that’s being rolled out across the bloc.

Bank of England reports on climate-related capital charges

More research on how climate risks could affect banks and insurers is required before changing capital rules, the Bank of England (BoE) has said.

In a Monday report, the central bank laid out its thinking on how the regulatory capital framework, which determines how big an equity cushion banks need to absorb potential losses, should adapt to the rising threat posed by climate physical and transition risks.

The BoE admitted that “capability and regime gaps” mean it can’t be certain that financial institutions are setting enough capital aside to handle climate-related financial losses. However, it added that current evidence suggests there are not good enough reasons for the capital framework to change. “[E]xisting time horizons over which risks are capitalised by banks and insurers are appropriate for climate risks,” the BoE wrote.

It said effective risk management controls at institutions may lower the amount of capital that firms need in the future to ensure their resilience to climate change. This understanding means the BoE will focus on improving companies’ “identification, measurement, and management of climate risks” in the short term.

The BoE pledged to continue its analysis of climate risks and capital impacts. As part of this, it said it would build its own capabilities and “forward-looking tools” to estimate the financial system’s ability to withstand climate shocks.

Rating agency warns of climate litigation threat to EU banks

Climate lawsuits are a growing risk to European banks and could adversely impact their creditworthiness in the future, a top credit ratings agency has said.

In a commentary article published Wednesday, analysts at Fitch Ratings said climate litigation could force banks to accelerate their decarbonization plans and divest from fossil fuels. While this kind of outcome would “likely have a modest impact” on banks’ cash flows, the analysts said it could “increase credit risk on the run-off portfolios if large oil and gas customers were unable to find alternative financing.”

In February, BNP Paribas became the first European bank to be sued in a French court for its ongoing financing of fossil fuels. The case was filed by climate activist groups which may deploy the same tactic against other large banks supporting the oil, gas, and coal industries.

If banks lose these kinds of climate lawsuits, the Fitch analysts say they could face administrative fines and reputational risks that degrade their brand values. Although the agency does not currently expect climate litigation to change its credit assessment of European banks, the analysts said legal actions could influence its rating decisions in the coming years.

Credit Suisse knocked for patchy climate plans

Embattled Swiss lender Credit Suisse has come under fire for its revamped climate plan by advocacy group ShareAction.

Released Tuesday, Credit Suisse’s climate plan includes new portfolio emissions reduction targets for the power generation, commercial real estate, iron and steel, aluminum, and automotive sectors, which it says are aligned with net-zero pathways. 

These complement the firm’s fossil fuels target, which commits the bank to halving the financed emissions linked to oil, gas, and coal activities by 2030. However, ShareAction criticized the target when it was released last year for not covering the bank’s capital markets activities, like debt and equity underwriting, even though these represent the bulk of the company’s financing of new oil and gas projects.

Credit Suisse did not update its oil and gas target in its latest plan, a decision that ShareAction criticized. “The bank must urgently update its oil and gas policy, which is one of the weakest in the European banking sector, with a particular focus on fracking,” said Kelly Shields, campaign and project manager at ShareAction. “Until Credit Suisse publishes a timebound plan to incorporate capital markets activities, which represent the bulk of its financing to top oil and gas expanders, in its disclosures and targets, shareholders must continue to press the bank for greater ambition on climate.”

The climate plan is slated to be voted on by shareholders at the bank’s annual meeting on April 4. ShareAction wants investors to use their ballots to oppose it and push for a more aggressive climate strategy.