BlackRock, the world’s largest asset manager with over $5 trillion in assets, recently announced a new commitment to focus on the financial risks of climate change, with a specific eye towards the disclosure and governance of climate risk. The company also signaled a potential greater willingness to support shareholder resolutions on climate issues.
Considering Blackrock’s massive size and influence, the significance of these announcements should not be understated. The development has the potential to drive increased attention among corporate executives in all industries on the need for more action on climate. The move is also another welcome sign that mainstream institutional investors are taking climate risk seriously.
BlackRock’s announcement puts them in-line with other investors already doing good work on climate risk. A robust effort to limit oil and gas methane will be essential to their success, and provides a number of opportunities for BlackRock to truly lead.
Why Methane Matters to Investors
As EDF has previously highlighted, methane is a highly potent form of carbon, and therefore a significant climate risk. In fact, methane is 86 times more harmful to our climate than carbon emissions, and is responsible for a quarter of the warming we are already experiencing today. The oil and gas industry is the largest industrial source globally, and emissions occur across the entire value chain.
From an investor’s perspective, methane poses distinct risks. As the primary component of natural gas, methane represents lost product. All told, the oil and gas industry loses $30 billion a year on otherwise saleable product. As such, smart investors should look at proactive methane management as a proxy for executive leadership and operational excellence. In an increasingly carbon-constrained world, unmanaged methane emissions also invite regulatory scrutiny. Smart companies will be prepared. Lastly, methane undercuts the reputation of natural gas being cheaper and cleaner, and jeopardizes its opportunity to play a role in a transition to a lower-carbon economy. This has negative long-term demand implications.
Leading investors, including Legal & General, BMO Global Asset Management, and CalSTRS already understand that methane poses a significant risk, and BlackRock should too.
How Investors Can Engage Industry
To help investors manage methane risk through engagement, EDF, in partnership with Principles for Responsible Investment (PRI), released An Investor’s Guide to Methane. The publication highlights best practices for measuring and reducing emissions while equipping investors with suggested questions to guide constructive dialogue.
The Guide also focuses on improving disclosure, given recent research from EDF has shown that current methane disclosure is inadequate to meet investor needs. The methane metrics highlighted in the Guide were designed to provide investors with actionable methane data, and align with The Task Force for Climate-Related Disclosure’s framework and its focus on metrics and targets companies should use to manage climate risk, for which BlackRock prominently highlighted its support recently.
In response to growing investor concerns around methane, PRI is launching a collaborative engagement on methane, and is currently recruiting investors. BlackRock should join this effort to engage with oil and gas companies globally to reduce methane risk and improve disclosure. This is an opportunity for global leadership on climate.
Shareholder Resolutions – An Opportunity for Near-Term Action
As mentioned, BlackRock indicated it is more open to using its voting power on shareholder resolutions to manage climate risk. Currently, there are 8 methane-related shareholder resolutions up for vote this spring, and BlackRock appears to be a top shareholder for 6 of these companies. The resolutions urge companies to provide better disclosure on methane management, and similar resolutions have earned the support of both ISS and Glass Lewis, the two major proxy advisory firms in the US. They deserve BlackRock’s vote.
New Products – An Opportunity to Innovation and Leadership
One way BlackRock could raise the bar on methane and be a global leader would be to use its platform to develop products to incentivize comprehensive emissions management. BlackRock has already launched low-carbon exchange traded funds (ETF) that over-weight (i.e. reward) less-carbon intensive companies. Could BlackRock launch a low-methane index that screens in methane leaders and locks out methane laggards, thereby rewarding effective methane management with relatively higher share prices?
So, What is Success?
BlackRock is right to focus on climate risk as a key priority for its engagements over the next two years. If BlackRock is successful, effective methane risk management will be appropriately rewarded in the public markets, and will be par for the course for oil and gas companies who want BlackRock’s significant investment dollars. EDF stands at the ready to help BlackRock in making their important work on climate risk a success.