Nearly two dozen firms in BlackRock’s Canadian portfolio have pledged to disclose and manage their climate-change risk, following a letter from CEO Larry Fink in which the world’s largest asset manager committed to divest shares in firms that do not meet BlackRock’s intensifying climate standards.

In his late January letter, Fink—whose New York-based fund manages US$8.3 trillion in assets—called on the CEOs of BlackRock’s portfolio companies to publish reports detailing how their businesses would operate in a net-zero-carbon economy by 2050. He also recommended companies disclose their climate-related financial risk using one or both of two globally recognized reporting standards: the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). 

The Logic contacted 60 of BlackRock’s top Canadian portfolio companies, including Shopify, Loblaw, Enbridge and Sun Life, to ask if they would comply with the fund manager’s stringent emissions targets and disclosure guidelines. Twenty-six of the 60 firms responded. While 22 companies said they disclosed their climate risk using the TCFD or SASB, just four told The Logic they have set net-zero emissions targets that align with BlackRock’s recommendations.

“Avoiding the worst impacts of the climate crisis requires us to reach net-zero emissions by 2050. There is a significant financial risk in investing in companies that don’t have a plan for reaching that target, as they are likely to be unprepared for new climate regulations and rapid market shifts that can disrupt their business models,” said Patrick DeRochie, a pension-engagement manager at Shift, a climate risk-consulting firm.

In his most urgent call to action on climate change to date, Fink said his firm was willing to divest shares in companies that don’t meet its “Heightened Scrutiny Model.” That means BlackRock may sell shares in companies that have high carbon intensity, are not prepared for a transition to net-zero emissions and/or aren’t engaging with the firm on their climate risk. 

“Where we do not see progress in this area, and in particular where we see a lack of alignment combined with a lack of engagement, we will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns,” reads the letter.

Fink’s annual missive has driven industry-wide change in the past. The executive’s 2018 letter urged business leaders to focus not just on making profits, but on contributing to society, as well. The following year, the 181 members of the Business Roundtable—including Jamie Dimon of JPMorgan Chase, Tim Cook of Apple and Jeff Bezos of Amazon—signed a letter disavowing the notion of shareholder primacy in favour of “a fundamental commitment to all of our stakeholders.” Following BlackRock’s January 2020 letter, in which Fink promised to vote against management at carbon-heavy firms that aren’t making environmental progress, several institutional investors in Canada told The Logic they had planned to take further action on climate change. 

“We welcome Larry Fink’s letter and call to action. Slowing the climate crisis is a global priority and we know we have an important role to play,” said Sun Life spokesperson Rajani Kamath. The financial-services company has not set a net-zero target, though Kamath said it plans to publish its first TCFD disclosures later this month and a sustainability report in March, “which provides greater detail on our commitments.” 

A spokesperson for Shopify, whose CEO Tobi Lütke has been vocal about climate change, told The Logic the firm already discloses its climate-change risk through the Global Reporting Initiative standard, but that it will consider following the TCFD and SASB, per Fink’s recommendation. The Ottawa-based e-commerce firm has discussed plans to eventually achieve net-zero emissions, but has yet to set a target date. As part of its carbon-reduction strategy, the company launched a sustainability fund in September 2019 to support companies fighting climate change; it’s contributed $5 million to the fund to date. 

Loblaw said it reported its climate risk using the SASB for the first time last year, but hasn’t set a target to reach net-zero emissions by 2050. “In our 2019 CSR [corporate social responsibility] report, we disclosed a reduction in carbon emissions across our corporate operations by 29.7 per cent and announced a new target to reduce emissions by 50 per cent by 2030,” said spokesperson Aly Vitunski. “We are in the process of evaluating our carbon targets, and any new announcements will be made in the 2020 CSR report,” said Vitunski. 

Among Canada’s six largest banks, TD is the only one that’s committed to net-zero emissions by 2050 across its entire organization. RBC has a target to reduce emissions by 70 per cent by 2025 for its operations, and CIBC has pledged to be carbon neutral in its operations by 2024. Scotiabank and National Bank of Canada both aim to cut their carbon emissions by 25 per cent by 2025, and BMO has been carbon neutral since 2010. All six banks report their climate risk using the TCFD. 

While BlackRock’s letters are particularly influential among CEOs and money managers, there’s already a growing list of global asset owners and managers that have implemented screening and divestment policies linked to climate change. Large public pensions, including the New York State Pension Fund, Norway’s Government Pension Fund Global and the U.K.’s NEST pensions, “are normalizing the practice of screening and reviewing existing fossil-fuel holdings for divestment on fixed timelines,” said DeRochie, who said the trend is “creating significant pressure on their peers, including Canadian pensions.”

BlackRock holds many of its Canadian portfolio companies in passive funds and cannot directly divest those assets if they fail to comply with the fund’s climate standards. “Passive management is a major barrier for investors in managing climate risks,” said DeRochie. “For that reason, there is also a growing trend towards passive funds that are weighted with this in mind. There is rapid growth in the market for low-carbon ETFs, ESG [environmental, social and governance]-weighted ETFs, fossil-free funds, clean-energy and impact funds. And there is increased pressure for fund managers to favour these options.”

In keeping with that trend, BlackRock plans to offer new passive funds that exclude fossil-fuel companies, giving investors the option to choose these over traditional funds “to allow clients to achieve their net-zero objectives.” It also plans to introduce a “climate objective” for new sustainable funds starting this year, which could include “carbon-reduction targets or a tilt towards issuers better prepared for the energy transition,” according to the firm.

DeRochie noted that regardless of whether Canadian firms are held in BlackRock’s passive or active portfolios, they may face pressure to act based on how other investors respond to the asset manager’s recommendations. “A credible net-zero plan is a signal to the market that they are planning for the future. Not having a plan to reach zero emissions is also impacting perception of brands and their social licence to operate,” he said. “From our perspective, the energy transition to net-zero emissions is inevitable—it’s really a question of who leads and reaps the rewards and who gets left holding stranded high-carbon assets.”

Update: Thomson Reuters provided information on its net-zero target after this story’s original publication. The story has been updated.