When two of the largest institutional investment management firms direct their attention to an issue of corporate governance, companies had better prepare to respond.
Vanguard Group, which manages $4 trillion for pension funds, endowments, foundations and individuals, announced early this month that its investment stewardship team has made climate-risk disclosure a priority over the past year.
It joined BlackRock Inc., which announced in March that enhanced climate-risk disclosure would be an area of focus this year for its investment stewardship team. BlackRock has $5.7 trillion in assets under management.
Given that two firms managing $9 trillion between them have begun to campaign for climate-risk disclosure, most other significant asset management and research firms likely also will take action, if they have not already done so quietly.
Therefore, companies should plan to study their exposure to climate change and report to investors on the implications of that exposure. They will be under tremendous pressure to do so.
In making the announcement, a Vanguard executive said: "Climate change represents an evolving set of risks and opportunities for companies in many sectors. … Our discussions have centered on advocating for disclosure of material risks to companies' business prospects and the value of their assets under a range of forward-looking scenarios."
In March, a BlackRock executive said: "Given climate change is a systemic issue, we believe disclosure standards should be developed that are applicable to listed companies across each market and, ideally, that are globally consistent." The executive cited the framework published by the Financial Stability Board's Task Force on Climate-Related Financial Disclosures.
Shareholders and other investors have a right to know what companies know about their climate-risk exposure. Analysts, managers and investors cannot determine a fair price for a company's stock if they do not know the extent of its exposure to climate change and the implications of that exposure on future earnings.