BlackRock Response to the Exposure Draft Climate-Related Disclosures Issued by ISSB

This post is based on BlackRock’s response to The Exposure Draft ED/2022/S2 Climate-related Disclosures issued by the International Sustainability Standards Board. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.

BlackRock manages assets on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, alternatives, and multi-asset strategies. Our clients, the asset owners, include pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world. Because our clients have diverse financial objectives, we consider a variety of investment factors, risks, and opportunities, including those related to climate.

Asset managers investing on behalf of clients are not just looking for more data on climate risk; they need high-quality information that is (1) relevant to understanding climate- related risks and opportunities, and (2) reliable, timely, and comparable across jurisdictions. Investors also recognize that climate data, controls and risk methodologies are still evolving. As a fiduciary to our clients, BlackRock has engaged with public companies on climate disclosure over the past five years. We have observed these companies continually developing and adapting their climate risk management and reporting tools, improving the quality of their disclosure over time.

BlackRock strongly supports the ISSB’s goal of providing a global baseline of standards to support the disclosure of more reliable, comparable, and consistent climate-related information. We view both the ISSB Exposure Draft ED/2022/S1 on sustainability-related financial information and ED/2022/S2 on climate-related disclosure as important contributions to a multi-year, multi-jurisdictional effort towards improving the availability, quality, comparability, timeliness, and interoperability of sustainability-related disclosures.

We have separately responded to the ED/2022/S1 on sustainability-related financial information. Our comments below are intended to propose aligning the ED/2022/S2 on climate-related disclosure with the following principles, which we believe will provide investors with high-quality disclosures, while creating the flexibility necessary for continuing development of creative, pragmatic best practices. These principles have similarly guided BlackRock’s response to the climate-related disclosure rules proposed by the U.S. Securities and Exchange Commission (“SEC”), Enhancement and Standardization of Climate-Related Disclosures for Investors.

While national authorities will ultimately determine the application and scope of ISSB-aligned standards (including the associated liability framework) in their jurisdiction, we encourage the ISSB to continue engaging with global regulators, as well as other standard setters, to ensure interoperability and alignment with the principles outlined below.

Principles for High-Quality Climate-Related Disclosures

• TCFD alignment: We support disclosure frameworks aligned with the TCFD framework and sector-specific metrics, such as those that will be taken forward by the ISSB. The TCFD framework has incorporated market feedback and attracted widespread support because of its relative simplicity and Our experience is that it results in clear disclosures that allow investors to assess how companies are adapting their business models to respond to climate-related risks and would provide an effective global framework.
• Global baseline standards with industry-specific guidance: We strongly support a global baseline of climate-related disclosure standards to enable investors to make more informed decisions. We urge regulators to work with market participants and standard setters, like the ISSB, to continue developing industry-specific guidance.
• Flexible approach to improving disclosures: We believe that regulators should allow for a “comply or explain” regime (consistent with the TCFD framework) for disclosure areas, such as certain metrics and targets, that are still actively evolving. This regime will allow companies to provide the disclosures or explain why they cannot. A flexible approach to disclosure will likely encourage more and more companies to provide such disclosures.
• Distinction between Scope 1&2, and Scope 3 disclosures: We support quantitative disclosure aligned with the Greenhouse Gas Protocol (“GHG Protocol”). As investors, we use GHG emissions estimates to size an issuer’s climate-related exposure. Specifically, we look to companies to provide Scope 1 and 2 GHG emissions disclosures, and meaningful short-, medium-, and long-term science-based reductions targets, where available for their sector. As investors, we use Scope 3 emissions as a proxy metric (among others) for the degree of exposure companies have to carbon-intensive business models and technologies. However, we do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control. Given methodological complexity for Scope 3 emissions and the lack of direct control by companies over the requisite data, our investors believe the usefulness of this disclosure varies significantly right now across industries and Scope 3 emissions categories. We encourage regulators to adopt a disclosure framework that accounts for this significant variation. Under this framework, companies would disclose emissions estimates for any of the fifteen Scope 3 categories that are material to them. If none of the fifteen categories are material, or if companies are not yet capable of estimating their Scope 3 emissions, they would have the option of explaining why that is the case.
• Consistency across public and private markets: Mandating reporting by companies across both public and private markets is critical to averting unintended consequences in the capital markets such as (1) the sale of physical assets to private companies to avoid disclosure, and (2) private companies being potentially disincentivized from going public, decreasing choice for public market investors. Uniform disclosures would also provide market participants with a clearer understanding of how the transition to a lower carbon economy is progressing across the entire economy. The absence of consistent private and public market disclosure standards forces public companies to step into the role of policing their value chain partners and clients through negotiating the implementation and monitoring of the data they need for their own disclosures, such as private companies’ GHG emissions
• Protections from liability: The liability attached to climate-related disclosure should be commensurate with the evolving nature of that disclosure to encourage rather than discourage higher-quality disclosure. We urge regulators to adopt a liability framework that provides meaningful protection from legal liability for disclosures provided in good faith while standards continue to evolve, and that gives companies the flexibility they need to develop their disclosures without imposing a chilling
• Adequate time for companies to develop high-quality disclosures: Climate-related disclosures often require companies to collect and aggregate data from various internal and external sources. Practical realities of data-collection and reporting do not cleanly line up with financial reporting cycles. Giving companies adequate time (e.g., 120 days) after their fiscal year-end to accurately collect and analyze this data will increase the quality of the climate related information investors receive. This timeline should still result in companies producing climate-related data in advance of their annual meetings, giving investors time to assess it before making proxy voting decisions.
• Adhering to relevant materiality thresholds: Finally, we believe companies’ climate- related disclosure obligations in their annual and quarterly reports should be linked to relevant materiality thresholds. Materiality thresholds will assist investors in identifying those companies that consider climate-related risks material to their operations and in evaluating the impact of those risks on companies.

Response to Exposure Draft ED/2022/S2 Climate-related Disclosures

As an investor, BlackRock has been pleased to observe that an increasing number of issuers are using the TCFD framework to provide more detail to their stakeholders through disclosures that are becoming increasingly robust over time. We welcome the ISSB’s alignment with the core principles of the TCFD framework. We strongly support the ISSB’s objective of building a single, global set of baseline sustainability reporting standards on which jurisdictions can build, to accelerate the disclosure of more comparable climate- related information.

The ISSB’s proposed standard for climate-related disclosures will benefit investors and other stakeholders by increasing the quality of information available. We believe this will assist us and other investors in evaluating the material impact of climate risk on particular issuers and in identifying those issuers that consider climate-related risks and opportunities material to their operations. We believe that the proposal sets forth an important roadmap to inform disclosure decisions on climate-risk oversight, strategy, governance, and risk management and will compel issuers to conduct a more thorough analysis than currently undertaken under the existing voluntary framework alone.

Setting out clear international guidelines around these disclosures will help level the playing field for all issuers and, over time, help reduce costs in complying with multiple reporting frameworks. In order to enable issuers to build the appropriate processes and controls to comply, the effective date should be no less than one full year after the standards are finalized.

In offering our support for the ISSB’s efforts to provide a baseline global standard for climate-related disclosure, we are submitting the following specific recommendations, which we believe will allow the final guidance to promote reliable, comparable, and consistent disclosures.

Disclosure of climate-related information in general purpose financial reporting

The ISSB’s exposure draft for climate-related disclosure refers to a company’s ‘general- purpose financial reporting’ as the location that this information should be published. However, given the diversity among national reporting regimes, ‘general purpose financial reporting’ may entail different practical conditions and associated liability per jurisdiction.

• Timing: Defining the reporting location as a company’s ‘general purpose financial reporting’ also effectively determines the timing of climate-related disclosure. However, the practical realities of the collection and reporting of climate-related data do not cleanly line up with financial reporting cycles. Climate-related disclosures often require companies to collect and aggregate data from various internal and external sources. As an investor, what we view as most important is ensuring that companies produce climate-related disclosure in advance of their annual meetings, giving investors time to assess the information before making proxy voting decisions. Giving companies adequate time (e.g., 120 days) after their fiscal year-end to accurately collect and analyze this data will increase the quality of the climate-related information investors receive.
• Liability: We recognise that the liability attached to general-purpose financial reporting will depend on national regimes, and consequently the ISSB’s requirement to locate climate-related disclosure within that report will in turn result in differing liability in different jurisdictions. In our view, liability should be commensurate with the evolving nature of climate-related disclosure, to encourage rather than discourage higher- quality disclosure. We urge national regulators to adopt liability frameworks that provide meaningful protection from legal liability for disclosures provided in good faith while standards continue to evolve (for example, in some jurisdictions this may be provided in the form of a safe harbour from liability), and that gives companies the flexibility they need to develop their disclosures without imposing a chilling We recognize that in certain national regimes, this may result in climate-related disclosure being located outside of general purpose financial reporting.
• Materiality: Further, while we note that the ISSB Exposure Draft ED/2022/S1 on sustainability-related financial information defines material information in alignment with the definition in the International Accounting Standards Board’s (IASB’s) Conceptual Framework for General Purpose Financial Reporting, in our view, materiality should be determined according to the definition most relevant to each jurisdiction’s wider reporting framework.

Permitting disclosure in the location best aligned with the liability considerations relevant to a specific national jurisdiction, whether or not that is inside of the general purpose financial reporting, will encourage issuers to make more robust climate-related disclosures (including with respect to newly implemented emission targets, scenario analyses and transition plans). Providing issuers with more time after the deadline of their general purpose financial reporting to prepare the information required will also increase the quality and accuracy of the climate-related information that investors receive.

For companies subject to reporting requirements in multiple jurisdictions, providing the option to cross refer to comparable reporting at parent company level may increase the efficiency of disclosure in some instances, and support the transparent disclosure of climate-related risks and opportunities to investors.

Further, explicitly permitting the use of prior quarter estimates could support more timely disclosure by issuers.

GHG emissions disclosure

As an investor, we believe that climate risk is investment risk, and we strive to help our clients make the most informed choices to improve their investment outcomes. We welcome the efforts of the ISSB to draw on the TCFD framework and the GHG Protocol in determining what climate-related information issuers should disclose. We encourage the ISSB to engage with regulators and market participants to provide additional industry-specific guidance on which gases are likely to be material, and how materiality should be evaluated.

Recognizing that relevant data and methodologies are still emerging, we recommend that the ISSB take a flexible approach to GHG emissions disclosures.

Scope 1 and 2 GHG Emissions. We support requiring issuers to disclose their Scope 1 and 2 GHG emissions estimates regardless of materiality, as this information helps investors assess exposure to climate-related risks and opportunities across a variety of sectors. However, given the methodological and estimation challenges issuers face today in collecting Scope 1 and 2 data on a timely basis, we are of the view that it is impracticable to require this information to be disclosed or ‘filed’ in general-purpose financial reporting on the annual report timeline, even if material, although that may change over time as these challenges abate. In our response to the SEC’s proposed climate-related disclosure framework, we have included a proposal for a New Form through which issuers could ‘furnish’ all GHG emissions data, given these methodological and estimation challenges. We encourage the ISSB to permit Scope 1 and 2 disclosures—where material—to be incorporated by reference from an appropriate alternative reporting location instead of requiring that it be included in a company’s general purpose financial reporting, unless a robust safe harbor can be provided to afford meaningful protection from liability for Scope 1 and 2 disclosures included in a company’s general purpose financial reporting .

• Scope 3 GHG Emissions. As we have said previously, at this stage, we view Scope 3 emissions differently from Scope 1 and 2, given the methodological complexity and lack of direct control by companies over the requisite data to assess Scope 3 emissions. In our experience as investors, these issues, and the usefulness of Scope 3 disclosures more generally, vary significantly across industries and the 15 categories of Scope 3 emissions. We support a ‘comply or explain’ approach to disclosure of Scope 3 in an appropriate alternative reporting location outside of a company’s general-purpose financial reporting, allowing issuers to either disclose material Scope 3 emissions or explain why certain emissions categories are not relevant to the issuer or not subject to reasonable estimation.
• As investors, we believe it is important to be able to evaluate companies’ assessments of their emissions across their value chain, or Scope 3 emissions, as such emissions could affect the economic viability of issuers’ business models. Climate risk and the economic opportunities from the transition are a top concern for our clients and a rapidly growing share of them have already committed to net-zero aligned portfolios. As investors, we use Scope 3 emissions as a proxy metric (among others) for the degree of exposure companies have to carbon-intensive business models and technologies. However, we do not believe the purpose of Scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their
• Further, as recognized by the US SEC in its proposal The Enhancement and Standardization of Climate-Related Disclosures for Investors, “the methodologies pertaining to the measurement of GHG emissions, particularly Scope 3 emissions, are evolving,” and with the broader adoption of reporting standards, data sets, and methodologies, they will improve meaningfully further.12 This evolution will require effort on the part of standard setters to provide the further guidance necessary for these disclosures to be reliable and consistent for investors, including with respect to materiality and the appropriate calculation methodology for each category of Scope 3 emissions.
• A flexible approach to rulemaking based on a “comply or explain” approach, compared to mandating complete Scope 3 disclosures within general purpose financial reporting before most issuers have the requisite capability, will provide issuers the opportunity to develop the resources necessary to comply with industry standards and best practices as they
• AUM Associated Emissions: We support the separate disclosure of GHG emissions associated with assets under management (“AUM”) on behalf of external clients, and encourage the ISSB to specify a methodology to support consistent disclosure. However, while BlackRock reports AUM associated emissions based on the PCAF framework, we note that data, controls and methodologies for computing GHG emissions associated with some asset classes are still emerging, and flexibility will be needed as this area develop.

Whole-of-board approach to governance of climate-related risks and opportunities

We support the objective of enabling a company’s stakeholders to understand the governance processes, controls and procedures used to monitor and manage climate- related risks and opportunities, building on the recommendations of TCFD.

However, in our view, robust oversight with respect to climate-related risks and opportunities requires a whole-of-the-board approach. While we recognize and appreciate that a dedicated committee of the board can be beneficial, especially for companies where climate risk and opportunities are material, the formation of such a committee should be at the discretion of the board. We do not think it is conducive to a holistic approach or, in some cases, appropriate to require companies to disclose the identity of an individual responsible for oversight of climate-related risks and opportunities.

Assessing and managing climate-related risks and opportunities is the purview of management, subject to appropriate board oversight. However, we do not believe issuers should be required to disclose specific details regarding management’s process, but should instead consider which elements of its climate-related governance and risk oversight processes are relevant to its investors. Prescribing a more granular level of disclosures would likely require issuers to disclose a large volume of information that is, on the one hand, unlikely to be material for investors, and on the other hand, may be competitively sensitive for issuers.

Climate resilience, and the evolution of scenario analysis

Where issuers choose to prepare and disclose scenario analysis, this may help a company’s stakeholders assess the climate resilience of its strategy. However, we note that for all issuers, regardless of industry, climate-related scenario analysis has proven to be one of the most challenging aspects of the TCFD recommendations.

Predicting climate change and quantifying its impacts on companies and the economy is inherently complex. We acknowledge the current lack of uniformity across issuers in various industry sectors on the (i) most appropriate climate-related assumptions to use, (ii)

scenarios against which analysis should be conducted, and (iii) client response assumptions to utilize.

Until there is further evolution leading to consistency in climate scenario analysis, the current disclosure landscape is not ready for a mandatory approach to climate-related scenario analysis. We find a “comply or explain” approach consistent with the TCFD framework. to be most appropriate at this time. A flexible approach to disclosure will likely encourage more and more companies to provide such disclosures.

Encouraging climate-related disclosure by private companies

At present, climate-related information with respect to private issuers is lacking in comparison to what is increasingly available from public issuers. To avoid regulatory arbitrage between public and private market climate-related disclosures, we believe that climate-related disclosure mandates should not be limited to public issuers, but should include private companies above an appropriate threshold. Therefore, we encourage national authorities building on the ISSB baseline standard for climate-related disclosure to find innovative ways to include the private markets in their reporting frameworks.

Conclusion

BlackRock strongly supports the ISSB’s goal of providing a global baseline of standards, to support the disclosure of more reliable, comparable, and consistent climate-related information, aligned with the TCFD framework. We view both the ISSB Exposure Draft ED/2022/S1 on sustainability-related financial information and ED/2022/S2 on climate- related disclosure as important contributions to a multi-year, multi-jurisdictional effort towards improving the availability, quality, comparability, timeliness, and interoperability of sustainability related disclosures.

Our recommendations are intended to support the objective set out by the ISSB to promote reliable, comparable, and consistent disclosures. Given the diversity among national reporting regimes, ‘general purpose financial reporting’ may entail different practical conditions and associated liability in different jurisdictions. Therefore, permitting disclosure in the location best aligned with the liability considerations relevant to a specific national jurisdiction will encourage issuers to make more robust climate-related disclosures. For companies subject to reporting requirements in multiple jurisdictions, providing the option to cross refer to comparable reporting at the parent company level, even if outside its general purpose financial reporting, may increase the efficiency of disclosure in some instances, and support the transparent disclosure of climate-related risks and opportunities to investors.

While national authorities will ultimately determine the application and scope of ISSB- aligned standards (including the associated liability framework) in their jurisdiction, we encourage the ISSB to continue engaging with global regulators, as well as other standard setters, to ensure interoperability and alignment with the recommendations outlined above, and to find innovative ways to include the private markets in their reporting frameworks.

We thank you for taking the time to review our input and are happy to be of further assistance as this consultation process proceeds.

The complete letter, including footnotes, is available here