Question

BlackRock is the world's largest asset management corporation. In January 2020, Larry Fink, the CEO and Chairman of BlackRock, issued an annual letter titled “A Fundamental Reshaping of Finance”1 to Chief Executives of companies in which BlackRock invests. In this letter, BlackRock announces several sustainability initiatives, recognises climate risk as investment risk, and urges companies to improve their financial disclosure to shareholders in relation to climate risks. As part of the initiatives, BlackRock begins to exit investments that present a high sustainability-related risk, such as thermal coal producers. The Institute for Energy Economics and Financial Analysis (IEEFA) commented that BlackRock’s initiatives might lead to review and likely divestment of Australian coal companies such as Whitehaven Coal and Yancoal.

Required:

Assume you are a business consultant, reporting to the board of directors of Yancoal Australia Limited, Australia's largest pure-coal producer. Yancoal is listed on the Australian Securities Exchange. You have been contracted to provide a report to Yancoal’s Board of Directors which:

1. Explains, taking an agency theory lens, why BlackRock revised its investing practices to consider climate risk as an investment risk. (Suggested words: 600)

2. Evaluates, taking an institutional theory lens, whether Yancoal will provide climate-changerelated risk disclosures. (Suggested words: 600)

3. Refers to Yancoal’s 2018 annual and sustainability reports for the year ended 31 December 2018,2,3 and a) evaluates whether Yancoal has provided any/adequate climate-change-related risk disclosures in these reports, and b) provides recommendations for preparation of, or improvement on, the climate-change-related risk disclosures for its 2019 reports for the year ended 31 December 2019 which will be released in April 2020. (

Answer 1

Black rock the largest asset management company decided to consider climate risk as an investment risk is a good go for investing and making necessary disclosures on the financial statements so as to enables its investors a better understanding of its strategies and investing planning decisions.

This disclosure ensures the investors to act accordingly and make a risk averse decisions.

1 Introduction

Climate Risk:

Climate risk refers to risksesulting from the effects of global warming. The study of climate includes developing risk assessment and riskmanagement strategies appropriate to global warming.

Climate risk is that risk which is beyond the control of an entity and can be regarded as Macro Factor and an Uncontrollable Factor.

Black rock has taken a smart move iof disinvesting and diverted the funds to an Australian company is risk averse

2. What accountability measures serve

Accountability as a principal-agent relationship

to align the incentives of the donor with those of the recipient in climate change financing? In

order to answer the question, we frame the problem as a principal-agent relationship, which

allows us to assess the impact of various accountability measures introduced in climate change

financing modalities and determine how these can affect the “contract” between the donor and

recipient. This also allows us to determine the potential impact of certain agent characteristics,

who have looked at accountability relationships in public administration

using agency theory. However, the extant literature offers limited insights into the specific

accountability measures found in international climate change financing institutions, which is our

objective .The next section elaborates on the concept of

accountability as a principal-agent relationship and describes the accountability issues stemming

from the relationship between donor and recipient in international climate change financing. We

then analyze the impact of information asymmetry and the use of imperfect performance data, as

well as the use of formal and informal accountability mechanisms (i.e., an accreditation process,

penalties and pressure from civil society organizations) to align the agent’s incentives with that

of the principal. This is followed by a discussion of the impact of agent risk preferences. The

last section of the paper provides concluding remarks, suggestions for policy-makers to improve

the accountability relationship between donors and recipients in climate change financing, as

well as areas for further research.

3.Informational issues

In a classic principal-agent model, the principal uses a compensation scheme to incentivize her

agent in striving for high levels of performance

With the agent possessing private information regarding his level of effort, the principal

is now unwilling to bear all the risk associated with the achievement of climate change

mitigation and adaptation results for the project she intends to finance. One way to indirectly

gauge the agent’s level of effort is via the imposition of a Monitoring and Evaluation System

(MES). The MES would require the agent to develop performance indicators, as well as collect

and report performance data to the principal.

4.Formal accountability measures

The first formal accountability measure to be analyzed is an ex ante accreditation process for the

agent. This accreditation process would impose a series of specific requirements to be met by

the agent before he is considered for funding, to ensure the agent has mechanisms in place for

sound project management. Such a pre-screening process is used by many multilateral

institutions and is a key component of the accountability regimes

5.Informal accountability measures

6. Impact of risk

Conclusions

The juxtaposition of the case with observable and unobservable effort allows to highlight how

asymmetric information can increase the risk of low project performance for the donor in climate

change financing, as the donor cannot directly observe how much effort the grantee is putting

towards implementing the project. We also looked at how making grant payments contingent

upon performance indicators related to the agent’s activities and outputs, in addition to the

climate change outcomes he achieves, can be beneficial if the performance indicators chosen are

indeed positively correlated.

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