Although it may seem like the last millennium, it was only in January of this year that the CEO of BlackRock, Laurence Fink, in his annual letter to CEOs, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post.) According to Fink’s letter, “[c]limate change has become a defining factor in companies’ long-term prospects.” Although he had seen many financial crises over the course of his long career, in the broad scheme of things, they were all ultimately relatively short-term in nature. Not so with climate change: “Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis.” And investors are now “recognizing that climate risk is investment risk,” making climate change the topic that clients raised most often with BlackRock. To that end, BlackRock announced a number of new initiatives, among them “strengthening our commitment to sustainability and transparency in our investment stewardship activities.” As part of that initiative, BlackRock said that it would hold companies accountable if they failed to make sufficient progress. That position came in the face of press reports, like this one in the NYT, highlighting what appeared to be stark inconsistencies between the BlackRock’s advocacy positions and its proxy voting record, protests outside of its offices by climate activists, letters from Senators and charges of greenwashing. So what has been the result? BlackRock has just published a report describing its investment stewardship actions taken during 2020 in connection with climate and other sustainability issues. Given that BlackRock is the largest asset manager, companies may want to take note.
In his letter, Fink recognized that, with regard to climate change, “we are on the edge of a fundamental reshaping of finance”: “Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage—a key building block of finance—if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?” With that in mind, BlackRock’s “investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”
To help address these issues, Fink made clear that companies needed to step up their games when it comes to sustainability disclosure. Fink maintained that everyone needs to see a “clearer picture of how companies are managing sustainability-related questions.” If companies do not ultimately address sustainability risks, Fink wrote, they will find the markets to be a skeptical bunch; transparency, on the other hand, will attract investment. As part of its engagement this year, BlackRock asked companies to publish disclosure in line with standards of the Sustainability Accounting Standards Board (SASB) and to disclose climate-related risks in line with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). (See this PubCo post and this PubCo post.) The information would be used by BlackRock to assess companies’ risk oversight and planning. Notably, in “the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk. We believe that when a company is not effectively addressing a material issue, its directors should be held accountable….Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
In its new report, BlackRock explains that it implements its program of investment stewardship through engagement and voting—either votes against company directors or support for shareholder proposals. While it has “been speaking with companies for years on sustainability issues, [its] investment stewardship team has intensified its focus and dialogue this year with companies facing material sustainability-related risks.”
BlackRock’s escalation process involves putting a company “on watch” if it is not satisfied with the company’s disclosures and allows the company 12 to 18 months to measure up. If the company fails to do so, BlackRock will usually take action by voting against management, most often with votes against those directors with oversight responsibility for the particular issue or those in senior leadership roles on the board. These votes could ultimately lead to a director’s stepping down from the board. With regard to shareholder proposals, BlackRock may vote in favor of proposals that address material issues, that it believes “need to be remedied urgently and that, once remedied, would help build long-term value. We may support proposals seeking enhanced disclosure if the information requested would be useful to us as an investor and if management has not already substantively provided it. To gain our support, the requests made in a shareholder proposal should be reasonable and achievable in the time frame specified.” If proposals do not meet those criteria, BlackRock may refuse to support the proposals but vote against directors if it believes that “the proposal highlights a failure (such as insufficient climate risk disclosure).”
In 2020, BlackRock “identified 244 companies that are making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, we took voting action against 53, or 22%. We have put the remaining 191 companies ‘on watch.’ Those that do not make significant progress risk voting action against management in 2021.”
BlackRock reports that it took voting action against companies where it believed “corporate leadership [was] unresponsive to investors’ concerns about climate risk or assessed their disclosures to be insufficient given the importance to investors of detailed information on climate risk and the transition to a low-carbon economy.” In 2020, these companies were primarily in the energy sector, with some in utilities, industrials and materials, and one in the financial sector. Of the 191 companies “on watch,” some were faced with critical issues, such as the pandemic and the economic crisis, some were working on evolving disclosure standards and some “have yet to fully acknowledge the risks and opportunities posed by the transition to a low-carbon economy.”
In the second half of 2020, BlackRock plans to initiate engagement with 110 other companies across carbon-intensive sectors, including companies in the “next wave in tackling climate change, such as financial services.” Although BlackRock’s initial focus has been primarily “carbon-intensive sectors,” it has also “identified a number of companies outside the carbon-intensive sectors that present high sustainability-related risk for heightened engagement over the next year.”
BlackRock observed that, while the focus of its report is on climate-related issues, it conducts investment stewardship encompassing a much broader range of issues related to sustainability, including “topics that have been central to many companies’ license to operate, particularly over the past few months, such as human capital management and diversity and inclusion. The COVID-19 crisis, and more recently the protests surrounding racial injustice in the United States and elsewhere, have underscored the importance of these issues and a company’s commitment to serving all of its stakeholders.” (See this PubCo post.) BlackRock noted that, as a long-term investor, it believes that “companies forced into difficult choices affecting employees, suppliers and local communities—especially those companies receiving government financial support—need to make prudent, balanced decisions about executive and board compensation and allocation of capital.” The SASB standards that BlackRock has advocated call for disclosure of the racial and ethnic profile of companies’ U.S. workforces. BlackRock advises that, in “the second half of 2020, as we assess the impact of companies’ response to COVID-19 and associated issues of racial equality, we will be refreshing our expectations for human capital management and how companies pursue sustainable business practices that support their license to operate more broadly. We also will continue to emphasize the importance of diversity in the board room and will consider race, ethnicity, and gender as we review a company’s directors.”
The report indicates that BlackRock has taken voting action where it is “unconvinced that companies are preserving their social license to operate.” In that regard, among other things, BlackRock has voted in support of a shareholder proposal on supply chain due diligence in light of concerns about working conditions, in favor of a shareholder proposal to further transparency regarding racial discrimination in lending practices and in favor of a proposal for disclosure regarding diversity and inclusion.