Stewardship focus: BlackRock report highlights sustainability

6 minute read  21.07.2020 Kate Hilder, Mark Standen

BlackRock's stewardship report provides insights into the rationale underpinning its stewardship approach and voting behaviour as well as flagging its engagement priorities for H2 2020.

Key takeouts

  • BlackRock has issued a report 'to provide clarity and insight' into its approach to engaging with companies on their management/disclosure of sustainability related risks.  In particular, the report provides an overview of BlackRock's approach to engagement on climate risk, including insights into its recent voting decisions.  
  • 'Sustainability is core to value creation': The report emphasises that BlackRock's engagement with companies on sustainability related risks is ultimately aimed at promoting delivery of long-term returns.  
  • BlackRock's approach to taking 'voting action': The report explains that BlackRock more often elects to vote against the reelection/election of one or more directors to register concern, rather than to vote in favour of a shareholder proposals because BlackRock considers voting against directors to be a 'globally applicable signal of concern'.  In addition, BlackRock observes that shareholder proposals are often flawed in some way (eg the timeframe specified may not be achievable) and in this case, voting against a director, still has the effect of signalling agreement that there is an issue.
  • Voting record: In 2020, BlackRock took voting action against 53 companies over their failure to adequately disclose/manage climate risk.  A further 191 countries have been put on notice to improve, or risk similar action in 2021.
  • In H2 2020, BlackRock has flagged its intention to 'refresh' its expectations for 'human capital management and how companies pursue sustainable business practices that support their license to operate more broadly'.  In particular, the report highlights board diversity (race/ethnicity/gender) as a key focus when reviewing company directors. 

BlackRock has issued a report 'to provide clarity and insight' into its approach to engaging with companies on their management/disclosure of sustainability related risks.In particular, the report provides an overview of BlackRock's approach to engagement on climate risk, including insights into its recent voting decisions.

The report also emphasises BlackRock's broader focus on other sustainability related risks and gives some insight into itsexpectations'/priorities going into 2021.

BlackRock's approach to sustainability related risks - 'sustainability is core to value creation'

The report emphasises that BlackRock's approach is ultimately aimed at promoting 'governance practices that help create long term shareholder value'.The purpose of engaging with companies on sustainability issues is to ensure that they are 'adequately managing and disclosing sustainability related risks and to hold them accountable if they are not'.

Escalating approach to engagement

The report explains that BlackRock uses both private engagement with individual companies and voting to drive improvement.This involves a 'a natural escalation process'.BlackRock explains,

'If we are not satisfied with a company’s disclosures, we typically put it ‘on watch’ and give the company 12 to 18 months to meet our expectations. (The complexity of many sustainability issues may necessitate detailed reviews of operations by the company if it is to make substantive disclosures that inform investors.) If a company has still failed to make progress after this timeframe, voting action against management typically follows'.

Approach to voting

The report gives some insight into the thinking behind BlackRock's voting behaviour and why BlackRock more frequently elects to register concern through voting against directors, rather than by voting in support of shareholder proposals.

  • Voting against directors is a 'globally applicable signal of concern':The report explains that though BlackRock considers both supporting shareholder proposals and voting against directors to be 'valuable tools in the stewardship toolkit' it 'typically employs votes against directors more frequently since they are a globally applicable signal of concern; additionally, significant votes against directors register strongly with both the individual director and the full board, and, importantly, failure to win a substantial majority frequently results in a director stepping down before the next annual meeting'.
  • Supporting shareholder proposals?The report states that BlackRock 'may support shareholder proposals' where the proposal addresses issues 'material to a company’s business model, which need to be remedied urgently and that, once remedied, would help build long-term value', and where the requests made are reasonable and achievable within the time frame specified.However, the report observes that in some cases 'shareholder proposals address issues that may not be material to the company’s business operations or risk or suggest changes that are not reasonably achievable within the specified time frame. In such instances, we generally decline to support the proposals but may vote against directors where we agree that the proposal highlights a failure (such as insufficient climate risk disclosure)'.

Engagement on climate risk

  • Continuing engagement on the issue: BlackRock has been engaging on climate risk with companies in carbon intensive industries for the past few years and this year stepped up its engagement and focus on climate risk management and disclosure and set the expectation that companies report in line with the TCFD recommendations.
  • Voting record in 2020: Earlier in the year, BlackRock put 244 companies on notice that their approach to integrating climate risk into their business model and/or climate disclosure was inadequate.Of this group of companies, BlackRock took voting action (voting against the election/reelection of a director; voting against the discharge of directors or the entire board; or supporting a shareholder proposal) at 53 companies.The remaining 191 companies have been placed on a 'watch list' and are expected to make improvements or risk BlackRock taking voting action in 2021.

Broader focus on sustainability issues

While the focus of the report is on climate-related issues, BlackRock emphasises that its approach to sustainability is much broader encompassing other environmental issues (eg sustainable practices in agribusiness) as well as other topics that are 'central to many companies’ license to operate' eg human capital management. To illustrate, the report includes a number of examples of instances where BlackRock has taken 'voting action' on the grounds of broader sustainability-related concerns eg sustainable working conditions or diversity and inclusion (among others).BlackRock comments that COVID-19 pandemic has only underlined the relevance of these issues.

Insight into H2 2020 plans

Initiating engagement with 110 companies on climate risk: BlackRock plans to initiate engagement on climate risk management/disclosure for the first time in H2 2020 with 110 companies (broadly, companies operating in emerging markets and financial services companies) from across a range of carbon intensive sectors.BlackRock comments that 'while we have already had conversations with a number of banks, we plan to increase these engagements over the next year as the sector improves its understanding of Scope 3 disclosures'.

Human capital management and diversity

  • BlackRock requested companies to publish disclosure aligned with the SASB standards (including disclosing the racial/ethnic profiles of their US workforces) in January. BlackRock says that as it assesses how companies have responded to the COVID-19 pandemic and 'associated issues of racial equality', it plans to 'refresh' its expectations for 'human capital management and how companies pursue sustainable business practices that support their license to operate more broadly'.
  • The report highlights board diversity (race/ethnicity/gender) as a key focus when reviewing company directors.

[Sources: BlackRock's executive summary; BlackRock report: Our Commitment to sustainability; Harvard Law School Forum on Corporate Governance and Financial Regulation 20/07/2020] 

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