BlackRock Inc. is a leading proponent of sustainability and one of the largest investment companies in the world with trillions of assets under its management. With interests across so many sectors and industries, the company has a great voice and influence on corporate governance matters.
Each year, BlackRock Investment Stewardship updates the company’s Global Principles and market-specific voting guidelines. These guidelines reflect what the company thinks is best for its clients in the long-term. BlackRock is keen to ensure that voting reflects its opinion on sustainable business practices and corporate governance.
Emerging issues, new information, and other factors mean that the guidelines need to be updated every so often. Currently, the themes dominating voting discourse include moving towards a low-carbon economy, diversity and equity, board composition, evaluation of shareholder proposals, and political influence by companies.
How Does Shareholder Voting Impact Companies?
BlackRock, as an investor, gets a chance to vote for the election and re-election of directors. It also gets to vote on proposals made by investors in annual general meetings.
There are issues that BlackRock considers as urgent and when the company does not address them quickly enough, BlackRock’s guidelines advocate for not re-electing directors.
This has had profound changes in the companies where BlackRock invests. For instance, voting against directors on matters of pay led to change in 80% of cases in the past year. On matters of diversity, it led to change in 40% of companies.
Stewardship Priorities for 2021
For the current calendar period, BlackRock has highlighted focus areas that “put sustainability at the heart of everything we do.”
- Shareholder proposals
- Climate risk
- Stakeholder interests
- Diversity , equity and inclusion
- Board quality
Focus on Shareholder Proposals
BlackRock also votes for or against proposals made by other shareholders in companies where BlackRock invests. The position taken on any issue will be assessed to determine whether it represents a material business risk. If so, BlackRock will evaluate whether management has done enough to address it and this is what informs the direction of the vote. In the past year, BlackRock has supported 89% of environmental proposals fronted by shareholders.
Going forward, BlackRock intends to continue supporting shareholder proposals as long as they are in line with the long-term value creation intention of the company. The proposal should also not be unnecessarily constraining to the management of the company.
Improving Climate Risk Management
In January 2020, BlackRock requested companies to make climate and sustainability-related risk reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework and the Sustainability Accounting Standards Board (SASB) standards. BlackRock notes that several countries including the UK and New Zealand have made TCFD reporting mandatory.
BlackRock has 191 companies on a ‘watch list’ regarding climate-related issues. These companies will have BlackRock vote against their directors should they not demonstrate commitment to align operations with the net zero emissions target. They need to show an understanding of how climate and sustainability-risk are assessed and weaved into their overall strategy.
Further, BlackRock intends to monitor political activities of especially carbon-intensive companies. This scrutiny is meant to ascertain whether there is congruence between public statements companies make and their political lobbying activity.
Assessing and Managing Business Stakeholder Issues
New in 2021 is an emphasis that companies report on how they determine their business stakeholders and how stakeholders’ interests are considered when making business decisions.
Additionally, BlackRocks is looking for companies to explain how they are addressing potential adverse impacts arising from business practices to mitigate material risks.
BlackRock currently has put nearly 150 companies on a watchlist because of activities with adverse impact on stakeholders. Such stakeholders include indigenous communities, employees, suppliers, and customers.
BlackRock intends to take a collaborative approach in discussing ways to eliminate or reduce such negative impacts going forward. A lack of change would force BlackRock to push for a change in the boards of such companies.
Diversity, Equity and Inclusion
BlackRock believes that diversity contributes to innovation and long-term value creation. To put that belief in action, the company has increased its expectation for disclosure of workforce gender and ethnic diversity and for company directors.
The make-up of companies should reflect their customers and the communities they operate in. Company directors should possess diverse personal and professional experiences as well to set a tone from the top.
BlackRock recognizes there are regional differences regarding the sharing of diversity information. For those in the United States, the expectation is for disclosure of demographic info including race, gender, and ethnicity using the equal employment opportunity standard form (EEO-1) along with explanation of any actions to promote and support diverse workforce.
Another new addition is the request for information about corporate political activity.
This aim is to ensure companies act consistently with their public statements on “material and strategic policy issues” and to provide an explanation for any apparent inconsistencies.
The needed transparency and disclosure extends to a company’s broader ecosystem including its trade associations.
To evaluate lobbying activity for US companies, BlackRock cites the CPA-Zicklin Index which benchmarks political disclosure and accountability policies and practices for election-related spending.
Emphasis on Board Quality
BlackRock insists on companies having independent directors who can effectively look after investors long-term interests. In Asia, for instance, the company insists that companies must have one director whose role includes engaging with shareholders to understand their concerns.
BlackRock also believes that a board needs to make the management aware of risk as well as strategic opportunities that can better a company’s position. As such, going into 2021, BlackRock will scrutinize boards more keenly for this. It also intends to hold directors accountable where business practices and disclosures fall short of expectations.
On board diversity, BlackRock will continue to push to have boards become more diverse in terms of age, gender, and professional experience.
In cases where BlackRock feels this is not the case, it will vote for change in the makeup of the entire board. In the US where it is possible to disclose such data, BlackRock is asking companies to declare the ethnicity of their directors. This will enable current and potential investors to make an assessment on independence.
BlackRock says it will also be looking at the average time of service for directors. It says it is crucial to find a balance between professional experience of long-serving directors and the fresh perspective of newer ones.
Finally, BlackRock will be looking at compensation packages for directors so that they coincide with long-term value creation. Bigger packages should reflect better outcomes for all other stakeholders besides shareholders.
Sustainability Risk is Investment Risk
Going forward, BlackRock has made a commitment that their investments strategy will be led by the conviction that sustainability risk is part of investment risk.
They will continue to hold boards accountable for sustainability related matters. In addition, BlackRock continues to look for deeper understanding on how sustainability factors affect economic growth, asset values, and financial markets. A better understanding will help to manage risk better and create long-term value for shareholders.