BlackRock sets out strong stance on sustainability, governance

Singapore

BLACKROCK, the world's largest asset manager, has issued an update of its global principles and voting guidelines for 2021, taking its strongest stance yet on sustainability and governance.

The firm, which manages around US$7.8 trillion in assets, will engage with companies more intensely. It will also hold directors accountable by voting against their re-election "where it believes companies are not moving with sufficient speed and urgency" on issues such as climate risk.

Between July 2019 and end-June 2020, it engaged with over 2,000 companies in over 3,000 engagements. This, it says, is a record number and an increase of more than half over last year.

Said Sandy Boss, BlackRock global head of investment stewardship: "The changes are very consistent with our long-term approach... one that's definitely asking a lot of companies to make sure they are demonstrating sound governance and sustainable business practices."

In the year to June 30, BlackRock focused on a universe of 440 carbon-intensive companies. Of these, it voted against 55 directors and put 191 companies "on watch", which means they risk votes against directors in 2021, unless they demonstrate significant progress on the management and reporting of climate risk.

In 2021 it will expand this universe to cover over 1,000 companies that represent 90 per cent of global scope 1 and 2 emissions, in which the firm's clients are invested. Scope 1 covers emissions from owned or controlled sources. Scope 2 are indirect emissions from the generation of purchased energy.

BlackRock said in its 2021 stewardship expectations report that it has communicated its position to companies throughout the past year and expects them to demonstrate how climate and sustainability related risks are considered and integrated into their strategy. "If a company does not provide adequate public disclosures for us to assess how material risks are addressed, we will conclude that those issues are not appropriately managed and mitigated."

The firm explicitly asks that companies in its focus universe show a business plan aligned with the goal of limiting global warming to well below 2 degrees Celsius.

On the issue of governance and stakeholder interests, there are two issues that may disproportionately affect Asian companies. In the interest of independent leadership, BlackRock is looking for one of two accepted structures - an independent chairman or a lead independent director.

Amar Gill, BlackRock's APAC head of investment stewardship, said: "We're emphasising that where you have a non-independent chairman on the board, we are looking for there to be a lead independent director. This is quite common in Singapore but not very common in a lot of the other markets in Asia.

"If there isn't a lead independent director, then we'd be looking at voting against the re-election of a non-independent chairman. That's going to be quite a significant change in Asia."

Another issue in Asia, he noted, is the excessively long tenure of some board directors. "You have so-called independent directors who are reappointed every three years, but they could be on the board for 20 or even 30 years, and are still classified as independent.

"We're going to take a strong view that if independent directors have been on board for an excessive period - I'd say more than 12 years is excessive - then we're going to vote against the re-election of such directors, especially if there is little sign of refreshment of the board with new members coming on."

This stance is expected to take place first among the more developed Asian markets such as Japan and Australia. "For the rest of Asia, this is an engagement topic we will be active on with the companies next year. And then look to make voting decisions in the year after."

The firm is also strengthening its focus on ethnic and gender diversity in large company boards, with an eye towards more voting action against boards which do not exhibit diversity in 2022.

BlackRock says its voting actions result in positive changes. Votes against directors on pay led to changes by over 80 per cent of companies. On diversity, its votes led to improvements by over 40 per cent of companies.

BlackRock chairman Larry Fink in his 2020 letter to investors and shareholders emphasised that climate risk is investment risk and would drive a significant reallocation of capital. In 2019 he called on companies to spell out a purpose beyond the pursuit of profit.