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BlackRock takes firm action on companies' sustainability disclosures

If dissatisfied with a firm's disclosures, it will put it 'on watch' and take voting action against management if progress is not seen to be made.

BlackRock CEO Larry Fink says Investors increasingly recognise that climate risk is investment risk, and questions on climate change are driving a profound reassessment of risk and asset values.

BLACKROCK, the world's largest asset manager, has taken a firm stance in its pivot towards sustainability.

In the Asia-Pacific, it has written to 577 companies representing over 90 per cent of MSCI index constituents (excluding Japan and Australia), putting them on notice that it expects greater disclosures on sustainability.

BlackRock employs an "natural escalation" process. In its recently published investment stewardship report, it said: "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. . . If a company has still failed to make progress after this timeframe, voting action against management typically follows."

The companies it has written to represent around two-thirds of market capitalisation in Asia, excluding Japan and Australia. BlackRock manages US$6.47 trillion in assets as at end-March.

Amar Gill, BlackRock's APAC head of investment stewardship, says in countries such as China, India and Indonesia, companies' awareness of sustainability issues is generally low.

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"Companies in Asia focus on issues like value creation and growing profits, and sustainability is generally not a priority particularly with the board.

"Very generally when we have discussions with management, they often say they understand how important the issue is for the sector. But they need to convince the board. So in our letter we explicitly ask the chief executive to share the content of the letter with (the board). We think bringing boards on our side is quite important."

BlackRock is asking companies to make disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and according to the standards set out by the Sustainability Accounting Standards Board (SASB). These are seen to be "benchmark frameworks" for companies to disclose their approach to climate-related risks and the transition to a lower carbon economy.

BlackRock is an original member of the TCFD Board and a member of the Investor Advisory Group of the SASB.

Mr Gill says: "A lot of companies are coming back to ask what exactly we will be looking for in 12 months. They are interested to know how much we expect. We would like to see that companies are looking at these disclosures, and within the operation, getting the data that would make the disclosures meaningful and relevant."

SASB, for instance, has developed a complete set of 77 industry standards. These industry-specific standards identify a minimal set of financially material sustainability topics and their associated metrics for a typical company in an industry.

The report by BlackRock Investment Stewardship (BIS) is an update of the actions it has taken to give greater teeth to its sustainability commitment. Last year, BlackRock was called out in various reports for a poor voting record in support of shareholder resolutions.

BIS said it identified 244 companies that are making "insufficient progress integrating climate risk into their business models or disclosures". Of these companies, it took voting action against 53 or 22 per cent. The remaining 191 companies are put 'on watch'. Those that do not make "significant progress" risk voting action against management in 2021.

The report alluded to Covid-19 and the racial issues roiling the US. "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 licence to operate more broadly. We also will continue to emphasise the importance of diversity in the board room and will consider race, ethnicity, and gender as we review a company's directors."

The report also framed BlackRock's two main voting actions - holding directors accountable and supporting shareholder proposals - in the context of maximising shareholder value. Both, it said, are valuable tools in the stewardship toolkit.

Shareholder proposals are non-binding and less common outside the US. But they "can garner significant attention and send a strong public signal of disapproval".

"Our approach 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."

The report singles out two Asian companies. BlackRock wrote to the CEO of Korea Electric Power Corp to raise concerns over planned investments in three coal-fired power plants in Vietnam and Indonesia. In subsequent dialogue with the company, it aims to discuss the strategic rationale for the company's involvement, as the projects appear to be "misaligned with its energy transition commitments".

It also singled out Standard Chartered Bank as a leader in climate-related business practices and disclosures. The SCB board's risk committee oversees climate risk and there is a dedicated climate risk team with clear accountability to senior management.

In a letter to shareholders and clients in January, BlackRock chief executive Larry Fink took a strong stance to make sustainability the new standard and a "critical foundation" for BlackRock portfolios. This, he said, is part of the firm's fiduciary duty to clients.

Investors, he wrote, increasingly recognise that climate risk is investment risk, and questions on climate change are driving a "profound reassessment of risk and asset values". "In the near future - and sooner than most anticipate - there will be a significant reallocation of capital."

BlackRock aims to double to 150 its offering of ESG (environmental, social and governance) exchange traded funds (ETFs) globally over the next few years.

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