BlackRock engages on climate disclosure

How broadly do you conceive of investment stewardship?

We look at investment stewardship starting from the perspective of governance, because in our experience there are very few companies that have excellent practices in relation to their environmental and social impacts without having good governance. So we believe good governance, good leadership from the board and executive management is the key to having good business practices throughout the company, including environmental and social practices.

One of the trends of this year’s proxy season has been the success of shareholder proposals regarding climate change. Have you been surprised by the level of support they have attracted?

From BlackRock’s point of view, it was a natural part of a progression, or an escalation. Our approach is to engage first on the issues, whether they are raised in a shareholder proposal or related to board quality and therefore something we might reflect through our voting on them in our votes on directors. But the point is that we talk to companies first about our concerns and expectations, and then we give them time to respond to that conversation.

For companies whose response is not as full as we would have expected, that may be reflected in our voting. That may lead us to vote against management. We can’t speak for other investors, but there is a trend at certain companies whereby a relatively low level of support that builds over years will lead to a vote passing if a company doesn’t respond in the way investors have been asking for.

What are you seeing with regard to how companies relate to you on these issues?

You can’t generalize but you do see trends. One thing we think is important about engagement and having that conversation is that we can explain how we look at the issue as an investor. For example, [regarding] climate risk disclosure: how we look at that issue, why we think it’s important for investors to understand how a company is dealing with that risk, and how we use the information it is either already disclosing or may disclose in the future.

The reason we believe that’s important is that there’s a lot of misperception in the general debate around what these issues are. Partly that comes down to language: some people think if it’s called ‘sustainability’ then it’s a specialist investing strategy. We are looking at these types of issues where they are material to a business’ operations, and we’re looking at the sustainability part in terms of sustainable financial returns into the future.

We also want to make sure companies understand that this is why we are asking for these things – it’s not because we love disclosure for its own sake. This is information we think investors need to compare different companies in the same sector to assess whether some are taking a more sophisticated approach to an emerging issue than others. [That information helps us] encourage the others to catch up through engagement.

That’s why we engage with companies that don’t get shareholder proposals. The shareholder proposal process is very common here, more than elsewhere, and yet many of these issues – whether it’s to do with human capital, climate risk or human rights – are global and faced by companies in every sector, to various degrees.

What are some of the better engagement practices you see?

Where we are seeing some really good progress is in companies using their written reporting as a broad-based form of engagement. That means being more communicative than you might be in a standard regulatory filing, making those mandatory filings even more communicative and then also using the company website or producing particular reports focused on key areas. It means using their own language to tell the story of the company and its approach to managing its particular risks – or the opportunities. You see those in cost savings, product innovation and entry into new markets.

Companies have argued that they already make significant disclosures. Is the concern that these disclosures are of the wrong style, or boilerplate?

It’s specific to specific companies. As a general indication, a lot of companies have started [doing this] but are not perhaps evolving as quickly as the apparent risk in their business, which suggests they ought to be disclosing how they are managing that risk. Sometimes companies are doing a reasonable job but they need to be moving faster. Others haven’t started despite multiple requests, or they say they are reporting relevant information but shareholders disagree.

Where do you like to see this information displayed?

It helps if the proxy is relatively focused on items that are going to be under consideration at the shareholder meeting. There are other venues for reporting relevant information, particularly data. With a lot of the environmental and social information we are seeking, it’s data as well as contextual reporting. It helps to have both and it doesn’t always fit into the proxy statement. The website is a good place – we see more companies starting to have integrated reporting, which I think is a much more significant undertaking. It’s a positive step, but you don’t take it lightly.

My sense is that companies need to take the approach that best fits what they’re doing now but also have a plan to evolve. That may lead to significant changes in how they report [in the future], but they shouldn’t put off doing something now for the sake of being perfect in three or five years’ time.

What sort of work are you doing with the Sustainability Accounting Standards Board (SASB)?

As an investor, BlackRock has been involved in some of SASB’s work up to now in identifying the key risks for certain sectors, being part of that feedback loop. I’m on the investment advisory group, which is helping SASB go from developing the standards to having them used by companies. From our point of view, SASB has taken a constructive approach to identifying the material environmental and social factors that companies should be reporting – and the governance ones – because as investors we need to home in on a few data points to be comparable across companies in a sector.

The fact of the matter is that without a standardized reporting framework it’s very difficult to do this analysis at scale, and yet most investors are trying to distill information about a vast universe of investable companies and make analytical decisions based on non-comparable information. Often it puts portfolio managers off doing this because you sometimes have to do a deep dive and independent research into every single company. If you can apply a filter, it can really help streamline the process. 


How do you avoid the danger of this ending up as a one-size-fits-all approach to disclosure?

That’s where the companies come in. As report writers, they need to give feedback to SASB about the high-level concepts, such as human capital, and then the metrics that are recommended to be reported as they pertain to a particular sector. If they think there is something not quite optimal about that, they can work with SASB to try to rethink it.

A lot of that work has been done but this is still early days in terms of this type of reporting, when you think how long financial reporting standards have been in use and under development. I think we have to be open-minded about how fit for purpose [the SASB standards] are going to be on day one, and keep working on building them out. SASB has done a great job of getting [those standards] fit for purpose – but nothing is going to be perfect on day one.

This article originally appeared in the Corporate Secretary special edition on shareholder engagement. Click here to view the full issue.