Making BlackRock’s “Nice List” Just Got A Lot More Challenging

Written By Elizabeth Saunders, Partner

December 22, 2020

BlackRock Investment Stewardship (BIS) released its 2021 Stewardship Expectations a bit earlier than anticipated, which may prove to be a useful gift for companies that need a jump on making the changes investors are expecting to see in the new year. While it should come as no shock that the largest global investor is aggressive with its principles and voting guidelines, companies may be surprised to find that the language is sharper, the focus universe is larger, and the voting impact is greater than ever before.

All changes outlined in the document are driven by BlackRock’s long-standing conviction that sustainability risk is investment risk. As described in the company’s September 2020 Investment Stewardship Annual Report, this past year BIS opposed the re-election of over 5,100 directors, the most in its history, to demonstrate its commitment to seeing progress made on issues that it deems central to long-term value creation.

The coming year will be no different. BlackRock has stated (in no uncertain terms) that it will use votes against directors, and in support of shareholder proposals, to drive the changes it views as integral to achieving its clients’ long-term economic interests.

Check This List Twice

Here’s a list of seven key takeaways from the new stewardship expectations that every company needs to know.

  1. BlackRock is doubling down on how companies manage climate risk.
    • BlackRock continues to expect companies to demonstrate a commitment to transitioning to a low carbon economy. In the year ended June 30, 2020, BlackRock focused on 440 carbon-intensive companies. In 2021, 1,000 companies will be added to this list. The newbies include communication services, consumer discretionary, consumer staples, energy, financials, healthcare, industrial, information technology, materials, real estate, and utility companies that face significant climate risk because of their business models, even if they do not operate in carbon-intensive industries. The “watch universe” now represents 90% of the Global scope 1 and 2 emissions of the companies in which BlackRock clients invest.
    • All of the companies on the list will need to “disclose a business plan aligned with the goal of limiting global warming to well below 2 degrees Celsius, consistent with achieving net zero global GHG emissions by 2050,” according to the investor’s explicit ask. But companies should have theoretically had a head start in 2020— as the new expectation is consistent with Larry Fink’s Letter to CEOs from January 2020 that recommended reporting using the TCFD framework and SASB standards.
  2. Companies can expect new guidelines related to natural capital.
    • Beyond climate risk, BlackRock has stated that it will be taking a closer look at how companies impact natural capital. Specifically, it will release expectations on promoting biodiversity and counteracting deforestation in the coming year.
  3. Stakeholder materiality assessments are no longer optional.
    • Most companies tend to address stakeholder assessments in an informal way, generally identifying issues as those discussed and considered by the Board of Directors. BlackRock is now more directly asking companies to report on how they identify their key stakeholders and then clearly show how those stakeholders’ interests directly factor into critical business decisions. This can be a lengthy and time-consuming effort for companies, who are expected to reach out to all internal and external stakeholders to assess material topics. This includes customer and employee surveys, institutional outreach, and supplier analysis. Any adverse impacts or material risks to stakeholder interests that result from business practices will need to be addressed and mitigated, and companies will have to demonstrate their due diligence as well as board oversight of these efforts.
  4. Disclosure on board and workforce diversity will not be optional.
    • Ethnic and gender diversity on the board and within the workforce are increasingly important issues for investors, and BlackRock is once again raising the bar in this area, especially when it comes to large company boards. U.S. companies will need to disclose EE0-1 data that includes race, gender, and ethnicity demographics for both their boards and their workforces. They will also be expected to describe how these numbers will continue to improve through specific actions designed to advance diversity, equity, and inclusion (DEI).
    • It’s important to note that for boards, diversity of tenure matters, too. BlackRock is interested in seeing “a balance between the knowledge and experience of seasoned directors and the fresh perspective of newer directors” to help ensure that boards are as well-rounded as possible.
  5. Actions will speak as loudly as words in political matters.
    • Reasonably, BlackRock expects companies to be doing what they say they are doing when it comes to corporate political activities. Companies will have to demonstrate that their actions, and the actions of political groups of which they are members, are in line with their public statements on material and strategic policy issues. If a business is an active member of a trade association, it must also be accountable for the company it keeps. In other words, the company’s position will need to be aligned with the trade organization’s position on major policies, or the company will have to provide a reasonable explanation as to why it is not.
  6. The buck will stop with the board.
    • BlackRock has always expected boards to influence and oversee management’s approach to material sustainability issues. In this year’s guidelines, those expectations have been restated more explicitly than ever, expressing that the board will be held directly accountable wherever business practices or disclosures fall short of expectations. General statements of risk oversight will no longer check the box.
  7. Support for shareholder proposals will increase.
    • Since July 2020, BlackRock has supported 50% of environmental and social shareholder proposals. The investor specifically supports proposals it sees as being aligned with long-term value creation. Going forward, BlackRock will likely continue to lend its support more regularly, especially for those proposals that address a material business risk that management is not adequately addressing. Even where management is making progress on an issue, BlackRock has indicated that it will still support a proposal if that proposal can help accelerate the desired results.

Make Your Own List

Nothing in the new 2021 guidelines is unexpected. But as the past year has shown, it’s all well-worth taking seriously.  If you haven’t already, now’s the time to make your own list of actions that will be necessary to help your business measure up to BlackRock’s latest expectations. Doing so can help you avoid unwanted votes next year while making your company’s policies more sustainable going forward.

If you’re interested in learning more about how Clermont Partners can help your company better understand risks and align with investor expectations, contacts us.

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