When BlackRock announced its stewardship expectations and updated proxy voting guidelines for 2021 last week, it sent a strong signal to the market about the importance of environmental, social, and governance (ESG) risk assessment and disclosure. BlackRock's guidance comes on the heels of its 2020 client letter, in which it committed to prioritizing climate change and sustainability in its investment decisions, and official commentary detailing BlackRock's approach to board diversity. That these investment and governance principles have been promulgated by the world's largest asset manager is further evidence that key market participants (other recent examples include Nasdaq, Glass Lewis, and ISS) continue to make ESG factors critical for their rule- and decision-making, and that the firms they regulate, advise, and invest may wish to consider following suit.
The guidelines issued by BlackRock that will have significant ESG implications for public companies, include the following:
- In order to ensure board effectiveness, BlackRock expects "boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of a variety of views and opinions in the boardroom." While there are no minimum requirements for race, ethnicity, or sexual orientation, BlackRock encourages boards to have at least two women directors. Further, to the extent that boards have not adequately accounted for diversity, BlackRock may vote against members of the nominating/governance committee.
- BlackRock advocates for robust disclosure of environmental and
social risks and opportunities as part of a well-functioning
governance model. As such, companies are asked to:
- Disclose the identification, assessment, management, and oversight of sustainability-related risks" in line with the four pillars of the Task Force on Climate-related Financial Disclosures (e.g., governance, strategy, risk management, and metrics and targets)
- Make available tailored reporting on environmental and social issue in accordance with the standards put forth by the Sustainability Accounting Standards Board (SASB).
- In order for investors to understand the composition of the company's workforce, BlackRock encourages companies to bring their disclosures on employee demographics in line with the EEOC's EEO-1 survey. Further, where companies fall short on these disclosures, BlackRock may vote against members of the committees responsible for human capital oversight or support relevant shareholder proposals.
- BlackRock expects companies to understand how their business may be impacted by climate-related risks and opportunities. To that end, companies must articulate how they are preparing to transition to a low-carbon economy, in two different scenarios: one in which global warming is limited to well below 2°C, and one with net zero GHG emissions by 2050.
- BlackRock acknowledges the need for companies to engage in certain political activities in order to influence public policy consistent with its values and strategies. However, BlackRock also recognizes the reputational, ethical, and compliance risks associated with corporate political activity, and intends to evaluate the "alignment" between company's stated positions on policy matters and its political activity.
As the world's largest asset manager, BlackRock is using its considerable influence to press firms to make more robust disclosures on a number of critical social and environmental issues, including a company's climate impact, workforce composition, and political activities. Moreover, boards of directors that fail to bolster these disclosures risk capital exit, as well as the potential for BlackRock (and other concurring investors) to vote against the reelection of board members responsible for overseeing these issues on the board's behalf. In the new year, it is clear that ESG has only gained importance among powerful market actors.
Ballard Spahr's ESG Group has deep experience advising companies and investors in this space. Please contact us for more information.
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