Larry Fink, the Chairman and CEO of BlackRock, recently sent his annual letter, addressing it to all investors with an intention to serve as a shared message to all stakeholders.
The recently released 2023 letter primarily shares his perspectives on topics related to the financial performance and strategy of BlackRock, however, does include a section containing ESG subject matter specific to climate change. Within this section of the letter, attention is given to clients which have a range of investment objectives and perspectives, in recognition of the importance of having “access to data to ensure that material sustainability risk factors that could impact long-term asset returns are incorporated into their investment decisions.” The letter reemphasizes BlackRock’s view of “climate risk as an investment risk,” citing risk-related scenarios such as natural disasters and their impacts to the market, while specifically focusing on the topic of transition to a low-carbon economy being top of mind for BlackRock clients.
While in the past he has written two letters each year - one on behalf of BlackRock clients to CEOs and the other to BlackRock shareholders, this year’s combined letter to investors and all other stakeholders may signal a subtle move away from providing targeted stewardship letters to CEOs going forward. While this may lead to some confusion amongst corporate CEOs and executive team members who typically seek to gain further insights from the CEO letter, there is sufficient information within this year’s combined letter which places emphasis on BlackRock’s previously stated position to call upon portfolio companies to improve sustainability-related disclosures. The message for companies to improve such disclosures, alongside other initiatives such as stakeholder engagement and climate transition planning, was initially announced by BlackRock and other large institutional investors years ago, and previously covered by Georgeson as identified in Fink’s letter released in 2020.
The climate-related section of this year’s letter entitled “Helping clients navigate and invest in the global energy transition” provides some assurance of BlackRock’s expectations for companies and how they may wish to implement or revise strategies to assess, disclose, and act on material climate-related risks. The topic of climate-risk management alongside guidance for disclosure of material sustainability-related risks and opportunities has continued in 2023 as a shared theme amongst larger institutional investors, as recently touched on by Georgeson pertaining to BlackRock’s 2023 U.S. Proxy Voting Guidelines.
BlackRock’s position regarding climate risk within its 2023 guidelines is to leave it “up to each company to define their own strategy”, which aligns with Fink’s perspective that is reemphasized in his 2023 letter stating “It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy, and we don’t know the ultimate path and timing of the transition. Government policy, technological innovation, and consumer preferences will ultimately determine the pace and scale of decarbonization. Our job is to think through and model different scenarios to understand implications for our clients’ portfolios. That’s why BlackRock has been so vocal in recent years in advocating for disclosures and asking questions about how companies plan to navigate the energy transition. As minority shareholders, it’s not our place to be telling companies what to do.” While BlackRock further states that “Better data is essential” and cites “More than half of the companies in the S&P 500 now voluntarily report Scope 1 and Scope 2 emissions” with expectations that the number will continue to rise, Fink reminds us of his perspective that “it is for the governments to make policy and enact legislation, and not for companies, including asset managers, to be the environmental police.”
The 2023 letter also places emphasis on BlackRock’s role as a fiduciary to clients who “have a wide range of investment objectives, preferences, time horizons, and risk tolerances.” Fink provides his perspective of “Choice never being more important to BlackRock than it is today based on their broader and more diverse set of clients” while further stating “in this environment the diversity of our offerings, our global perspective and insights, and our approach of always putting our clients’ preferences at the center of our work remain powerful competitive advantages.” Within the section of the letter entitled “Transforming proxy voting with greater client choice,” BlackRock places emphasis on efforts to continue to innovate in a variety of areas to expand choices made available to their clients. This includes offering options for clients that have expressed interest in having a more direct role in the stewardship of capital, with BlackRock delivering on a solution to enable a portion of interested investors with the ability to vote their shares. BlackRock’s belief is that “adding more voices to corporate governance can further strengthen shareholder democracy. But democracy only works when people are informed and engaged. As more asset owners choose to direct their own votes, they need to make sure they are investing the time and resources to make informed decisions on critical governance issues. Proxy advisors can play an important role. But if asset owners rely too much on a few proxy advisors, then their voice may fall short of its potential.” Fink states his belief “that the industry would benefit from more proxy advisors who can add diversity of views on shareholder issues.”
Georgeson notes that the two largest proxy advisors, ISS and Glass Lewis, have expanded the variety of voting policies to which their clients can subscribe, and both proxy advisors have the capability to develop customized policies based upon the views of their clients. Additionally, Georgeson has seen an emergence of technology platforms focused on voting and shareholder communication, and a trend in new service providers offering proxy advisory services. Fink further states “Amid these shifts, companies will also need to find new ways to reach their shareholders who choose to direct their own votes, and robust disclosures and advances in the proxy ecosystem will become even more important.” Based on this commentary from BlackRock, companies will need to be diligent in their approach to engagement with investors, should they hope to gain a deeper understanding of how respective voting choice programs are implemented in conjunction with the various views of how different portions of an investor population may wish to execute on customizable voting policies. Companies may also wish to remain pro-active with their respective approaches for assessing and providing more robust disclosure based on materiality of applicable risks to their business.
The collective remarks from BlackRock serve as its reflection on the evolving risks and opportunities that exist based on the current state of the investment universe. This includes impacts from globalization, supply chains, geopolitics, inflation, economic policies, climate, and other ESG-related factors, which remain critical for institutional investors such as BlackRock to continue to identify, monitor, and manage based on material risks that may impact shareholder returns.
There is a universal understanding amongst large institutional investors that there is no one size fits all approach for integrating ESG-related issues into a company’s strategy. However, there is also an expectation that a company should establish an appropriate governance structure to assess and manage ESG-related risks and opportunities, disclose against investor-favored frameworks, and ensure that there is a plan to mitigate the material ESG-related risks that the company may face. Hence, from an investor point of view, issuers need to ensure that their ESG-related strategy is both protecting value through risk management and creating value through the opportunities that will arise from the global energy transition. In conclusion, Georgeson recommends that issuers focus on continuous improvements to disclosure, which for material risks includes the establishment of meaningful targets which are well-defined and accompanied by robust and annual reporting on progress.
This notice is provided by Georgeson for general informational purposes only and is not intended and should not be construed as legal, regulatory, financial or tax advice. Georgeson is not licensed or authorized to practice law in any jurisdictions and hence does not provide any legal advice and it does not hold itself out as doing so. Neither Georgeson nor any of its affiliates or contributors accept any responsibility or liability for the quality, accuracy or completeness of any information contained in this notice. It is important that you seek independent professional advice relating to the subject matter of this notice before relying on it.
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