The world's largest fund manager outlined its key engagement priorities for 2021, including board quality and effectiveness, climate and natural capital, and company impacts on people.
BlackRock's sustainability engagement priorities are carried out on a global basis, which means they will be raised with Australian listed companies. They are the foundation, alongside Global Principles and market-level voting guidelines for the firm's engagement with thousands of companies annually, said Iris Davila, head of investment stewardship, BlackRock Australia.
Board composition, effectiveness, and accountability remain a top priority, BlackRock said, because governance issues require effective board leadership and oversight. In Australia, BlackRock particularly look at issues including overboarding - directors holding positions on too many boards.
"Something that we spend a lot of time focusing on is how boards work, seeking out how they manage these risks, and an issue of whether or not some boards are overboarded," Davila said. "If you think about in the peak intensity months [in the early part of the COVID-19 crisis], many boards were having to meet on a weekly if not daily basis - that whole issue of over boarding can bring itself out."
Many ESG issues are correlated and interrelated, and companies that out-perform tend to have an articulated strategy around purpose, Davila noted.
"COVID did bring out some urgency around the climate issue, but also the natural capital as well, and if you think about strategy, purpose and financial resilience, that's something that we spend time on as well," she said. "Both the human capital management piece and capital preservation and balance sheet management, and all of that. But many companies that did well were those that had articulated a strong purpose and strategy which again is always very effective when you speak with various stakeholders - employees, clients, customers, and other external stakeholders."
The theme of company resilience - in terms of overall financial sustainability as well as consideration of ESG issues - was made more explicit through 2020.
"They're all brought back together by the clear articulation of the strategy and the clear articulation of purpose as well, and how you are also considering all the various stakeholders that companies now need to be mindful of, aside from just directly their shareholders," Davila said. "In the last few years, we have been more explicit in our asks when we speak with companies, how do you think about resilience, especially as how you're thinking to this internally, and how you're articulating this externally."
This consideration of resilience and other ESG material issues guides BlackRock to ask companies about how their strategies and targets are articulated through remuneration packages, to assure that incentives align with long term value creation. While BlackRock engages on this on a global basis, this is particularly carried out in Australia through engagement and votes on remuneration reports.
BlackRock has also sharpened and evolved its views on climate risk, including asking companies to disclose to the guidelines in the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) reporting guidelines.
"The reason for that is, we're looking at climate risk at that as a financial risk and from the fiduciary perspective," Davila said. "Certainly we have endeavoured to be a little more explicit on some of the asks we're making of companies and this is an evolution not a revolution, in line with our advocacy on TCFD and encouraging companies to communicate in terms of the TCFD and SASB.
"We're not trying to micromanage companies. We're trying to promote long term sustainable business practices, and to that end, providing that transparency and disclosure whether it be starting with TFCD and as companies become more familiar with that process, becoming a little bit crisper in asking for better transparency and better disclosure and identifying which is a risk that is real. It is important for us as a fiduciary and as an investment manager to have companies better articulate how they think about this risk and manage it. There are certain tools and certain pieces of information wed' like to see to assess how well you are managing this risk, as a critical risk going forward."
Human capital management is another area that has come forward with renewed impact in 2020 and into 2021, Davila noted.
"People and the management of people, is for most companies, their most important resource," she said. "How they're managing that risk and again that opportunity is critically important. It is something we do ask companies. It is difficult because it is a subjective issue to a certain degree."
Davila noted that information such as employee satisfaction surveys, metrics like injury rates and other metrics are useful, but engaging with companies provides a fuller picture.
"It's also thinking about how they're developing employees and broader diversity and inclusion as well," she said. "How are you developing your internal pipeline, your succession in terms of your key management and a few levels down to make sure that's in place. That's one that we do spend quite a bit of time on with companies, when speaking with companies.
"Companies have appreciate that having gone through challenging times, if they can ensure the wellbeing of employees, people will deliver through extraordinary circumstances if they have that trust and belief, and that comes out in having conversations around purpose and common language and what is the strategy and bringing that to life for employees."