Although BlackRock, which manages assets valued at over $9 trillion, and its CEO, Laurence Fink, have long played an outsized role in promoting corporate sustainability and social responsibility, BlackRock has also long been a target for protests by activists. As reported by  Bloomberg, "[e]nvironmental advocates in cities including New York, Miami, San Francisco, London and Zurich targeted BlackRock for a wave of protests in mid-April, holding up images of giant eyeballs to signal that 'all eyes' were on BlackRock's voting decisions." Of course, protests by climate activists outside of the company's offices are nothing new. There's even a global network of NGOs, social movements, grassroots groups and financial advocates called "BlackRock's Big Problem," which pressures BlackRock to "rapidly align [its] business practices with a climate-safe world."  Why this singular outrage at BlackRock? Perhaps because, as reflected in press reports like  this one in the NYT, activists have reacted to the appearance of stark inconsistencies between the company's advocacy positions and its proxy voting record: BlackRock has historically conducted extensive engagement with companies but, in the end, voted with management much more often than activists preferred. For example, in the first quarter of 2020, the company supported less than 10% of environmental and social shareholder proposals and opposed three environmental proposals. BlackRock has just released its Investment Stewardship Report for the 2020-2021 proxy voting year (July 1, 2020 to June 30, 2021).  What a difference a year makes.

BlackRock also has a new global head of investment stewardship, who took the reins last year as COVID-19 shut down much of the economy, but also intensified companies' attention on racial inequities and environmental issues, such as climate change. "We've made adjustments in our approach," she told Reuters. For example, in the 2020-21 proxy year, BlackRock Investment Stewardship supported 35% of shareholder proposals (297 out of 843), compared to 17% (155 out of 889) the previous year. And, this year, BIS voted against the election of 255 directors as a result of climate-related concerns, an increase from only 55 in the prior year.

Of course, BlackRock remains focused on financial returns for its clients. The report opens with an assertion that BIS "undertakes all engagement and voting activities with the goal of advancing [its clients'] economic interests..." But that does not mean that governance and sustainability are pushed to the side.  Rather, in aiming "to be the voice of the long-term investor," BIS urges "companies to focus on the governance and sustainability risks that can impact their ability to generate long-term financial returns....Throughout our report, we focus on how important sound corporate governance practices are to delivering sustainable long-term value. We also explore how factors such as climate change, the fair treatment of workers, and racial and gender equality, among others, are increasingly relevant to a company's business operations." To that end, "board quality and effectiveness" are top priorities and "sustainability risk—including climate risk—is investment risk."

During the 2020-21 proxy year, BIS had the most engagements (2,330) with companies regarding climate and natural capital (essentially, natural resources such as air, water, land, minerals and forests), followed by strategy, purpose and financial resilience (2,200) and board quality and effectiveness (2,150).  In addition, BIS voted on more than 165,000 management and shareholder proposals across 71 voting markets.

Election of directors. One of BIS's most important signals of support or concern is voting for or against directors. BIS believes that if "a company is not effectively addressing a risk that could impact long-term value, its directors should be held accountable." During the 2020-21 proxy year, BIS voted in over 64,000 director elections.  Most significantly, BIS voted against one or more directors at over 3,400 companies globally—that amounted to 6,560 votes, or 10%, against directors "for falling short of our expectations." By comparison, last year, BIS reported that it voted against 5,130 directors at 2,809 companies. One of the key issues this year was lack of board diversity, with 1,862 against votes globally. In the Americas region, "insufficient board gender diversity was the top reason for voting against a director." BIS voted against 1,554 directors at 975 companies—or 61% of the votes it cast against directors in the Americas region—for board-gender-diversity-related reasons. BIS cast 2,222 votes at 1,327 companies, primarily in the Asia-Pacific region, as a result of independence concerns, but only 213 companies in the Americas region. Overboarding concerns led to 758 votes against directors at 639 companies, including votes against 163 directors at 149 companies in the Americas. In addition, 255 of the votes against the election of directors were as a result of climate-related concerns, including 172 in the Americas region.  Globally, BIS voted against the election of 931 directors at 453 companies for executive comp issues, a significant increase over the prior proxy year, when BIS voted against 668 directors at 338 companies. Executive comp concerns led to votes against directors at 138 companies in the Americas.  The increase was largely attributable to "COVID-19 related in-flight adjustments that companies made to reward executives despite missing financial performance targets, reducing their workforces, or taking government financial support. BIS opposed executive pay programs when companies were not able to explain how these adjustments supported long-term, sustainable value creation."

Say on pay. In general, BIS reports that, in the U.S., shareholders "tend to be more supportive of management's proposed executive pay plans" than in other markets, even though levels of support have gradually fallen over time. With regard to say-on-pay votes, BIS believes that companies should "consider disclosing how their executive compensation structures align with their long-term strategy and purpose, including shareholder interests and key stakeholder considerations. Otherwise, they may see their reputation damaged and their social license to operate impaired."  

In voting on say on pay at different companies, BIS assessed executive comp decisions relative to "the experiences of their employees, and other key stakeholders," including "the reputational risk of making outsized payments to executives, especially if they reduced their workforces as a result of temporary shutdowns or definitive closures." Globally, BIS voted in favor of 84% of say-on-pay proposals, compared with 88% supported during the 2019-20 period.  In the Americas region, BIS voted on 3,181 proposals in the 2020-21 proxy period, voting no on 161 proposals, or 5%, compared to 3,095 proposals in 2019-20 proxy period, when it voted against 130 proposals, or 4%.  BIS indicates that it votes against management comp when the company provides "poor disclosure" or demonstrates a "lack of rigor of performance metrics" or makes "outsized executive awards not linked to long-term performance and without robust rationale."

A number of companies this year elected to include ESG performance metrics in their executive comp plans. In that context, BIS believes that "ESG performance metrics should reflect material business factors and be aligned with a company's long-term strategy. It is important that companies using sustainability performance metrics in their executive compensation plans carefully explain the connection between what is being measured and rewarded alongside business goals and long-term performance. It is important that sustainability-related performance metrics are stretching and well tested, just as would be the case for financial metrics. Failure to do so may leave companies vulnerable to reputational risks and undermine their sustainability efforts."

Sustainability/Climate. BlackRock "believes that climate risk is investment risk and that every company's business model will be profoundly affected by the transition to a net zero economy." In that regard, BlackRock has advocated for "more widespread and standardized sustainability reporting." Specifically, in January 2020, BlackRock asked that companies publish reports aligned with the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). (See this PubCo post.) BIS requests that companies provide sufficient disclosures to assess their "plans to transition their business models to a low-carbon economy, including short-, medium-, and long-term targets." When assessing a company's disclosures, BIS looks at "whether the information provided clearly and comprehensively explains the material sustainability-related drivers of risk and value in its business." In the 2020-21 proxy year, BIS voted against 107 companies for inadequate sustainability reporting.

However, BIS recognizes that regulators worldwide are "exploring reporting frameworks, standards or guidance," and it is "mindful of the challenge companies face in light of the multitude of frameworks and, as yet unresolved, regulatory expectations....Until a global set of standards is established, we will, in our engagements with companies and the broader stewardship ecosystem, continue to advocate for corporate sustainability reporting that supports investors' understanding of the long-term sustainability of a company's business model, operations and financial performance." In the 2020-21 proxy period, BIS voted against 319 companies (177 in the Americas) by voting in support of or abstaining on climate-related shareholder proposals because of "climate-related concerns that could negatively affect long-term shareholder value."

In its engagements on climate, BIS communicated its expectation that companies needed to demonstrate how climate and sustainability-related risks are integrated into strategy. If public disclosures were inadequate,  BIS said that it "may conclude that those issues are not appropriately managed and mitigated."  In 2021, based on GHG emissions data provided by third-party data providers, BIS expanded its "climate focus universe" to over 1,000 carbon-intensive public companies, representing "90% of the global scope 1 and 2 greenhouse gas (GHG) emissions of our clients' public equity holdings with BlackRock."  Companies in the climate focus universe were subject to more rigorous assessments.

In addition, BIS reports that it had 634 engagements with companies in the financial sector this proxy year, noting that financial institutions have "increased net zero commitments and demonstrated efforts to keep pace with external advancements around measurement methodologies, scenario analysis and regulatory requirements for both reporting and stress testing. We have seen companies commit to heighted climate scrutiny in the financing policies as well as the development of products to further finance sustainability."

BIS voted on 28 "say-on-climate" proposals, 22 of which were submitted by company management. BIS supported 26 of these proposals at 23 companies. BIS reports that, as of early July 2021, the 20 proposals with known outcomes received average support of approximately 97%, while the six proposals submitted by shareholders received average support of 33%.

Shareholder proposals. In the 2020-21 proxy year, BIS supported 35% of shareholder proposals (297 out of 843), compared to 17% (155 out of 889) in the previous year. This year, on behalf of clients, BIS reports that it supported 64% of the environmental shareholder proposals, 35% of the social shareholder proposals and 32% of governance shareholder proposals. Last year, BIS said that it supported 6.3% of the environmental shareholder proposals, 6.8% of the social shareholder proposals and 17.1% of governance shareholder proposals. This year's votes on shareholder proposals may reflect a broader shift in attitude on the part of BIS. In this new stewardship report, BIS indicates that, with regard to shareholder proposals, "where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we may choose to support the proposal. We may also support a proposal if management is on track, but we believe that voting in favor might accelerate progress." That approach is new for the 2020-21 proxy year and contrasts sharply with its previous approach, under which BIS said that it may vote in favor of proposals that address material issues, that it believes "need to be remedied urgently and that, once remedied, would help build long-term value. We may support proposals seeking enhanced disclosure if the information requested would be useful to us as an investor and if management has not already substantively provided it. To gain our support, the requests made in a shareholder proposal should be reasonable and achievable in the time frame specified."  

Stakeholders.  While key stakeholders—employees, suppliers, customers and communities—will vary across companies, BIS believes that creating "enduring sustainable value for all stakeholders" will ultimately benefit shareholders: "Our conviction is that companies perform better when they are deliberate about their roles in their communities and society overall and act in the interests of their employees, consumers, customers, suppliers, and shareholders." To that end, BIS had 1,350 engagements and advocated improved disclosures regarding stakeholder issues to understand if companies are making "prudent decisions that benefit their key stakeholders."  

With regard to diversity disclosure, BIS wants companies to disclose workforce diversity, including race, gender and ethnicity, consistent with the EEOC's EEO-1 survey data.  BIS also asks companies to demonstrate "board oversight, due diligence, and remediation mechanisms relating to adverse impacts on people arising from their business operations." In the 2020-21 proxy year, BIS voted against management over concerns about social issues at 36 companies. In addition, BIS supported 35 out of 100 social-related shareholder proposals, including 27 out of the 75 shareholder proposals at U.S. companies. By comparison, in the 2019-20 proxy year, BIS supported eight out of 114 social-related proposals.  These proposals address topics such as racial equity audits, diversity and disclosure of EEO-1 data.

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