BlackRock flexes US$7 trillion financial muscle to vote against boards that do not disclose climate risks in move towards ‘new standard for investing’

BlackRock said on Tuesday it would no longer invest in thermal coal producers and would vote against management at companies it invests in if they have not made sufficient progress in disclosing climate risks, as the world’s biggest asset manager moves to make sustainability “our new standard for investing”.

The announcement came as part of the latest annual letter to chief executives by Larry Fink, the BlackRock chairman and chief executive, who has previously called for companies to do more than just make money for clients but make a “positive contribution to society.”

“Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink wrote in his letter.

In 2019, BlackRock, with nearly US$7 trillion in assets, voted against or withheld votes from 4,800 directors at 2,700 different companies, he said.

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A groundswell of concern has risen in recent years over the rapidly changing environment, making the topic front and centre of the global investing community. That also turned sustainable investing into an important topic for money managers, as they seek to attract a younger group of investors who are more concerned about environmental and social issues.

The move comes as regulators are pressing the industry to account for how firms evaluate environmental and other risks in their decision-making processes.

The European Union last year adopted new rules that will require asset managers, insurers and pension funds to disclose how they are evaluating environmental, social and governance (ESG) risks in their investment processes by 2021.

China will require listed companies and bond issuers to disclose environmental and social risks in their businesses beginning this year.

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“We need to recognise that climate change – obviously, one of the big challenges of our time – is not just an issue of the environment or the right thing to do, but actually that climate risk has really become significant investment risk,” said Geraldine Buckingham, BlackRock’s head of Asia-Pacific business. “We, as a fiduciary, need to therefore help clients to understand and respond to that risk in their portfolios.”

Geraldine Buckingham, head of Asia-Pacific at BlackRock. Photo: Jonathan Wong
Geraldine Buckingham, head of Asia-Pacific at BlackRock. Photo: Jonathan Wong

As part of its initiative, BlackRock said it would remove companies that generate more than 25 per cent of their revenues from thermal coal production from its discretionary active investment portfolios by the middle of this year.

BlackRock also said it would double its offerings of ESG exchange-traded funds to 150 in the next few years, work with index providers to increase the universe of sustainable indices and expand its sustainable active investment strategies.

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Starting this quarter, the group will make quarterly disclosures on its proxy voting, as well as disclosing its votes and explanation of its decisions promptly in “key high-profile votes.” The asset manager also plans to increase disclosure of its engagement with companies as part of its annual investment stewardship report.

Buckingham said investors in Asia are asking her more and more about sustainability and in some markets, such as Australia and Japan, they have the same expectations as their European counterparts on environmental and social issues.

“For the first few months of [2019], the topic I was asked about the most was the US-China trade war,” Buckingham said in an interview. “But, I’d say that has shifted and sustainability is definitely the thing I’m asked about the most now.”

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Given BlackRock’s size, Fink’s prior letters have previously caused a stir among C-suite executives, with some corporate leaders spurred to talk about their company’s “purpose”, but others grousing about the tone of those letters. Billionaire real estate investor Sam Zell told CNBC in 2018 that Fink and other CEOs calling for social change were “extraordinarily hypocritical”.

As a large provider of index funds, which are increasingly popular among investors, BlackRock is limited in its ability to sell shares in companies they do not agree with if that company remains in a benchmark index. As a result, shareholding voting and direct engagement are the primary avenues of influence that BlackRock, Vanguard Group and other passive investors and index providers can use to change policy.

In 2017, BlackRock and Vanguard voted in favour of a successful shareholder proposal to require oil giant ExxonMobil to disclose how climate change could affect its operations.

BlackRock, in turn, has also been criticised by environmental activists for its voting record. Last year, Ceres, a non-profit organisation focused on sustainability, ranked BlackRock 43rd among 48 asset managers for its voting history on climate-related initiatives during the 2018 proxy voting season. Vanguard was ranked 42nd.

In December, Christopher Hohn, founder of activist investor TCI Fund Management, called out BlackRock and other major asset managers as being “full of greenwash”. TCI said it would target directors of companies that do not report their carbon emissions.

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Earlier this month, BlackRock joined Climate Action 100+, an initiative of more than 370 investors with more than US$35 trillion in assets seeking to force companies to take action on climate change. That includes improving governance and strengthening climate-related financial disclosures.

BlackRock also said it has engaged with companies on sustainability-related issues for several years, urging management teams to make progress on disclosure consistent with the Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures, of which BlackRock is a founding member.

BlackRock’s emphasis has always been much more on engagement and spending time with management, Buckingham, the BlackRock Asia-Pacific head, said.

“Over time, if we do not think those changes are being made, we vote against management. But we see voting as one tool and not our primary tool in expressing our views to companies,” she said. “Our view has been that engagement over time is actually a more effective mechanism to seeing the change we want.”

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