On February 13, 2020, BlackRock released its 2020 voting guideline updates. Changes to its global and U.S. updates are summarized below and a complete list of policy guidelines, engagement priorities and investment stewardship details are available on BlackRock's Investment Stewardship site.
The policy updates follow the release of BlackRock Chairman and CEO Larry Fink’s 2020 letter to CEOs – A Fundamental Reshaping of Finance – and companion letter to clients focused on sustainability and climate change (together, the “2020 BlackRock Letters”). Georgeson outlined the highlights from the letters here.
BlackRock Investment Stewardship Global Corporate Governance & Engagement Principles
Corporate governance, engagement and voting
BlackRock believes that while corporate governance standards vary by individual markets, there are certain overarching principles that should apply across markets. These principles inform BlackRock's voting decisions based on market-specific assessments. Specific updates to its global governance and engagement principles are summarized by topic below.
General
BlackRock removed a statement indicating that it takes an "engagement-first approach." This revision aligns its principles with the statements in Larry Fink's letter that BlackRock will be increasingly disposed to vote against management and board directors, and in favor of sustainability-related shareholder proposals, where companies fail to make progress in managing and disclosing ESG-related matters. However, BlackRock continues to view engagement as an important activity. BlackRock states that its engagements emphasize dialogue on governance issues that have material impact on financial performance and enable it to vote in line with its clients' long-term economic interests.
Boards and directors
We focus on board composition, effectiveness and accountability as a top priority. In our experience, high standards of corporate governance are the foundations of board leadership and oversight.
Quotation source: BlackRock Investment Stewardship Global Corporate Governance & Engagement Principles
In line with the general revision to its engagement approach above, BlackRock also bolstered its expectations that companies publicly disclose their approach to governance, including board structure, and explain how that approach ties to shareholders' best interests. Specifically, its 2020 updates add language noting that when a company is not effectively addressing an issue that is material to company performance, it will hold the company's directors accountable.
Auditors and audit-related issues
This year, BlackRock clarified that if it believes a company does not provide robust disclosures, including disclosure related to auditors and related issues, it will conclude that companies are not adequately managing risk.
Environmental and social issues
The most significant updates to BlackRock's Investment Stewardship Global Corporate Governance & Engagement Principles relate to environmental and social (E&S) issues. This is in line with expectations set forth in the 2020 BlackRock letters, which outlines climate change as the defining factor in companies' long-term risks and prospects. This section has been expanded, explicitly positioning E&S issues as a matter of risks and opportunities, to align with BlackRock fiduciary duty to protect and enhance its clients' economic interests.
Again conforming to the 2020 BlackRock Letters, it has updated its guidelines to include its expectation that companies issue reports aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and Sustainability Account Standards Board (SASB) standards
It believes that these reports will provide financially material information with industry-specific metrics and targets, and it will use the reports to assess portfolio investments and engage with portfolio companies. Read more about TCFD, SASB and other ESG initiatives and organizations that issuers should understand.
Updates also include a new section for climate risk outlining BlackRock's process for assessing climate-related shareholder proposals. The firm will make voting decisions on each shareholder proposal on a case-by-case basis and may vote against the election of relevant directors even if it disagrees with the details of a climate-related proposal, where it has concerns regarding the disclosure or management of climate matters.
In certain instances, we may disagree with the details of a climate-related shareholder proposal but agree that the company in question has not made sufficient progress on climate-related disclosures. In these instances, we may not support the proposal, but may vote against the election of relevant directors.
Quotation source: BlackRock Investment Stewardship Global Corporate Governance & Engagement Principles
BlackRock Investment Stewardship Corporate Governance and Proxy Voting Guidelines for U.S. Securities
These policies as updated apply to U.S. companies in which BlackRock is an investor.
Boards and directors
Director elections
This year, BlackRock – in line with the updated expectations outlined above regarding governance and engagement – included new language indicating that it believes that when a company is not effectively addressing a material issue, its directors should be held accountable. BlackRock may withhold votes from directors or members of particular committees.
Classified board of directors / staggered terms
BlackRock updated its policy on classified boards by providing examples of instances when it may find certain board structures to be acceptable. BlackRock indicated that it might make exceptions to its general position of supporting declassification-related shareholder proposals in instances where the board provides an appropriate strategic rationale for the classified board structure.
Risk oversight
As was the case in its global policy updates, BlackRock's U.S. policy updates now include language indicating that the absence of robust disclosures may lead them to reasonably conclude that companies are not adequately managing risk.
Environmental and social issues
The "Environmental and social issues" section is the most significantly updated portion of BlackRock's U.S. policy updates. Consistent with its global updates, BlackRock now expects companies to provide E&S disclosure in-line with TCFD recommendations and SASB standards, which it views as frameworks that help companies disclose more financially material information. Specifically, BlackRock finds SASB's guidance to be beneficial to companies' abilities to identify and discuss governance, risk assessments and performance against KPIs, global standards, peer benchmarking and verification.
BlackRock expects companies to issue reports aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the standards put forward by the Sustainability Accounting Standards Board (SASB).
Quotation source: BlackRock Investment Stewardship Global Corporate Governance & Engagement Principles
BlackRock specifically asks companies to:
- "Publish disclosures in line with industry specific SASB guidelines by year-end, if they have not already done so, or disclose a similar set of data in a way that is relevant to their particular business"; and
- "Disclose climate-related risks in line with the TCFD's recommendations, if they have not already done so. This should include the company's plan for operating under a scenario where the Paris Agreement's goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines."
These disclosures will be used to determine whether companies are properly managing and overseeing risk and planning for the future. Without the disclosures, BlackRock will, "increasingly conclude that companies are not adequately managing risk" and hold companies accountable by generally engaging with the board or management. It may vote against the election of directors where it has concerns that the company is not dealing with its E&S issues appropriately.
Climate risk
When a company receives a climate-related shareholder proposal, BlackRock will assess each proposal within its framework and consider the robustness of company disclosure in addition to its understanding of company management of the issues as has been revealed through historical engagements with BlackRock. There may be instances when BlackRock disagrees with details of the proposal and agrees that the company has not made "sufficient" progress on climate-related disclosures, in which cases it may vote against relevant director elections.
Looking ahead to the 2020 proxy season
BlackRock's 2020 guideline updates continue to emphasize its focus on the role that governance plays in companies' long-term value creation story and the increasing importance of sustainability and climate change in investment risks and opportunities, as outlined in Larry Fink's 2020 Letter to CEOs: A Fundamental Reshaping of Finance. Collectively, these updates solidify BlackRock's move away from an engagement-led approach to stewardship, and intention to leverage its voting power to drive companies to improve the disclosure and management of ESG risks and opportunities. We encourage companies to consider their governance frameworks and disclosure practices in light of these updates, and to consider thoroughly their engagement agendas for 2020.
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