BlackRock’s 2021 Proxy Voting Guidelines Prioritize ESG Actions

Allie Rutherford and Rob Zivnuska are partners at PJT Camberview. This post is based on a PJT Camberview memorandum by Ms. Rutherford, Mr. Zivnuska, James Hamilton, and Eric Sumberg. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here); and Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here).

Key Takeaways

  • BlackRock released proxy voting guidelines and stewardship expectations for 2021 that reflect its continued commitment to integrate ESG throughout its investment and stewardship functions and provide greater transparency around its efforts
  • Key guideline changes focus on climate risk, human capital management, diversity and stakeholder interests and provide a more clear path for BlackRock to vote against management when its expectations are not met
  • BlackRock announced plans to engage with over 1,000 companies globally on climate risk and is prioritizing engagement with approximately 150 companies on material social risks associated with addressing the needs of key stakeholders
  • BlackRock is among a number of investors who are taking a more assertive approach to ESG, including a new coalition of asset managers representing $9 trillion of AUM committing to investments aligned with net-zero carbon emissions by 2050; these actions signal the increased marketwide focus and momentum on ESG and the importance for companies to consider investor perspectives as they enhance practices and disclosures

Last week, BlackRock released its 2021 proxy voting guidelines for the U.S. and other major markets along with updated global principles and a new summary document outlining its stewardship expectations for the coming year. BlackRock began the year by providing a comprehensive roadmap for how it planned to realign its investment approach, engagement priorities and voting transparency with its policy positions on sustainability risk. These updated materials demonstrate how BlackRock intends to pair higher expectations for corporate responsiveness across a number of topics, including diversity, equity and inclusion and environmental risk, with a greater willingness to vote against management where these expectations are not met.

The Stewardship Expectations Report provides context for some of the policy changes that BlackRock intends to undertake in 2021, which include doubling the number of carbon-intensive companies with which it will engage and being more likely to support environmental and social-focused shareholder proposals. BlackRock intends to release updated engagement priorities and supporting key performance indicators in early 2021, as well as new commentaries outlining its perspectives on companies’ impacts on people and natural capital (defined as the environment beyond climate).

Market Context and Impacts for Companies

BlackRock recently outlined the sustainability-focused actions it took in 2020 and the progress it has made in integrating ESG into assets under management, creating new sustainable investment strategies and climate risk tools and taking a more comprehensive approach to engagement and transparency on stewardship. Within this context, BlackRock’s 2021 guidelines signal that while its expectations for companies continue to grow beyond just disclosure and into concrete efforts to decarbonize and diversify, stewardship is just one of the ways in which it is integrating ESG into its investment approach.

Within the stewardship context, BlackRock’s new guidelines are indicative of how the broader investor landscape continues to evolve. BlackRock is not alone among investors placing new pressures on companies to enhance their ESG disclosures and practices and signaling an increasing willingness to use their vote to express their views. State Street Global Advisors wrote to boards in late summer setting forth its engagement strategy and expectations on board and workforce diversity and this week Vanguard published new expectations for board diversity in 2021. A number of investors have recently announced new initiatives that advance ESG priorities:

  • Last week, a new coalition of asset managers representing $9 trillion of AUM including UBS Asset Management, Wellington Management and Fidelity International committed to investments aligned with net zero carbon emissions by 2050, Macquarie Asset Management announced plans to manage its portfolio in line with net zero carbon emissions by 2040 and the New York State Common Retirement Fund set a similar 2040 commitment for its portfolio. These moves come on the heels of several company commitments, many of which were driven by engagement with investor coalitions such as the Climate Action 100+ (which now counts BlackRock and State Street among its nearly 550 investors with an estimated $52 trillion of AUM) to reach similar emissions goals
  • In addition, a number of new policies and proposals on gender, racial and ethnic diversity have recently been announced. Several investors have begun campaigns to compel companies to publish their workforce demographics in line with the U.S. Equal Employment Opportunity Commission’s EEO-1 Survey, Legal and General Investment Management and Goldman Sachs Asset Management have enacted tougher board gender and ethnic diversity policies, a number of states have implemented or are considering mandates on board gender or racial and ethnic diversity and Nasdaq has proposed a ‘comply-or-explain’ board diversity listing standard

Companies seeking to address these trends should apply an investor lens to identifying and disclosing progress on their ESG priorities. While investors are pushing for more information upon which to make investment and stewardship decisions, they are also implementing proprietary ESG investment models, and deepening the integration of ESG expertise in stewardship and portfolio management teams. Companies will be well served to take control of their own narrative and use disclosures and engagement discussions to communicate how they are identifying and addressing material ESG topics.

BlackRock 2021 U.S. Proxy Voting Guidelines

BlackRock has traditionally published its proxy voting guidelines in the first months of the year, making the early release of the 2021 guidelines a change in approach. Notable updates to its U.S. proxy voting guidelines include:

Climate Risk: Building on themes described in Chairman and CEO Larry Fink’s January 2020 letter to CEOs, together with the BlackRock Investment Stewardship (BIS) team’s mid-year “Our Approach to Sustainability” report, expectations on climate risk have been clarified. BlackRock expects companies to “articulate how they are aligned to a scenario in which global warming is limited to well below 2° C and is consistent with a global aspiration to reach net zero GHG emissions by 2050.” This expectation includes disclosure along the TCFD and SASB frameworks, inclusive of how companies will consider the challenges of adapting to a low-carbon economy within their existing strategy and emissions reductions efforts. BlackRock may now support shareholder proposals on climate risk that align with its stated expectations. In 2021, BlackRock will expand its universe of carbon intensive companies with which it will engage on climate risk from 440 companies to over 1,000 companies globally, representing 90% of global scope 1 and 2 emissions.

Human Capital Management (HCM): HCM has been a key focus area for BlackRock and the topic now has its own section in the proxy voting guidelines. BlackRock outlines its view on the importance of HCM to business continuity, innovation and long-term value creation and also notes its expectation of board oversight. In 2021, BlackRock will expect disclosure of workforce demographics, such as gender, race, and ethnicity in line with the EEO-1 Survey, along with steps being taken to advance diversity, equity, and inclusion. Where BlackRock believes disclosures or practices fall short of market or peer practice, it may vote against members of the appropriate committee or support related shareholder proposals.

Board Composition: BlackRock updated its policies on board composition by noting that it encourages boards to disclose demographics related to board diversity, including gender, ethnicity, race, age, and geographic location, as well as milestones to achieve “multi-faceted racial, ethnic, and gender representation.” BlackRock will also consider average board tenure when evaluating board refreshment processes and may now oppose boards that appear to have an “insufficient mix” of short-, medium- and long-tenured directors.

Key Stakeholder Interests: A new section outlines BlackRock’s expectations for overseeing and mitigating the legal, regulatory, operational, and reputational risks that may come from poorly managed stakeholder relationships, inclusive of employees, business partners, clients and consumers, government and regulators and communities in which companies operate. In 2021, BlackRock will prioritize engagement with approximately 150 companies whose key stakeholders may be impacted by adverse business practices or insufficient management of ‘social’ sustainability risks. While there is no stated voting action attached to this new guideline, BlackRock expects board oversight and appropriate due diligence regarding these risks.

Company Responsiveness: BlackRock made significant changes to its expectations for acknowledging and responding to vote outcomes for shareholder proposals, director elections, compensation and other ballot items. New policies include:

  • For shareholder proposals, previously BlackRock expected companies to implement proposals that received majority support – it now expects companies to consider proposals that get substantial support. Based on the accompanying Stewardship Expectations Report, substantial appears to be generally defined as any shareholder proposal that receives support of more than 30% of votes cast. Noting that developments in 2020 have informed its approach, BlackRock will now support shareholder proposals where it agrees with the intent to address a material business risk and determine that management could improve in managing and disclosing that risk. Citing the need for “urgent action on many business relevant sustainability issues,” BlackRock indicates it will be more likely to support proposals without waiting to assess the effectiveness of engagement. Under the revised guideline, boards that fail to demonstrate responsiveness should anticipate votes against independent directors
  • BlackRock has changed the threshold at which it expects companies to respond to relatively low director votes, now expecting responsiveness when a director does not receive support from at least 75% of shares voted (up from 70%), though it notes that this applies primarily in cases where BlackRock voted against the director

BlackRock made a number of other substantive changes, some of which may affect voting behaviors and impact vote support for management proposals, including:

  • The overboarding guideline of a maximum of two total boards for public company CEOs has been expanded to include all public company executives (the overboarding guideline for non-executive directors remains unchanged at four total boards)
  • BlackRock is more likely to support shareholder proposals related to corporate political activities if it identifies a misalignment between the company’s stated positions on policy matters material to its strategy and the positions taken by industry groups of which it is a member. This approach is explained in a separately updated commentary which outlines BlackRock’s perspective on activities and disclosure related to political spending and lobbying. This document includes insight into the type of information it expects companies to disclose such as the purpose of the company’s contributions and engagement in lobbying, how the activities align with strategy and or goals of public participation, and board oversight for monitoring such activities
  • A new section on virtual shareholder meetings outlines BlackRock’s expectations that shareholders should be afforded meaningful opportunities to participate and interact with the board and management and be allowed to voice concerns and provide feedback without undue censorship

Finally, there are a number of more narrowly targeted refinements to guidelines, including:

  • The guideline on director attendance has been clarified to include multi-year patterns of poor attendance or single year attendance issues with no disclosed rationale
  • Ownership stake and the holding period of the dissident are additional factors that will be considered in the evaluation of contested director elections
  • Further guidance on factors that will be considered in mergers, acquisitions, asset sales, and other special transactions, including the explanation for the economic and strategic rationale of the transaction and the degree that it enhances long-term shareholder value
  • Removal of language stating that BlackRock will normally support advisory proposals on golden parachutes, indicating that it may be less supportive of such proposals
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