ImpactAlpha, July 15 – Our house is on fire. Let’s keep an eye on it.
That was the takeaway from BlackRock’s disclosure of its 2020 proxy voting record released yesterday. The $7 trillion asset manager voted against management at 53 companies. But that was just over one-fifth of the 244 companies it has identified as making insufficient progress on climate risks and disclosures. The remainder were put ‘on watch.’ BlackRock identified 60 companies whose disclosures, targets and business practices meet expectations.
A few years ago, such transparency and activism might have been applauded as an example of corporate responsibility. By now, BlackRock’s record looks painfully passive in light of both the urgency of climate action and BlackRock’s own rhetoric.
In the proxy season just past, BlackRock’s votes have been closely watched by investors and asset owners eager to gauge the seriousness of CEO Larry Fink’s public commitments to put climate risk front and center and to hold companies and their directors accountable.
Of particular note: BlackRock declined to join a campaign aimed at forcing JPMorgan Chase to remove from its board the former Exxon chief executive Lee Raymond, voting to re-elect the longtime bank director. BlackRock also withheld support for a vote asking the bank to align its lending activities with the Paris goal of keeping warming well below 2 degrees Celsius.
“BlackRock is complicit in slowing down climate action in the corporate sector,” said ShareAction’s Catherine Howarth. BlackRock “sent a signal through its voting choices that high carbon companies can relax and count on BlackRock not to push for the urgent action needed to address the climate emergency.”
The companies ‘on watch’ “have effectively been given a 12-month free pass during the most critical and narrow time window in history for mitigating climate risk,” Howarth added.
Most of BlackRock’s 53 votes against management opposed directors up for re-election. BlackRock voted against two Exxon directors and to break up the CEO and chairman roles, but did not support calls from the Church of England and New York State Common Retirement Fund to replace the oil giant’s entire board. BlackRock also voted against directors at Daimler AG, Deutsche Lufthansa, and Volvo, among other companies.
The majority of the 53 companies in which BlackRock voted against management were in the energy or utility sectors. They include Arch Coal, Frontera Energy, Goodrich Petroleum, Northern Oil and Gas, and Peabody Energy.
BlackRock voted in favor of just five shareholder proposals, including climate-related proposals at Chevron and aviation manufacturer TransDigm. And after joining the investor alliance ClimateAction 100+ in January, BlackRock voted for just two out of a dozen proposals flagged by the group.
The most glaring of BlackRock’s pulled punches came at JPMorgan Chase’s annual general meeting. The bank is considered the world’s largest fossil fuel funder; Rainforest Action Network has calculated that JPMorgan has financed $268 billion in fossil fuel projects since the Paris accord was adopted in 2015. (JPMorgan this year also joined Climate Action 100).
“BlackRock faced two clear tests on JPMorgan Chase, the world’s top banker of fossil fuels, and it failed both,” said RAN’s Jason Opeña Disterhoft.
The shareholder proposal asking the bank to report on the carbon footprint of its fossil fuel lending received a hair’s breadth under 50% of votes, suggesting that BlackRock could have decisively tipped the balance. “It’s an outlier that BlackRock wasn’t there,” said Danielle Fugere of As You Sow, which filed the resolution. (Vanguard, another major JPMorgan shareholder, also voted against the resolution.)
“With their outsized voting power, BlackRock alone could have swung climate-critical resolutions at Delta Air Lines, Dominion Energy, and JPMorgan Chase to majority support,” lamented Eli Kasargod-Staub of Majority Action. “But BlackRock voted against them.”
Investors had higher hopes when Fink released his annual letter in January. The statement was hailed as a potential watershed moment that would force the rest of Wall Street to follow BlackRock’s lead.
“We are on the edge of a fundamental reshaping of finance,” Fink wrote. “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.”
Also pushing BlackRock were large asset owners, including pension funds, for which corporate engagement, or ‘stewardship,’ has become an important part of managing passive equity funds that otherwise merely track standardized indexes. Large asset owners in particular increasingly see global warming as a systemic risk to financial markets worldwide.
Last year, Japan’s $1.4 trillion Government Pension Investment Fund, awarded a $50 billion mandate to LGIM, the asset management arm of the U.K.’s Legal and General Group, and reduced allocations to BlackRock and other asset managers. GPIF has pushed managers for more active oversight of the “negative externalities” created by companies in its portfolio, and has boosted the weight it assigns to such stewardship activities.
LGIM has been willing to divest from companies if they don’t respond to engagement strategies. It has excluded ExxonMobil from its Future World funds because of climate change risk.
Investor groups said BlackRock’s report suggests progress, but lacks a sense of urgency to address the looming climate crisis.
“It is clear from these limited disclosures and voting changes that BlackRock has yet to overhaul its proxy voting approach with anywhere near the scale that would be necessary to comprehensively and systematically address climate risk across its holdings,” said Majority Action’s Kasargod-Staub.
BlackRock’s level of disclosure and engagement might once have been applauded, but that time has passed.
Said As You Sow’s Fugere, “Continued engagement where companies are not taking action is, in the end, a failure.”
E, S and G.
BlackRock reported that it engaged with many more companies in the latest proxy season. Environmental engagements increased from 316 in the 2018-2019 season to 1,230 in 2019-2020, a nearly 300% increase. Social engagements were 870, up 146% and governance engagement were 2,835, up 47%. BlackRock said it identified 110 additional companies in carbon-intensive sectors such as financial services and emerging markets that it will initiate new engagements with in the second half of 2020.
BlackRock did not disclose the companies on its watch list, but the firm provided some rationale. The COVID crisis delayed some companies’ progress on climate issues, and in certain sectors, such as finance, disclosure standards are still evolving, offering companies a reprieve. Companies have 12 to 18 months to meet expectations, explains BlackRock. If they do not show progress, “voting action against management typically follows.”
The firm is pushing companies on social issues as well, especially in light of the COVID crisis. BlackRock supported a shareholder proposal at Tyson Foods to improve the company’s supply chain due diligence around sustainable working conditions. At Santander Consumer USA, it supported a resolution about racial discrimination in the company’s lending practices. BlackRock also voted against the re-election of a director at McKesson for failing to address its role in the U.S. opioid crisis, among other moves.
“We believe issues that could threaten a company’s license to operate will become even more acute in the wake of the COVID-19 crisis,” BlackRock said in the report. It added that it will “refresh” expectations for human capital management in the second half of the year.