Investment giant BlackRock announced the release of its Engagement Priorities for 2023, outlining the key themes identified by the firm as sources of material risk or opportunity that will form the focus of its engagements with companies this year.
The release of the engagement priorities follows several months of pressure BlackRock, who, as the largest global investment management company and a leading voice in the investment community on climate change and energy transition-related investment themes, has found itself at the center of a vocal anti-ESG movement by Republican politicians in the U.S., who have accused the firm of pushing a socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. agenda on companies, or of “boycotting” and working to harm energy companies.
Despite the political pressure, however, the engagement priorities released by BlackRock Investment Stewardship (BIS) remain largely unchanged from the prior year, and continue to include in sustainability-focused topics in its key themes, including “Climate and natural capital,” and “Company impacts on people,” alongside other priority topics including “Board quality and effectiveness,” “Strategy, purpose, and financial resilience,” and “Incentives aligned with financial value creation.”
In this year’s release, however, BlackRock stressed that its engagement is focused on understanding how companies manage risks and capitalize on opportunities, and that it “does not tell companies what to do.” Similarly, in its commentary section discussing its climate-focused engagements, BlackRock stated that “it is not our role to engineer a specific decarbonization outcome in the real economy.”
The climate section also stressed that the investment manager’s focus on this area “is based on our fundamental role as a fiduciary to our clients.” BIS added:
“As part of this role, we are interested in hearing from the companies in which our clients invest on the impact of climate change and the energy transition on their strategy and long-term business model. We engage on this topic because the way in which companies navigate material climate related risks and adapt through the energy transition may have a direct financial impact on our clients’ investment outcomes and financial well-being.”
One of the key aspects of BlackRock’s climate-related engagement is on disclosure, with BIS encouraging disclosures aligned with the TCFD framework, and welcoming the work of the ISSB to develop global sustainability reporting standards.
While the document doesn’t advocate for specific climate targets or strategies, it notes that investors can get better clarity and ability to assess risk “when companies detail how their business model aligns to a range of climate-related scenarios, including a scenario in which global warming is limited to well below 2°C, and considering global ambitions to achieve a limit of 1.5°C,” adding:
“We are better able to assess preparedness when companies disclose short-, medium-, and long-term targets, ideally science-based where these are available for their sector, for scope 1 and 2 greenhouse gas emissions (GHG) reductions and to demonstrate how their targets are consistent with the long-term financial interests of their shareholders.”
The Engagement Priorities commentary also indicated some evolution in BlackRock’s approach to reporting emissions across company value chains, or Scope 3 emissions. While last year’s report encouraged companies to disclose Scope 3 emissions and targets where material, but did not consider these disclosures as essential to its support for directors due to the “methodological complexity, regulatory uncertainty, concerns about double-counting, and lack of direct control by companies,” this year’s report – while acknowledging the same concerns – notes that a growing number of companies are now disclosing Scope 3 emissions, allowing “investors to evaluate the long-term risks to and resilience of companies’ value chains.” Given the remaining challenges, BlackRock states, “we understand that the scope 3 disclosures that companies are able to make will necessarily be on a good faith and best-efforts basis.”
In its discussion of its engagement priorities for the “incentives aligned with financial value creation” theme, BlackRock noted the increasing use of sustainability-related factors in company incentive plans. While BlackRock stated that it “does not have a position on the use of sustainability-related performance criteria,” it added:
“Appropriate use of financial and other metrics aligned with long-term risk management – as well as investment in renewable energy and product innovation, to name a couple of examples – may be increasingly important to some companies, given the materiality of these issues to their business models.”
For companies that do use sustainability-related factors in incentive plans, BIS encouraged them to ensure that they are as rigorous as other financial or operational targets, and that the companies can explain the connection between the incentives and company strategic priorities.
On the natural capital front, BlackRock said that it focuses on disclosures regarding the key components of land use, water, and biodiversity, given their potential impact on “the long-term financial returns of companies with material exposure to nature-related impacts and dependencies.”
BlackRock’s “company impacts on people” engagement theme focuses on the key areas of human capital management – including the ability to attract and retain a workforce to carry out its strategy – and companies’ human rights impacts. Key human rights risks highlighted by BIS include poor working conditions, substandard wages, and use of forced labor or child labor by companies or their suppliers, community harm or displacement such as using contested land or infringing on indigenous people’s rights, a hostile or discriminatory workplace, among others. While BlackRock states that it “not in a position to, advise or direct companies in how they identify, manage and mitigate human rights-related risks,” it notes that its focus is on the governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. of these risks, including on understanding whether a company considers human rights across its value chain, how the board oversees human rights risk, how companies identify mitigate and prevent potential human rights impacts and measures the effectiveness of these strategies, as well as whether a company engages with affected stakeholders and collaborates with industry peers and other stakeholders on these issues.
Click here to access BlackRock’s 2023 Engagement Priorities report.
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