As a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term financial interests of our clients, we may signal our concern by voting against management. -BlackRock Investment Stewardship, Engagement Priorities for 2020In 2020, BlackRock identified 244 companies (and took voting action against 53 of them) for ''lack of progress integrating climate risk into their business models or disclosures.'' Coupled with strong investor stances on gender diversity, these voting actions send a clear message: Institutional investors will not be satisfied with ''all talk and no action'' on environmental, social, and governance (ESG) issues. Companies have been slowly realizing that ESG is good for business - from maintaining market share and brand equity to attracting and retaining talent. Investor actions against climate change, coupled with their rising expectations for racial board diversity, underscore the fact that ESG components are quickly becoming core investment criteria for the world's largest asset management firms. What does this mean for organizations and the boards that oversee them, particularly during the complex and evolving COVID-19 environment? In a recent episode of Inside America's Boardrooms, Paul Washington, Executive Director of the ESG Center for The Conference Board, discusses investor expectations around ESG given the COVID-19 pandemic. Washington and host TK Kerstetter review BlackRock's sustainability expectations and five key performance indicators (KPIs), which are expanded below. [embed]https://www.youtube.com/watch?v=Vnt81siLQyo[/embed]
BlackRock's KPIs for ESG
BlackRock has established key performance indicators (KPIs) based on their own wide-ranging observations, the UN Sustainable Development Goals, and other frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD). These KPIs (discussed in the episdoe above) span five main areas explored in detail below: board quality, environmental risks and opportunities, corporate strategy/capital allocation, compensation to promote long-termism, and human capital management. (1) Board quality: Because quality leadership is essential to corporate performance, BlackRock prioritizes board composition, effectiveness, diversity and accountability. Evaluate:- How do you assess your board's effectiveness and performance?
- What is your board's position on director responsibilities and commitments, turnover and succession planning, crisis management, and diversity?
- Is a non-executive, preferably independent, director available to engage with shareholders on these topics?
- If your company is already engaged in TCFD-aligned reporting, are you disclosing sufficient detail across the four TCFD pillars?
- Have you set a timeframe for reporting fully in line with the 11 TCFD recommendations?
- Are sustainability risks and opportunities, like those identified in the SASB framework, integrated into business strategy, and do capital allocation decisions align with long-term strategy?
- Can you explain long-term strategic goals, the milestones that demonstrate progress, and any anticipated or incurred obstacles?
- Is the board fully engaged with management on the development and implementation of this strategy?
- Do policies reward executives for strong, sustainable returns rather than short-term hikes in share prices?
- Do pay outcomes correlate with a long-term, business-relevant performance metric, like five-year total shareholder returns or returns on invested capital?
- Does your board oversee human capital management strategies?
- Do you disclose your approach to ensuring the adoption of business practices in this area-or at least are you able to explain the type of information you review and how frequently?
Expanding the view from sustainability to stewardship
Despite the specificity of many of its KPIs, BlackRock refers to them in the context of ''stewardship priorities.'' According to Washington, it behooves boards to address KPI areas with a broader view. For example, the COVID-19 crisis expands the purview of human capital management into areas such as physical safety and mental health. ''Companies, even in their crisis management teams, haven't fully deployed their HR or sustainability folks in responding to this crisis. There's an unused capability there,'' Washington said. In another example, BlackRock does address diversity and inclusion in its language about board quality. Washington advises thinking beyond this scope to ''the company's role as a citizen - for instance, its position on public policy issues that relate to things like economic security and economic equality and the company's role in its communities.'' Overall, he said, ''I think boards face an even more daunting set of topics to cover than even those that have been outlined by BlackRock.''Learn how to turn ESG principles into action with Diligent's ESG Solutions.
Diligent solutions help organizations comply with ESG standards and regulations, evaluate risk controls, benchmark governance practices and educate leadership on new frameworks and developments. Learn more about Diligent's ESG Solutions.Media Highlights
Environmental, social and governance (ESG) issues have become more complex and multifaceted than ever before. At the same time, ESG continues to ascend on board and leadership agendas.
In this buyer’s guide, we explore what a market-leading ESG solution should look like and highlight the key areas organisations should be prioritising as they embark on their search.