Steps Corporate Counsel Can Take to Meet BlackRock’s ESG Standards

28 Apr, 2020 12:07
source: Clermont Partners

Singularity Financial Hong Kong April 28, 2020 – BlackRock is leading the way in sustainability reporting and expecting all publicly traded companies to do the same.

About this author: Elizabeth Saunders is a Founding Partner at Clermont Partners, a leading, women owned financial communications strategy firm specializing in ESG, investor and transaction communications. Formerly she was the Chairman of FTI’s Strategic Communications Segment in the Americas. Saunders holds a law degree from DePaul University, with a concentration in Securities Law, and a BBA in Finance from the University of Notre Dame.

Companies that are not yet actively disclosing their environmental, social, and governance (ESG) policies will soon find that such reporting isn’t just a good idea, it’s a mandate. Considering the recent announcement from BlackRock, the world’s largest fund manager, the timeline for publishing this information just became much shorter.

Leading by Example

BlackRock has more than $7 trillion in assets under management and is estimated to be a top 3 holder in more than half of all US publicly held companies. Companies don’t tend to make contact with BlackRock portfolio managers or compliance officers due to the passive nature of the firm’s funds. (More than one-third of BlackRock’s assets are in the form of ETF’s, making them the largest global provider of these index-tracking mutual funds that can be traded like stocks.) Despite the lack of contact, management teams are often unnerved at the potential sway BlackRock could have if the firm turned negative on their company.

This past January, BlackRock informed the investment community and the public of its plans to put sustainability at the center of its investment strategy. It is making good on its promise and setting the example for other firms, starting with strengthening its internal focus on gender equality and affordable, clean energy. In addition, BlackRock will actively enhance transparency into shareholder engagement in several ways, including disclosing its vote on key high-profile votes more quickly, better explaining the rationale behind these votes, and improving disclosure of its engagement with companies in its annual stewardship report.

Raising the Bar

BlackRock fully expects all its portfolio companies to follow suit, and sooner rather than later. Specifically, BlackRock is asking companies to:

– Immediately begin using the Sustainability Accounting Standards Board (SASB) reporting framework. BlackRock is a proponent of the SASB’s clear set of standards for reporting sustainability information across a wide range of issues, from labor practices, to data privacy, to business ethics. BlackRock has asked companies to publish a disclosure in line with industry-specific SASB guidelines by year end, much as BlackRock has already done itself, or to provide a similar set of data in a way that is relevant to the business.

– Be ready to implement the Task Force on Climate-related Financial Disclosures (TCFD) framework in the near future. TCFD’s climate risk reporting recommendations ask companies for an operating plan that supports the Paris Agreement’s goal of limiting global warming to less than two degrees. The framework covers climate-related risk along with the related governance issues that are essential to managing such risks. Since BlackRock itself is not yet in full compliance with the TCFD framework, it has not put a specific timeframe on mandating this level of reporting. However, BlackRock is actively working to bring its own reporting in line with the framework and is expecting its portfolio companies to do the same.

Delaying Is Not Worth the Risk

Companies that fail to heed BlackRock’s suggestions in a timely manner could face real and immediate consequences. In its announcement, BlackRock stated that it will view lack of such robust disclosures as a sign that companies are not adequately managing ESG risks. More to the point, BlackRock warned that it will “hold board members accountable” for failing to provide adequate disclosures. The penalty for such oversights will likely manifest in votes against those board members come proxy season, and the potential for BlackRock to support ESG related shareholder proposals.

This is a very different strategy than BlackRock has used in the past. Historically, Blackrock has voted for management in about 90% of all votes at annual general meetings, and mostly voted against proposals sponsored by shareholders.

Three Steps to Take Now

Today, companies have some flexibility in formulating the extent of their sustainability disclosures. But that flexibility won’t last long if companies continue to postpone action. To prepare for implementing the SASB and TCFD frameworks, get started today by taking these steps:

– Create an ESG SWAT team. Charge this steering with gathering the data required for reporting purposes and, more importantly, accelerating the approval of any new ESG policies the company will need to adopt. The team should include the company’s general counsel, corporate security, head of investor relations, and head of marketing, along with other team members who play a hands-on role in communicating with suppliers and customers.

– Find out where the company’s reporting falls short. For an excellent example of what the SASB reporting framework requires, and the level of sustainability reporting that BlackRock expects, see BlackRock’s own SASB disclosure. The SWAT team can use this as a benchmark for comparison with the company’s current reporting to determine where it will need to provide more robust information.

– Prioritize the polices that need to change. If the company lacks formalized or robust ESG policies on key issues, now is the time to put them into place. The company’s industry will help dictate which ESG areas are most important, but keep in mind that BlackRock is specifically asking for improved climate risk reporting and that it has also chosen to focus on gender equality within its own operations. The company will need to make room on its corporate website for publicizing the updated polices. See the CARS investor relations site for an example.

The Time Is Now

When BlackRock decides it’s time to focus on sustainability reporting, its hard to argue that companies need to as well. Use these suggestions to follow the investor’s lead, and find that the company will not only improve its ESG ratings, it will improve the company’s ability to manage risk and sustain profitable operations well into the future.

(This post is republished with permission from Clermont Partners.)