After a year of global economic contraction the focus from the world’s major investors is on  ESG. This is not the outcome of soul searching for moral redemption. Rather there are other, more earthy, drivers. Not least of these is the global flow of investment funds into “sustainable” portfolios. Hence, if the asset manager and/or pension fund is not offering these then they too lose money and market share. The other is that, for the extra large investors who have no choice but to hold a bit of every company in the world, some ESG factors such as climate change, are existential threats to the value of every investment they hold.

BlackRock and State Street Global Advisors recently published their annual CEO letters to boards and management of assets they hold. The letters set out stewardship priorities for 2021 and make it clear that there will be increased pressure on boards to disclose and act more on ESG.

Main priority takeaways revolve around systemic risk in both:

• Climate:
  • Clear and transparent data and disclosures aligned with TCFD and SASB
  • Requiring action to transition to a net zero economy
  • Identifying climate risk as an investment risk but also climate transition as a historic investment opportunity
• Talent : by way of ethnic diversity

Below are some aspects of the letters and updated voting guidelines that will directly impact boards in ASX-listed companies.

Diversity

Diversity has clearly moved on from gender diversity. Whilst BlackRock recognises that the issues of race and ethnicity vary greatly across the world, the CEO letter makes it clear that they expect companies in all countries to disclose how the talent strategy reflects long-term plans to improve diversity, equity and inclusion as appropriate for each region.

State Street appears to be going further to ensure companies disclose the racial and ethnic compositions of both their boards and employees. The CEO letter states that:

• In 2021, they will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards;
• In 2022, they will vote against the Chair of the Compensation Committee at companies in the S&P 500 that do not disclose their EEO-1 survey responses (a U.S. survey which requires company employment data to be categorised by race/ethnicity, gender and job category); and
• In 2022, they will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not have at least one director from an under-represented community on their boards.

This policy comes into effect in 2022. While the ASX 200, or other regional indices were not mentioned in the State Street letter, we expect that State Street will require similar disclosure requirements of ASX-listed companies, noting that State Street is one of the most active of the “passive” funds in voting against AGM resolutions in Australia. While this may not be 2022, it may behove ASX 200 company boards to begin identifying and tracking workforce diversity beyond gender, and considering policies for improving diversity performance.

Shareholder proposals

Both State Street and BlackRock have signalled a willingness to support more shareholder proposals, with Larry Fink saying:

“We see voting on shareholder proposals playing an increasingly important role in our stewardship efforts around sustainability. Accordingly, where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we will support the proposal.”

If there was any doubt about intent, in the second half of 2020 BlackRock supported 54% of all shareholder environmental and social proposals assessed as being aligned with long-term value.

BlackRock’s CEO letters and 2021 stewardship expectations can be found HERE and HERE, and State Street’s CEO letter can be found HERE.

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