The CEOs of State Street Global Advisors (SSGA) and BlackRock have separately published their annual letters advising of their calendar year voting priorities (see HERE for the last year’s summary article).

ESG issues are top of the agenda with transparency and consistency of reporting the converging theme.

Consistent with prior years, the CEO of SSGA stated that:

“..these issues are matters of value, not values—opportunities for companies to mitigate downside risk, innovate, and differentiate themselves from competitors. To that end, we view the use of our voice and our vote as central to our fiduciary responsibility to our clients to maximize long-term risk-adjusted returns.”

Others may take these comments with a grain of salt, also noting that asset managers that fail to take note of ESG issues risk funds walking out the door to competitors, as average punters around the world are not loathe to move their pension assets with mandates consistent with their values.

Whatever the underlying reasons, their main focus in 2022 will be to support the acceleration of the systemic transformations underway in climate change.

SSGA will retain fossil fuel companies in their portfolios (not that they have much choice given that index funds constitute much of their investment offerings and market positioning). Interestingly, they suggest that some of the dirtier companies will have a much harder transition job than less dirty companies, and that they recognise this. The inference is that they expect and accept dirtier companies’ transition rates to greener outcomes to be slow relative to other companies. SSGA suggest it is in the world’s interests that the world may well need additional investments in some “light brown” fossil fuels to propel the transition to net zero. This is to prevent having brown fossil fuels companies going private to be under less pressure to go green rather than relying on an improbable immediate shift to renewables to solve the massive climate challenge.

BlackRock makes a similar case that divestment from entire sectors will pass carbon-intensive assets to private markets absent disclosure and scrutiny which ‘will not get the world to net zero’.  They also acknowledge the different pace of change between developing and developed countries and the need for countries to provide reliable and affordable energy sources to their citizens. Having removed companies from their portfolios that generate more than 25% of their revenues from thermal coal production, it is ironic that BlackRock highlights the potential for societal discord and polarization around climate change where the demand for hydrocarbons is met with limited supply and increasing cost.

Beginning in the 2022 proxy season:

• SSGA and BlackRock expect companies in major indices in the US, Canada, UK, Europe, and Australia to align with climate-related disclosures requested by TCFD, including disclosure of: (1) board oversight of climate-related risks and opportunities; (2) total direct and indirect GHG emissions (“Scope 1” and “Scope 2” emissions); and (3) targets for reducing GHG emissions. Neither expect scope 3 targets.
• SSGA will launch a targeted engagement campaign with the most significant emitters in its portfolio to encourage disclosure aligned with expectations for climate transition plans, which covers 10 areas including decarbonization strategy, capital allocation, climate governance, and climate policy. In 2023, SSGA will hold companies and directors accountable for failing to meet these expectations (see HERE).
• BlackRock is also focusing on sustainability asking companies to publish SASB disclosures by year-end. They have telegraphed that they will vote against directors and management in companies not making sufficient progress on sustainability-related disclosures or how the risks are being addressed.

SSGA expect companies to have 30% women directors. SSGA are prepared to vote against the Chair of the board’s Nominating Committee or the board leader should a company fail to meet these expectations. This requirement should not trouble most ASX 200 companies.

SSGA will also increase their focus on racial and ethnic diversity. In the upcoming proxy season SSGA will take voting action against responsible directors if (1) companies in the S&P 500 and FTSE 100 do not have a person of colour on their board, (2) companies in the S&P 500 and FTSE 100 do not disclose the racial and ethnic diversity of their boards, and (3) companies in the S&P 500 do not disclose their EEO-1 reports.

ASX listed companies are not on the list. We expect that this will be a sleeper issue for most ASX boards until local governance codes catch up with North America and the UK. Given Australia is well advanced on gender representation (at least at board level), and 25% of its population was born elsewhere, this may be sooner than some think.

See the President and CEO of State Street Global Advisors, Cyrus Taraporevala’s, letter HERE. BlackRock CEO Larry Fink’s letter to CEOs can be accessed HERE.

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