- BlackRock, the world’s largest asset manager, is losing patience with companies that are slow to disclose the details of their adherence to environmental, social and governance (ESG) principles, according to Jessica McDougall, a director for investment stewardship at BlackRock.
- “We don’t have patience much longer for these disclosures to be forthcoming,” McDougall said last week in a webcast sponsored by Diligent, adding “we are increasingly seeing the impacts of climate change not only across our portfolios but also across the global economy.”
- BlackRock, which manages $9 trillion in assets, has pressed for more disclosure in recent years, “but this was the year that we really started to take more concerted action based on what companies were providing us” before the 2021 proxy season, McDougall said. “Where we felt that companies were falling short for a variety of ESG issues, we were more inclined to support those [shareholder] proposals this year.”
ESG activism by shareholders took center stage during the 2021 proxy season when Engine No. 1, a hedge fund, won investor support for replacing three directors on the board of Exxon Mobil.
Engine No. 1 rallied investors including BlackRock, State Street and Vanguard Group by arguing that Exxon had wasted capital on oil projects that yielded meager returns while ballooning company debt. It also said Exxon lacked a solid plan for shifting to cleaner sources of energy.
Like investors, regulators including the Securities and Exchange Commission (SEC) are pressing for more detailed ESG disclosure.
SEC Chair Gary Gensler in July noted increasing investor concerns about climate risk and said he has asked agency staff to submit a proposal for mandatory disclosures for agency consideration by the end of 2021.
Such reports may be required in an expanded Form 10-K and describe a company’s direct and indirect carbon emissions, including those by suppliers and partners in its “value chain,” he said.
Companies may be required to disclose both qualitative and quantitative details, including how they manage climate-related risks and opportunities day-to-day operations and in broad strategy, Gensler said, noting rising investor pressure for consistent ESG standards.
Companies may also need to report on metrics such as greenhouse gas emissions, financial impacts of climate change and progress towards climate-related goals, Gensler said.
“Since January we’ve seen the SEC begin to finally take investor signals seriously and recognize the need for standardization” of ESG disclosure, according to Andrew Droste, head of stewardship for Carbon Tracker Initiative.
The agency is reacting to a lack of both consistent ESG standards and accountability on disclosure, while pursuing its mandate to protect investors, ensure fair, efficient and orderly markets, and facilitate capital formation, Droste said Wednesday in a Diligent webinar.
ESG principles loomed larger in shareholder activism this year after the hedge funds that launch most proxy fights realized that large institutional investors “started to care about climate change in corporate director elections,” according to Kai Liekefett, a partner and co-chair of the shareholder activism practice at Sidley Austin.
The hedge funds, like politicians, “do the functional equivalent of kissing babies, even if they hate babies, and pretend to care about the environment” in order to rally shareholder support, he said. “This is something that the voters care about, so they pretend to care about it too.”
Even amid growing pressure on ESG, “there are still a lot of boards who see this as something that just a couple of do-gooders are pursuing, but nothing they should really take into account when running a company,” Liekefett said. “There is a lot of lip service being paid to ESG topics.”
A boardroom that shrugs off sustainability concerns among stakeholders may jeopardize its company’s reputation and financial prospects, according to the panelists in the Diligent webinars.
“ESG issues are laden with risks, and there are lots of different types of risks that are associated with ESG issues,” according to Kevin Maxwell, associate general counsel at WestRock. “If your board isn’t focused on ESG issues, it ought to be.”