Impact Investing

A $7 trillion climate change warning to the stock market from its biggest shareholder

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Key Points
  • BlackRock, which has significant influence on proxy battles against corporations, signalled this week it would support more shareholder resolutions on issues including climate change.
  • The world's biggest investor has been criticized in the past for not following the words of its CEO Larry Fink, who has said climate will "fundamentally reshape finance," with enough action.
  • In the past week, Exxon Mobil was targeted by activist investors and a $200 billion New York pension fund threatened to divest from fossil fuel companies.
An abandoned oil rig in the U.K. during Covid-19. "We've been talking about this for 20 years and some of the changes we saw this week were unlike anything we've seen before," said Mindy Lubber, CEO and president of sustainability nonprofit Ceres, speaking about action from investors on climate change.
Jason Alden | Bloomberg via Getty Images

The evidence of climate change — from global temperature records to Arctic ice melt, wildfires, hurricanes and flooding — is accelerating. So is investment pressure on corporations.

In the past week, Exxon Mobil was targeted by activist investors, as well as CalSTRS, one of the nation's largest pension funds. New York State's $226 billion pension fund announced a plan to potentially divest from oil and gas stocks in the years ahead. The world's largest money manager, BlackRock, issued an update to its approach to engaging with corporations, indicating it will be more inclined to vote in favor of shareholder resolutions, and against boards of directors at companies.

While that BlackRock strategy change — outlined in a new investment stewardship document published Wednesday night — may seem to be the mundane one among recent climate actions in the market, impact investing experts say that ahead of the 2021 annual shareholder meeting season, the $7 trillion fund manager's plans represent an important change.

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"We've been talking about this for 20 years and some of the changes we saw this week were unlike anything we've seen before," said Mindy Lubber, CEO and president of Ceres, a sustainability nonprofit that works with investors on climate change. Ceres announced this week a consortium of investors managing $9 trillion in assets that have committed to investing along net zero carbon goals.

While it is not part of the new net zero investor coalition, with $7 trillion in assets on its own, BlackRock's decisions influence other investors and corporations.

"BlackRock owns every company in the market," Lubber said.

A BlackRock spokesman downplayed the significance of its new report in a call with CNBC earlier this week, but impact investing experts, who have been critical of the company in recent years for a weak voting record on shareholder resolutions, say it is significant and should lead to more action that mirrors the strong words of CEO Larry Fink on climate.

Shareholder votes work

According to new data included in the report, BlackRock already changed its approach to voting shareholder proposals. Since July 2020, it supported eight out of nine environmental proposals brought by shareholders.

"That level of support, if it continues, is a distinct break with their historical record," said Jackie Cook, director of sustainable stewardship research at Morningstar, who has tracked shareholder climate proposals for years. 

When it comes to support for shareholder resolutions on climate, BlackRock and Vanguard, the two largest fund companies, have finished near the bottom of the group of top 50 asset managers in recent years and that has led climate investing experts to lose faith in them as investment stewards focused on climate.

But they pointed to one particular aspect of the new BlackRock report: an analysis conducted by the company on the impact of shareholder resolution votes. BlackRock concluded that the data shows the votes work to influence corporate management.

"That's validating for proponents who've been saying exactly this for years," says Cook.

Given BlackRock's history of votes against environmental and social shareholder resolutions and the size its vote of shares represents, this shift could be the difference between the slow pace of change at companies and more action. Votes from BlackRock and Vanguard can move a shareholder resolution from 10% to 40% in favor.

"I do believe this signals a step change," Cook said.

BlackRock said in the report that for resolutions that received at least 30% of shareholder support, the evidence suggests it does result in management meeting the shareholder requests for change, even if not fully, at a majority of companies (for votes where 50% of support or more was received, companies fully met expectations more than 90% of the time).

A BlackRock analysis of voting in support of shareholder resolutions shows they have resulted in changes at corporations in recent years.
BlackRock report, "Our 2021 Stewardship Expectations."

"Our analysis finds that companies tend to meet the request made in a shareholder proposal if it receives significant support, regardless of whether or not the proposal passes," BlackRock concluded.

While that may seem obvious, proxy voting experts say it is important because BlackRock has never explicitly offered this conclusion before. Its stance in the past has been to typically focus on its own individual engagements with companies as the best method for moving companies.

Before those July votes, BlackRock also took a more narrow view of shareholder resolutions it might support. Now it has outlined three key priorities it expects boards at companies to address: climate, diversity, and stakeholder capitalism.

"That will drive votes in a more proactive way, and that's a big deal that they broke it out," Lubber said. "It looks like they are saying they will be voting on climate resolutions to a huge extent rather than a modest extent. $7 trillion provides a loud voice and influence that other asset owners, and companies in its portfolios, will follow."

BlackRock doubters remain

Given disillusionment among impact investors in recent years when it comes to BlackRock and Vanguard voting records, doubts remain.

"They have a big stick and this report makes the case for the power of voting," says Andy Behar, CEO of shareholder advocacy nonprofit As You Sow. "If they just voted they would change the whole dynamic, that's the bottom line. They have the power to wield the vote and they showed us in the data their vote can make a huge difference. We've been showing them this chart for a decade and I'm thrilled they have adopted it as their own."

As You Sow has targeted BlackRock at its own annual meeting in the past for its failure to support more resolutions. Behar delivered a speech from the floor of the BlackRock meeting last year pointing to what he sees as a disconnect between BlackRock's words and actions, for "using its big stick like a wet noodle" Behar says, and that means he remains skeptical until he sees the results from the upcoming annual meeting season.

"For the largest investor firm in the world to be saber rattling, that will have an impact," said Tim Smith, director of ESG shareowner engagement at Boston Trust Walden. "Unless a company is stupid, when the largest investor says here is what we expect of you, and by the way rest of world expects this too, a lot are going to start responding. They are saying the situation has become more urgent and therefore they need to see demonstrable action."

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BlackRock has a large staff working on direct engagement with companies, and that will continue. In fact, the new report says it will more than double the number of companies with which it engages on climate issues to over 1,000. BlackRock announced a list last year of roughly 200 companies that it put on "watch" for climate inaction. "That's not an insignificant term to use," Smith said, and he added that engagement remains a relevant tool for a company the size of BlackRock.

The new direction and attitude from BlackRock on voting is something investors will monitor carefully to make sure it is being institutionalized. "We've had resolutions to BlackRock on this topic and each time they put some new steps forward but the result in proxy season was they didn't move, they voted for a minority of resolutions," Smith said. "This year they need to improve their record and I think there's a real chance."

But shareholder advocates should not fall into their own narrow view that resolutions are the only way to move companies. Direct engagement, pressure from suppliers like a Walmart, as well as from a firm's own employees and industry peers, are important mechanisms for change, Smith said.

"Maybe this report is their signal they will join the community of shareholder advocates that vote. I am hopeful, sincerely hopeful and think we will see action, but we will see," Behar said. At this point, he added, it is just more "great words."

General guidelines aren't detailed enough to predict votes or changes in voting patterns. In fact, Cook had thought that one of BlackRock's changes to the wording of its 2020 guidelines, about expecting companies to issue reports aligned with carbon accounting standards known as TCFD or SAS, signaled a stronger inclination to support climate risk disclosure resolutions.

"I was clearly wrong about that," Cook said. "But after issuing this report, it would be very tricky for BlackRock to explain next year why they rubber-stamped management's position on E&S resolutions yet again."