While managing COVID-19 related risks and impacts may be the current priority for many public companies, BlackRock provided a reminder yesterday that environmental, social and governance (ESG) issues will form a core part of its engagement strategy this proxy season.  Publishing its investment stewardship team’s public company engagement priorities for 2020 (Priorities), BlackRock stressed, among other things, that it intends to hold board directors accountable for demonstrating “material progress” on ESG-related disclosures and practices.

BlackRock’s 2020 Investment Stewardship Engagement Priorities

The Priorities place an enhanced focus on sustainability-related issues and disclosures. Moreover, the Priorities articulate key performance indicators against which the asset manager will track companies’ progress and identify those directors whom it will hold responsible for demonstrating progress on these issues.  The Priorities outline five focus areas for engagement: (1) board quality; (2) environmental risks and opportunities; (3) corporate strategy and capital allocation; (4) compensation to promote long-termism; and (5) human capital management.

1. Board QualityBlackRock looks to understand and evaluate the effectiveness of board oversight of management.  One of the core components of this evaluation will be direct engagement with a non-executive, preferably independent, director who has been identified as accessible to shareholders.  The most senior non-executive director will be held accountable for identifying the director for direct engagements.

Some areas that BlackRock may target in company engagements include disclosure regarding director responsibilities, turnover and succession planning and the board’s role in crisis management.  In addition, BlackRock may vote against directors on the nominating and/or governance committee where the asset manager considers the board to be insufficiently diverse.

2. Environmental Risks and Opportunities.  As announced earlier this year, BlackRock is asking companies by the end of 2020 to issue reports aligned with frameworks established by the Sustainability Accounting Standards Board (SASB), or similar metrics, and the Taskforce on Climate-related Financial Disclosures (TCFD).  The Priorities reiterate this request and reaffirm that directors will be held responsible if a company does not make adequate progress on these disclosures. Noting the work that its investment stewardship team has done in engaging on climate risk disclosure, BlackRock states that it will be “increasingly disposed to vote against management when companies have not made sufficient progress” on this disclosure.

For companies that BlackRock has already engaged with on TCFD-aligned reporting, BlackRock expects that these companies sufficiently disclose across the four broad pillars of the TCFD framework.  In addition, BlackRock expects that these companies provide a timeframe within which they will be able to fully report in alignment with the eleven, more granular, recommendations of the TCFD framework.  BlackRock will hold members of the relevant board committees, or the most senior non-executive director, accountable for inadequate disclosures and the related business practices.

3. Corporate Strategy and Capital Allocation.  BlackRock expects that companies publicly disclose how they integrate sector-relevant sustainability risks and opportunities into their business strategies.  The Priorities mention SASB’s framework as a reference for sector-specific standards and explain that BlackRock will hold the most senior non-executive director accountable if the company has not provided “adequate disclosures” and made progress on the underlying business practices within an agreed upon timeframe.

4. Compensation That Promotes Long-Termism.  BlackRock will evaluate the correlation between executive pay and long-term performance as well as company-wide pay structures, noting that these structures give insight into a company’s human capital management practices.  Compensation committee members will be held accountable for these pay outcomes.

BlackRock also notes that they may vote against the election of compensation committee board members in such instances as when a company has failed to adequately demonstrate the link between strategy, the creation of long-term shareholder value and incentive plan design.

5. Human Capital Management.  BlackRock expects that boards oversee human capital management and that companies disclose the board’s role, including an explanation of the type of information reviewed and how frequently.  Relevant board committee members, or the most senior non-executive director, will be held accountable if a company lacks disclosure of the board’s role in overseeing the company’s human capital practices.

Legal assistant Sarah Foster contributed to this post.