Has BlackRock changed its approach to engagement and voting? - BlackRock's Big Problem

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Has BlackRock changed its approach to engagement and voting?

In December 2020, BlackRock made a welcome 180-degree turn on its purported strategy as a shareholder, after years of saying voting against management was a last resort and claiming engagement was private, amiable, and behind-the scenes. 

BlackRock, led by Global Head of Investment Stewardship Sandy Boss, now says it plans to take strong voting action – including voting off directors and supporting shareholder proposals – at more companies with greater transparency. This positional change is undoubtedly the result of tireless grassroots efforts, accountability and reporting from shareholder advocacy organizations, client pressure, and changes in leadership within BlackRock itself.

BlackRock still has a lot more to do to truly align its strategy with urgent climate goals, as detailed in this analysis of the 2020 announcement. Ultimately, until there is follow-through on an ambitious plan of action, this new strategy is still just rhetoric and potential evasion of BlackRock’s responsibility and influence as a shareholder.

What can BlackRock really do, given that it works with client money?

Larry Fink has said that climate change is a major threat to clients’ investments, so continuing to support the companies driving climate change makes BlackRock part of that threat. There is an inherent conflict between the long-term survival of companies whose core business model is based on fossil fuels or deforestation and the long-term existence of life as we know it. Continuing to hold fossil fuel companies in a portfolio is an abdication of long-term fiduciary responsibility. Until it pursues action that aims to materially reduce greenhouse gas emissions, BlackRock is trying to have its cake and eat it, too.

What does Fiduciary Duty mean for BlackRock’s ability to act on climate?

Climate change poses an enormous systemic risk to our economy. So much so that Larry Fink himself said that climate change will reshape finance. Given the systematic threat of climate change, the only way a financial firm can fulfill its long-term fiduciary duty to its clients is by proactively acting to mitigate the climate crisis. Financial firms that do not take the climate impact of their investments into account are not acting in the best interest of their clients or our economy.

Do you expect BlackRock or the economy to change overnight?

Of course not. Change takes time, but we need bold and visionary leadership right now – while we still have a chance to avoid the worst impacts of the climate crisis. We can’t rely on incrementalism while the world burns. Larry Fink says coal won’t disappear tomorrow, but science says we need to stop burning coal as quickly as possible, so funnelling dollars into the industry just pushes us closer to the brink. This all comes down to one simple truth: humanity must avoid catastrophic climate change. Asset managers who publicly acknowledge this truth while propping up companies that drive us toward catastrophe are not leaders or visionaries, and they are certainly not putting sustainability at the center of their investment decisions.

If BlackRock stops investing in fossil fuels and other climate-harming companies, will another investor just step in?

Fewer institutional investors are buying energy stocks, and, for many companies, institutional investors are reducing the size of their fossil fuel holdings. The energy transition, in which global economic growth is increasingly decoupled from fossil fuel use, is underway. As energy stocks have become less relevant, other sectors are moving forward.

What can BlackRock do about its passive investments in companies driving the climate crisis?

True climate leadership must include taking responsibility for avoiding systemic impacts to the financial system and economy overall. BlackRock’s existing portfolio, unchecked, is driving runaway climate change. The notion that passive funds are derived through objective analyses of the market is simply not true, in reality index funds are “passive in name only.” Selection criteria are created by fund managers, and their methodologies shift regularly. It is past time for fund managers to think seriously about how climate change is a crucial criterion.

How are Indigenous rights connected to deforestation and climate change mitigation?

Studies have shown that Indigenous peoples are the best protectors of forests, and that when Indigenous peoples’ rights to autonomy and self-determination are respected, the territories they control remain biodiverse and intact. Given that deforestation is the second largest driver of climate change worldwide following fossil fuel extraction, prioritizing Indigenous rights is a crucial part of protecting the world’s rainforests, which are some of the most important strongholds for climate change mitigation. 

Just as BIPOC people have been challenging the white supremacist legacy of slavery in the United States for centuries, Indigenous peoples in the Amazon have been fighting for centuries to defend their ancestral territories from colonialist exploitation and invasion. The exploitation of the Amazon today continues this pattern of colonialism and environmental racism. Almost all of the crude oil and agribusiness industries currently operating in the Amazon are owned and financed by European or U.S. corporations. This is why our work to get major financial institutions like BlackRock to stop financing the destruction of the Amazon is anti-colonialist and anti-racist work.

What are “deforestation commodity companies” and what can BlackRock do about them?

“Deforestation commodity companies” are companies that produce and distribute commodities that involve deforestation in their production processes. There are multiple steps in a typical cycle of deforestation, providing multiple opportunities for profiteers to play a role in forest destruction. First, old growth trees are logged for timber and other industrial purposes, often by illegal loggers (Greenpeace has cited a study that in one state in Brazil, almost 80% of all logging is carried out by illegal loggers). Harvested trees require further deforestation to take place in order to be transported to market, and a logged forest is significantly less biodiverse and more vulnerable to fire. Once old growth trees are gone, ranchers typically burn what is left to clear the land for cattle grazing. This leads to a further loss of biodiversity and a depletion of soil nutrients. Eventually, the only crops that can be grown in the areas where deforestation has taken place are monocrops like palm oil or soy. Monocrops can typically only grow with exorbitant amounts of fertilizers, and are highly susceptible to pests or disease. 

BlackRock and other asset management firms may not be directly cutting down forests, but when they choose to invest their clients’ money in deforestation commodity companies, they are perpetuating a destructive cycle. Instead of turning a blind eye in the interest of profit, BlackRock and other firms like it must insist that any companies it invests in have clear policies with safeguards in place to ensure that their products are not being sourced from deforested lands. For detailed guidance asset managers can use to create such policies, check out this link

What is FPIC and why does it matter?

FPIC stands for Free, Prior, and Informed Consent. This is a right recognized in the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP), and in the International Labor Organization (ILO) Convention 169. It allows Indigenous peoples with collective land titles to ancestral territory to give or withhold consent to a project that may affect them or their territories. Once they have given their consent to such a project, they can withdraw it at any stage. FPIC ensures that Indigenous peoples are consulted and able to negotiate the conditions under which a project will be designed, implemented, monitored, and evaluated.  

Unfortunately, FPIC is rarely properly enforced, and many countries lack adequate regulatory policies that outline precisely how “consultation” should take place. This leaves the door open for companies to use manipulative tactics in order to get Indigenous communities to give consent to carry out potentially harmful projects on their territories. In the 2020 report, Investing in Amazon Crude, Amazon Watch documented how oil companies that BlackRock invests in have coerced Indigenous communities in the Amazon to give consent to devastating oil extraction projects on and near their territories. These oil companies will sometimes promise jobs, fuel, food, or other much-needed infrastructure to communities in exchange for permission to operate. As reliance on outsiders increases, many communities experience a weakening of social cohesion, and a loss of their traditional means of survival.

What more needs to be done on coal now that BlackRock has a coal exclusion policy?

BlackRock is making a lot of noise about excluding coal from funds, yet only a fraction of BlackRock’s more than $8 trillion AUM is currently under its coal exclusion screen. Worse still, the exclusion screen applies to less than 20% of the coal industry. BlackRock must expand the coal screen to cover more of the industry and apply it to all its funds.

Why does BlackRock need to expand its exclusion policy if it’s integrating ESG data into all its active funds?

There are certain climate-harming industries that will never be sustainable, like coal, tar sands, and Arctic oil. These must be investment no-go sectors. The science is clear that we need to phase out these fossil fuels as soon as possible, so any investment in them is a risk for our economy and our planet. While ESG exclusionary screens can be a good tool, simply integrating ESG data is vague and in its current form will not eliminate climate-destroying companies from investment funds.

How can BlackRock use its shareholder power to slow the climate crisis?

As the world’s largest shareholder, BlackRock has immense power and influence over the entire business community. It can implement public and visible consequences for companies that are not moving fast enough to align with the low carbon economy we need. Companies that are not moving toward science-based targets are not just a risky investment, they are endangering global security, financial and otherwise, and BlackRock has the power to push these companies to change. For more information on BlackRock’s voting record and the potential power of major asset managers see these recent reports from MajorityAction and ShareAction.

What types of ESG funds are currently available, and what are the impacts of these ESG products?

There are 3 defined types of ESG funds:

  1. Exclusionary screens – These exclude bad acting companies from funds based on the screen. These are the most impactful ESG tools because they result in money being taken away from destructive companies, provided the screen criteria is strong enough.
  2. Screens focused on engagement and voting mandates – These can be a good tool, as they dictate how these funds vote their shares in associated companies. Unfortunately, they also provide an excuse for asset managers like BlackRock to vote the wrong way with the rest of its funds, thereby negating the impact of the funds in the first place.
  3. Impact investing screens – These bring companies that are doing well into funds they might not otherwise be in. While these screens can also be a good tool, they don’t stop the companies that are destroying our planet, which is what scientific consensus tells us we need to do.

Is staying invested and engaging with a company a better strategy for change than pulling investments out of a destructive company?

Any investor – particularly one with the capacity of an asset manager like BlackRock – is a future share buyer and therefore a company is incentivized to engage. Total unwillingness to consider exit as an option would likely decrease the power of an asset manager’s engagement, according to Albert Hirschman in his book, Exit, Voice, and Loyalty. Academic analysis has found that investors that sell shares do not lose the proverbial “seat at the table,” but in fact can continue to engage both publicly and privately.

 

1 Jahnke, Patrick. “Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change.” 8 February 2019. Available at http://dx.doi.org/10.2139/ssrn.3314906

2 Hirschman, A. Exit, Voice, and Loyalty. Harvard University Press (1970).

3 Goodman et al. “Social Shareholder Engagement: The Dynamics of Voice and Exit.” October 2014. Journal of Business Ethics 125(2):193-210. 

If institutional investors stop investing in fossil fuels and other climate-harming industries will private equity just step in?

Private equity is too small to absorb all the fossil fuel equity. According to the latest FSOC report, the entire private equity industry is only around $3.7 trillion, including everything it invests in, or about half of BlackRock’s AUM. It is highly unlikely it could absorb all the fossil fuel assets. Additionally, BlackRock and other asset managers also hold a lot of debt via bond funds. Private equity purchases equity, so it would not buy up the debt if BlackRock were to offload it.