06 February 2020 by Peter Swabey
Companies must recognise the requirements of their stakeholders, as well as their investors
Mr Larry Fink, Chairman and Chief Executive Officer of BlackRock, has published his annual encyclical to the CEOs of companies in which BlackRock invests.
His focus is on climate change – as he rightly says, “climate risk is investment risk” – and especially the need for improved reporting so that “all investors, along with regulators, insurers, and the public …[have} … a clearer picture of how companies are managing sustainability-related questions”. Mr Fink goes on to link this to the importance of companies recognising the needs of their stakeholders, rather than simply its investors, because “Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders”.
In recent months, I have been struck time and time again by the question of trust. Of trust in business and, more widely, of trust in organisations. In the same way that many of the public anecdotally lack trust in politicians and estate agents, we have seen an increasing lack of trust in business. I would still argue, as James Wates did at the launch of his principles last year, “that good business, well done, is a force for good in society” and that good governance is the bedrock on which good business, well done, is based. Unfortunately, there have always been just enough companies who do not do business well, companies which profiteer, which avoid tax, which treat their workforce badly, etc., not to mention those which go bust in compromising circumstances, to fuel that atmosphere of mistrust. Similarly, we have seen a number of charities, hospitals, local government and sports organisations get into difficulties through the poor behaviour of individuals, the organisation or both. As a society, we are less believing than once we were and the occasional rotten apple is assumed to be more symptomatic of the whole, especially when, too often, there seem to be little or no consequences for them.
Which brings me back to Mr Fink and his CEO letter, in which he says that BlackRock will now expect companies in which it invests on behalf of its clients to report against both the Sustainability Accounting Standards Board guidelines “by year-end, if you have not already done so, or disclose a similar set of data in a way that is relevant to your particular business” and “disclose climate-related risks in line with the [Task Force on Climate-related Financial Disclosures]’ recommendations, if you have not already done so”.
He goes on to say that BlackRock will use this reporting to satisfy itself that “companies are properly managing and overseeing these risks within their business and adequately planning for the future” and, where they are not satisfied, will be holding directors personally accountable by voting against them, or withholding their votes, at the AGM. Given that BlackRock is one of the largest investors in many FTSE companies and one of the most committed to corporate engagement – they won our award in November for Best Investor Engagement, voted on by FTSE 350 company secretaries - this is a fairly robust stick with which to drive compliance.
Some companies may, perhaps, be sceptical of strictures on corporate governance from someone whose job title is “Chairman and Chief Executive Officer” and who was paid, according to BlackRock’s 2019 proxy statement, some $24 million in 2018. But, regardless of Mr Fink’s personal situation, climate change affects us all and it is great to see such a significant investor making a stand to encourage companies to focus more on their longer-term sustainability than on short-term profits. Of course, the challenge will now be for other investors, and their advisers, to place a similar premium on climate change initiatives from their investee companies when valuing their stocks and deciding how to vote at general meetings.
Last October, the Financial Reporting Lab published an excellent project report, Climate-related corporate reporting, on which we reported in the December/January edition of Governance and Compliance, which provided lots of practical guidance and a range of examples of the developing practice of climate-related reporting. The Lab has now published a further report, this time on workforce related corporate reporting, which includes some helpful examples of good reporting which will help those companies that do choose to report more in this area. Both climate change and stakeholders are enormously significant topics at the moment, and I don’t think that will change soon.