Michelle Edkins is a Managing Director at BlackRock and Global Head of its Investment Stewardship team of over 30 specialists based in five key regions internationally. In that role, she is responsible for the team’s engagement and proxy voting activities in relation to the companies in which BlackRock invests on behalf of clients.GlobeScan Director Femke de Man spoke with Michelle about corporate sustainability as perceived by the investment community.
How do you see the Environmental, Social, and Governance (ESG) world evolving? What has changed over the past five years?
A number of things have changed. The ESG information available has increased both in quantity and quality, which has enhanced investor understanding of the long-term financial impacts of corporate ESG practices. Investors are increasingly looking for opportunities to invest in a way that reflects their perspective on environmental and social issues. This, in turn, has encouraged product development by asset managers as client demand has grown. Asset managers have a better understanding of how to integrate ESG factors into their products. As a result, investors have the opportunity to invest at different levels of conviction, from screening out certain companies to integration into mainstream portfolios to thematic funds. For example, an investor with views on climate change might invest in any of a fossil fuel-free fund, an active large cap fund that takes into consideration the constituents’ climate risk exposure, or a thematic fund that over-weights companies actively working on products and strategies to transition to the low-carbon economy of the future.
Another thing that has changed is the dialogue between companies and investors such as BlackRock. More companies recognize that mainstream investors (those not investing significantly in SRI, but more on a traditional or mainstream basis) are interested in understanding how a company is managing its environmental and social impacts. Historically in North America, ESG issues were seen as social or political issues. Through dialogue with BlackRock, for example, companies now understand that we don’t look at it through that lens. We look at how a company manages the material ESG factors inherent in its business as a signal of operational efficiency and leadership quality. This is where you see the change in dialogue. As companies hear from more investors how this type of information is factored into investment and stewardship analysis, companies are reporting more around key issues such as greenhouse gas emissions and targets in relation to climate risk, or employee engagement and satisfaction as a dimension of human capital. They are managing for these relevant factors.
When we engage with these companies, we generally don’t want to talk to the corporate social responsibility person. We want to talk to directors about how the board ensures it is well briefed on those ESG matters material to the business and how they assess whether management’s approach is appropriate. We want to talk to management about how what we would call ESG is taken into account in how they develop and implement strategy and run the business. Engagement with companies is crucial, and the sometimes significant difference in language can be a barrier to mutual understanding. If we can explain why these are financial issues to BlackRock, with a long-term dimension to them, then we are speaking the same language.
Another important development is the continued evolution of reporting frameworks to ensure consistent, comparable and investment decision–relevant ESG disclosure by companies. The Sustainability Accounting Standards Board (SASB) has contributed significantly to this for the U.S. market, as has the Financial Stability Board’s (FSB) Taskforce on Climate-related Financial Disclosure (TCFD) on climate-risk reporting globally. Investors need to understand how companies are managing the ESG factors material to business performance over the long term. When companies focus on managing and reporting on these factors, investors can understand the performance implications. Investment banks have also done good work identifying these factors and developing models to show how they flow through to financial performance.
For example, if a company is heavily dependent on water in its production process but operates in a water-stressed region, it may need to innovate and adapt in terms of inputs, product design and operations. That’s not just an environmental issue; it is also good business management! My idea of success is when we no longer have to explicitly discuss “ESG integration” because it has become standard investment practice. The thing that will move the needle is when all companies think this way about how they run their business, and when investors think this way when they are assessing an investment opportunity and thereafter in their stewardship activities.
How would you describe the current state of corporate sustainability in the investment community? Are we finally seeing a convergence between mainstream investors and SRI investors?
There is some convergence – perhaps something like a Venn diagram. The overlap, where mainstream investors are integrating ESG into investment analysis and stewardship, is getting bigger. There will always be specialist funds and fund managers because they provide an investment approach that their clients value. And, impact investing – where investors direct their savings to a certain social or environmental outcome such as access to medicine – in addition to financial returns, is growing as a specialist investment strategy. Today, many traditional asset managers don’t factor ESG considerations into active investing or ownership activities. Maybe they will in time or perhaps ESG simply doesn’t fit their time horizons or investment thesis.
Do you feel it has become more accepted that a company’s ESG performance has a positive impact on the bottom line?
It is difficult to prove that this one dimension of how a company is managed feeds through to the bottom line, although there is some academic evidence that sound practices on material ESG factors improve share price performance. From a practical perspective, it makes sense that a great board of engaged directors who challenge and support management, a management team that is focused, committed and driven, and a robust approach to strategy and operations will have higher odds of delivering long-term, sustainable financial performance. There are multiple dimensions to successful companies and it may be a distraction to try to isolate one. You need them all and they all must work together.
There is a lot of discussion of short-termism vs long-termism. How do we encourage long-term thinking?
It is a philosophy. It is difficult to institutionalize long-term thinking unless leaders are bought into it. When leaders stand up and say ‘ignore the noise in the market, focus on the end goal that we have set,’ and deliver the same message over and over again, employees, investors and others will take note. The communications exercise is crucial. The CEO and CFO must commit to explaining their long-term focus and how they will deliver long-term value to shareholders. When the long-term strategy is understood and supported, then investors don’t worry as much about short-term performance dips and the company can focus on implementing the long-term strategy. When management does a poor job of explaining milestones, the company is overly punished when things go wrong in the day-to-day. In a cynic’s view of the world, one of the reasons management doesn’t set a long-term strategy is they are worried about being held accountable, especially in an environment with such a short-term CEO tenure, which makes it much harder to deliver a long-term vision.
Thinking of sustainability and corporate responsibility leadership, there are debates about whether this leadership needs to be incremental or more transformational, a call for bold leadership. What do you think? What is needed and why?
From time to time, it is transformational, but most change will come incrementally, from small changes in behaviour, focus, demand, and so on.
The challenge with transformational change is that there is not always a change agent at the right level. For example, the global market needs to up its game on climate risk knowledge, which at that scale may require regulatory intervention. Individual markets such as France, where asset owners and managers are mandated to report on the carbon intensity of investments, will have an impact. As will the recommendations of the FSB’s TCFD, as previously mentioned. The TCFD has proposed a reporting framework on climate risk and opportunity that is relevant globally but is voluntary. It could be transformational but it will require a concerted effort from practitioners to ensure widespread adoption.
But again, most things in this space happen incrementally, gradually, through thousands of conversations. Everyone is talking about how millennials and women will drive ESG investing. But, millennials don’t have money right now, so that transition of assets will happen over the next three decades. That’s the same timeline as climate risk and low-carbon economy adaptation. It is incremental.
Change also requires a push back on certain misconceptions and that is where engagement can be so effective. Companies sometimes express surprise that BlackRock asks them about, say, their workforce diversity or another matter that some may categorize as social or political. Through engagement we have the opportunity to explain how we link these considerations to value as a long-term investor on behalf of clients. We busted a myth by letting them know that.
Sometimes the pace of change feels glacial so it’s good to do a retrospective every once in a while. When I moved to the U.S. six years ago, it was unusual for corporate directors to meet with shareholders. Now, we have a director in about a third of our meetings, either because the company wants us to get to know their board leadership or we have an issue to discuss that requires a director perspective. It used to be only troubled companies that fielded directors, say because of an activist challenge or an unsolicited bid, but now it is much more about building a relationship.
BlackRock plays such an interesting role – from Larry Fink’s letter to CEOs to your announcement asking for greater disclosure on climate and diversity. How do you see the role of BlackRock in moving forward the conversation on sustainability?
BlackRock’s responsibility is to protect the interests of our clients as long-term investors. One way we are able to do that is through our voice, to raise and engage on issues relevant across a market – such as board diversity in North America – as well as at a company level where we believe there is room for improvement in business practices. As an active and indexed investor, our diversification across the market makes it more efficient at times to engage and raise ideas at that broadest level, such as through Larry Fink’s annual governance letter to CEOs. If nothing else, it starts the conversation on sustainability.
As a result of your scale, do you feel your engagements are improving practices?
We do. It’s hard to showcase any one thing because much of the change is incremental. We want to engage with companies in the near term to make small changes to their practices so that they deliver better, less volatile long-term returns. Transition is generally preferable to disruption. For example, if a company improves disclosure around its management of methane gas emissions, it won’t rock the short-term share price. But it will help investors understand the risk to the business, and we can assess whether we think that management is addressing it in an adequate way.
What sort of ambitions do you have for BlackRock going forward as a catalyst of change?
To the extent we are a catalyst for change, it is because the feedback we provide to companies through dialogue is helpful to them in their decision-making and they choose to do things differently as a result. Companies know we are going to be invested for the long term, that we are looking at ESG factors from a financial perspective, and that we are trying to be constructive, not to micro-manage. In this way, we support our mission to protect our clients’ long-term economic interests and support companies in delivering sustainable returns.
