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At BlackRock, Stewardship Means Dialogue Not Micromanaging

Jon Hale, Ph.D., CFA

Jon Hale: Hi, I'm Jon Hale, director of sustainable investing research at Morningstar. I'm here at the Morningstar ETF Conference with Michelle Edkins. Michelle's the managing director and global head of investment stewardship at BlackRock.

Michelle, thanks for being here today.

Michelle Edkins: Thanks, Jon.

Hale: Tell us about investment stewardship at BlackRock. What does it mean? What are you trying to accomplish when you engage with companies that you own.

Edkins: BlackRock is a fiduciary for our clients, and in light of that, and the fact that our clients are long-term investors both because they're saving for long-term financial goals and because the majority of them are investing through index strategies, we see stewardship as that dialogue between the investor and the company about how they're generating long-term financial returns.

Hale: Tell us a little bit about the different ways that you engage with companies. How are you, how you sort of approach the engagement process?

Edkins: As a long-term ambassador, BlackRock is looking to build those relationships with management and boards that support an open dialogue. So we are not trying to micromanage, but we're trying to make sure that the company understands our perspective as a long-term ambassador on behalf of our clients and that we understand the approach that management is taking. Then we can assess whether we agree with management that that is consistent with the interests of our clients as long-term investors. 

We identify companies for engagement on a number of different dimensions. One is if we are about to vote at a shareholder meeting and we need some more information or we need to communicate that we have concerns. So that's a voting related engagement.

We also engage where we've identified issues outside the voting process, either because one of our active portfolio managers has a concern that they bring to us, or through our own analysis we've identified a concern. Then we'll engage if there's been an event at a company of if the company's seeking an engagement with us, which, as we're often one of their largest shareholders, is quite frequent.

Then, finally, each year we have some themes that we engage around, often across a particular sector, and so we'll have conversations around that issue and climate risk is one example, lack of gender diversity on boards in the U.S. is another example, of that thematic type of engagement.

Hale: So this year, it was, certainly, climate risk disclosure was in the headlines, particularly the Exxon vote on a shareholder resolution on the topic, which BlackRock supported. Tell us a little bit about why you believe, why BlackRock believes that climate risk disclosure is important.

Edkins: BlackRock believes climate risk is an important issue to understand as an ambassador because it effects companies across the economy and across global markets. It's not just contained in one sector, although our initial focus is on carbon-intensive companies, so oil and gas, mining minerals, and transportation, for example. Obviously, climate risk as opposed to carbon-intensity affects all of us, and I think Texas is an example of perhaps some emerging changes in climate that will affect companies as well as individuals in society. We also saw that a few years ago, when a number of companies had their supply chains completely disrupted when there were significant monsoon rains and flooding in some of the southeast Asian countries. 

It's important to understand how companies are integrating those considerations into their strategy, into their risk management processes, and into their capex decisions, and that's why we need the disclosure to help us understand a company's approach, and identify the companies where we think they could be providing more information or maybe taking a different approach.

Hale: With this issue of climate risk disclosure, is your position then to vote in favor of climate risk disclosure resolutions across the board or only in certain cases?

Edkins: We believe that you should engage first, so BlackRock has engaged my team, Blackrock Investment Stewardship, has engaged with companies across the globe that we consider to have significant climate risk in their business models. We will determine how we vote on shareholder proposals based on the responsiveness we get from companies. We're not seeking a quick fix here. For some companies, this is the beginning of their journey on climate risk disclosure. They need to start gathering data. They need to build models. They need to create reporting systems. So in that sense, we need to monitor the progress being made, and if we felt that there wasn't sufficient progress or that the board and the management team were not sufficiently engaged on this, then we might reflect that in our vote.

Hale: So a vote in favor of the Exxon shareholder resolution is really saying to Exxon, "We think you have had an opportunity to get going on this issue, and we don't like the progress we've seen so far."

Edkins: That's right. And this year for the first time around some of these high profile votes, we published what we call a vote bulletin, explaining the engagement we've had to date, the analysis we did in relation to this particular meeting and vote, and then how that fed through into our vote decision as well as disclosing the vote decision. Because we want to be able to explain our process, and sometimes explaining it in the context of a particular situation makes it more accessible for people who are interested to understand how we do engagement and how we determine our voting.

Hale: Do you feel as though BlackRock investors are more interested, more engaged themselves in this idea of what you're doing on corporate engagement?

Edkins: In the last few years, we have definitely seen an uptake in client inquiries amongst our clients at BlackRock. The other thing that's important to remember is we have clients across a very broad spectrum, so Sovereign Wealth Funds that, on this issue of climate risk, and most their wealth's through oil and gas production, and labor funds that might have very strong views on climate risk at the other end of the spectrum, we have to use our professional judgment both in engagement and voting to pursue the outcome that we think is in the best, long-term, economic interest of all our clients as long-term investors.

Hale: All right, Michelle Edkins. Thank you for being with us today.

Edkins: Thanks very much.

Hale: For Morningstar ETF Conference, I'm Jon Hale.