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How BlackRock discusses ESG, and what happens when a company pushes back

Michelle Edkins is managing director and global head of the investment stewardship team at BlackRock Inc., the world's largest asset manager with close to $6 trillion under management. BlackRock has become a leading player in the growing environmental, social and governance movement, and Edkins spoke with S&P Global Market Intelligence about how her role is changing as ESG gains prominence. She also offered a behind-the-scenes look at BlackRock's engagement discussions with companies, and explained why she sees opportunities in climate change.

The following interview has been edited for length and clarity.

S&P Global Market Intelligence: How has your job changed over the past 5 years as ESG has become more mainstream?

SNL Image
Michelle Edkins, global head of BlackRock's investment stewardship team
Source: BlackRock

Michelle Edkins: The main difference is that with better disclosures and better data, investors and companies have a better sense of how to discuss ... ESG.

The governance has always been a consideration: The quality of leadership demonstrated by the board, the quality of management and execution of strategy. But we now have a much better sense of that broader picture.

And why that's important is, the valuation of companies is not really reflected in physical assets anymore. It used to be that you'd invest in land and you'd invest in a factory and that would really determine the company's value and opportunity to create returns into the future. The intangibles of what makes a company successful are much more important now to how it's valued and how people predict its ability to generate returns over time.

What does BlackRock's engagement with companies look like in practice?

It's a range. Some of the light-touch engagement that we do will be around the time we're preparing to vote at a shareholder meeting and we want to clarify something that's in the company's disclosure that we don't quite understand. And that will generally be a telephone call.

Then on more substantive matters — discussing board succession planning or how a compensation plan aligns with long-term strategy or how a company is thinking about material environmental and social risks in the business, whether it's human capital or climate risk — those kind of conversations are usually more detailed, take more prep on our part and on the company's part and they are often in person and often involve board members as well as management representatives.

But the key thing about it is: We're asking questions to build our understanding of the company's approach, we're giving the company feedback on our assessment of its approach to governance, and then we're discussing a broader range of issues.

When the world's largest asset manager gives feedback, do companies just immediately fall into line? Or is there pushback?

Most companies take feedback the way most individuals take feedback: They listen, they reflect and then they determine how they're going to respond. But no company can be fulfilling its fiduciary duty to all its shareholders if it takes input from only one shareholder — whoever that is — and radically changes what it does.

If BlackRock gives some feedback and the company says, "we respectfully disagree," then that's absolutely appropriate. And if we continue to disagree with their approach, then that would be reflected in our vote. That's how the engagement and voting lines up.

BlackRock's engagement priorities cite climate change as a factor presenting significant investment risks and opportunities. What opportunities do you see in climate change?

Clearly there are a lot of risks. But the main opportunity that we see is the adaptation to a low-carbon economy. That gives companies that are looking at that in a disruptive mindset an advantage to innovate, to anticipate, to change, to create new markets for products that may not have existed before.

Human capital management is another of BlackRock's engagement priorities again in 2019. How are you approaching that?

Like a number of our priorities, the real focus is on enhancing disclosure in relation to this particular aspect of corporate management. Because nearly every company says, "Our people are our greatest asset." But there really isn't a lot of explanation about how the board and management are ensuring that they've got the highest-quality asset and they're deploying that asset to the greatest effect.

Now, that sounds a very sort of surgical way to talk about people. But ... we want to have a better sense of how companies are thinking about how they attract and retain and develop the workforce that they need to succeed.

In his annual letter in January, BlackRock Chairman and CEO Larry Fink wrote that a company's purpose and profits are "inextricably linked" and called on CEOs to address societal issues ranging from the environment to racial inequality. Have you heard any surprising reactions to this letter?

This year's letter is a re-articulation of a lot of points of the 2018 letter. We were surprised about the level of debate around this issue, because companies clearly have a purpose — that's their reason for being. But certain parties — whether it's academics or theorists or commentators in the media — saw purpose being divorced from value creation and how a business is run and structured, because [purpose] is a loaded word in some people's minds.

This year's letter is emphasizing how BlackRock thinks about purpose and putting more definition around it, because others tried to define it differently to how we're thinking about it. And we are saying that this is about running a business for the long term and your purpose is your guiding light.