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Letter to CEOs (Blackrock and State Street)

10 February 2022

Letter to CEOs (Blackrock and State Street)

In the spirit of annual tradition, the heads of largest global investment funds - Blackrock and State Street Global Advisors (SSGA), addressed listed companies around the world via ‘Letter to CEOs’. In these letters, investors highlight the themes and issues they believe are impacting companies’ ability to deliver long-term returns and value.

Larry Fink’s letter, traditionally, calls for the need for CEOs to have a clear purpose, a coherent strategy, and a long-term view for their organisations. The 2022 letter also argued that in order to prosper, companies must rely on stakeholder (rather than shareholder) capitalism, driven by mutually beneficial relationships between a company and the employees, customers, suppliers, and communities. Having said that, the fair pursuit of profit is still “what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”

In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. 

Mr. Fink also touched on the impacts of the covid pandemic, predominantly in relation to turnover, employee expectations and changes in pay. In his view, employees across the globe are increasingly looking for more from their employer – including more flexibility and more meaningful work. Companies that succeed in creating better, more innovative environments for their employees might enjoy lower levels of turnover and higher returns.

Those who show humility and stay grounded in their purpose are more likely to build the kind of bond that endures the span of someone’s career.

Following the COP26, Mr. Fink’s letter could not omit the topic of climate change. Being a member of the Climate Action 100+, Blackrock believes that every company and every industry will be transformed by the transition to a net zero world. While the transition poses significant risks for many, Mr. Fink suggests that decarbonising of the global economy is going to “create the greatest investment opportunity of our lifetime”. He also suggests that the transition will not happen overnight, and agrees that traditional fossil fuels like natural gas will play an important role both for power generation and heating in certain regions, as well as for the production of hydrogen. In order to create a green economy that is fair and just and to avoid societal discord, governments and companies must ensure that people continue to have access to reliable and affordable energy sources. 

1. What are you doing to disrupt your business? 
2. How are you preparing for and participating in the net zero transition? 
3. As your industry gets transformed by the energy transition, will you go the way of the dodo, or will you be a phoenix?

Blackrock is a big proponent of engagement rather than divestment. Divesting from entire sectors results in passing carbon-intensive assets from public markets to private markets, and this will not get the world to net zero. This is also the reason why governments must provide clear pathways and a consistent taxonomy for sustainability policy, regulation, and disclosure across markets, and support communities affected by the transition.

Lastly, Blackrock is positioning its systems to enable more of their clients to have a say in how proxy votes are cast at companies their money is invested in. While they are currently offering this option to certain institutional clients, they are working to expand that universe to ensure that every investor, including retail investors, can have the option to participate in the proxy voting process if they choose.

Cyrus Taraporevala, the president and CEO of SSGA, approached the letter from a slightly different perspective, by an appeal for strong, capable, independent boards exercising effective oversight to create long-term shareholder value. In addition to challenges associated with COVID-19, he also highlighted supply chain disruptions, climate change, gender, racial, and ethnic inequity. The need to manage these threats and opportunities by transitioning strategies and operations has never been more important. Similar to Blackrock, these issues are matters of value, not values for SSGA. 

Climate change is central to SSGA’s stewardship activities.  SSGA believes that the transition to low carbon economy will be very hard, complex and non-linear, and anticipate that “many companies will likely need to adopt approaches that require experimentation, innovation, and ongoing adjustments along this unchartered journey.”

SSGA letter goes on to suggest that instead of a binary “brown” vs “green" distinctions, we could approach the transition on a spectrum of shades - from dark brown to dark green.  A fossil fuel such as coal would then be considered “dark brown,” whereas natural gas could be "light brown," and wind power would be a "dark green." 

While more companies are making net-zero commitments, with over one-fifth of the world's 2,000 largest public companies having committed to meet a specific target, few have provided a clear roadmap to achieve these goals — and fewer asset managers have provided detail on what they expect these companies to disclose as they prepare for this historic transition.

In addition to a risk of greenwashing, Mr. Taraporevala also warns of "brown-spinning” - a term he uses to describe public companies selling off their highest-emitting assets to private equity or other actors at a discount. Just like Blackrock, SSGA does not believe that passing the carbon to a different owner will solve the climate change crisis we are all facing.

As a long-term investor in companies making these commitments, what we are seeking from these transition plans is not purity, but pragmatic clarity around how and why a particular transition plan helps a company make meaningful progress towards the destination.

Beginning in the 2022 proxy season, SSGA will:
  • Expect companies in major indices in the US, Canada, UK, Europe, and Australia to align with climate-related disclosures requested by TCFD, including whether the company discloses: (1) board oversight of climate-related risks and opportunities; (2) total direct and indirect GHG emissions (“Scope 1” and “Scope 2” emissions); and (3) targets for reducing GHG emissions. SSGA will start taking voting action against directors across applicable indices should companies not meet these disclosure expectations.
  • Launch a targeted engagement campaign with the most significant emitters in their portfolio to encourage disclosure aligned with their expectations for climate transition plans, which covers 10 areas including decarbonisation strategy, capital allocation, climate governance, and climate policy. In 2023, SSGA will hold companies and directors accountable for failing to meet these expectations.
SSGA continues to advocate for better diversity on boards and across executive teams. Beginning in 2017 with their Fearless Girl campaign, SSGA have encouraged companies to add at least one woman director to their boards. This past year, every company in the S&P 500 had at least one woman on their board.
Beginning in the 2022 proxy season, SSGA will expect all companies in their holdings to have at least one woman on their boards. Additionally, beginning in the 2023 proxy season, SSGA will expect boards to be comprised of at least 30% women directors for companies in major indices in the US, Canada, UK, Europe, and Australia. This should result in boards with 3 or 4 female directors on average. In each instance, SSGA are prepared to vote against the Chair of the board’s Nominating Committee or the board leader should a company fail to meet these expectations.  

In addition, from 2022, SSGA will take voting action against responsible directors if:
  • Companies in the S&P 500 and FTSE 100 do not have a person of color on their board
  • Companies in the S&P 500 and FTSE 100 do not disclose the racial and ethnic diversity of their boards, and 
  • Companies in the S&P 500 do not disclose their EEO-1 reports. 
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