Building a Culture of Long-Term Investment and Growth

BlackRock's guidance for investors to engage on ESG issues
Building a Culture of Long-Term Investment and Growth
Publ. date 15 Jun 2015
The world’s largest asset manager, BlackRock, has teamed up with nonprofit sustainability leader Ceres to create guidance for institutional investors on engaging with companies and policymakers on sustainability issues. The guide “21st Century Engagement: Investor Strategies for Incorporating ESG Considerations into Corporate Interactions” includes tactics and case studies from 37 experts spanning 6 countries.

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Sustainability opportunities & risks trigger engagement 

The guide comes in a time with a growing concern in the capitals markets about global sustainability risks that could materially impact company performance. With more than $4.3 trillion in assets under management, BlackRock strongly states that managing risks forms a crucial part of a company's sustainability blueprint. One of the things the asset manager concerned with is, if companies are taking a short-term risk that may bump earnings up in the near term, what about the expense of the long-term viability of the company? A tell-tale sign is a sustainability report that separates business growth and social and environmental issues. BlackRock instead is looking for sustainability principles that are related to risks and opportunities for each business and how the company is managing that.

Transparency good indicator for overall business practice

 “As a long-term investor on behalf of our clients, BlackRock believes we have a responsibility to engage with companies on a range of governance matters, including the material environmental and social impacts of their operations,” said Michelle Edkins, Managing Director and Global Head of Corporate Governance and Responsible Investment at BlackRock. “In our experience, companies that manage all dimensions of the business to the highest standards are more resilient and generate more sustainable financial returns over time. We’re encouraged by the efforts leading companies are making in reporting material ESG risks and opportunities, which helps shareholders and others to understand how effectively risks are being mitigated and opportunities realized to protect and enhance long-term economic returns.”  

What it's all about for investors

A materiality matrix, which analyzes the key sustainability topics for a company and its key stakeholders, refers to those ESG issues that are most relevant to the company's financial performance. More specifically, it can be seen as a further prioritization of the sustainability topics and their expected impact on the business based on revenue growth, gross margin protection, and cost reduction. Harvard professor Bob Eccles emphasizes the importance of a well-balanced materiality matrix that not only covers relevant business risks, but that also can be used as a driver for innovation.

Investor engagement comes in different forms and shapes 

According to Mindy Lubber, president of Ceres "Every year for the past decade, we have seen an increase in corporate engagement by institutional investors on sustainability issues – especially climate change, resource constraints, diversity and human rights – which creates enormous economic risks for both companies and investors. T he number of sustainability-focused shareholder resolutions continues to rise. We’re also seeing upticks in other engagement strategies, such as investors meetings with boards, negotiating with executive teams and asking hard, pointed questions on earnings calls and annual meetings. The guide outlines various ways for investors to boost their engagement with companies on these issues.”

How to increase the engagement outcome? 

Generally-accepted performance metrics that leading impact investors use to measure social, environmental and financial performance of their investment help to clarify the new business approach of sustainability. This way, companies can better define and quantify the real business value. Furthermore, focusing reporting on materiality is essential. Show for example how uncontrollably increasing resource prices can be addressed by shifting to a circular economy business model, improving competitiveness. Finally, sustainability should not be a standalone activity, but embedded into the company's core strategy. By expressing clear targets, it will help the investor to calculate the impact on the financial bottom line.

The guide by BlackRock and Ceres does not only provide insights in engagement strategies, tactics and intensity, it also features a set of ESG-themed questions that portfolio managers and analysts should be asking companies in key sectors. Ultimately, this will broaden and deepen the company-investor dialogue on ESG issues that impact value (please refer to the top of this page to download the guide for free as PDF). 

More information

Are you looking for opportunities to engage your investors in sustainability? Please contact Josée van der Hoek: at +31 6 28 02 18 80 or josee@finchandbeak.com to find out how we can help you. 

Image by: Flickr, John Morgan 

About Josée van der Hoek

Experienced strategic issues management specialist with expertise in strategy development, food waste and DJSI. | josee@finchandbeak.com

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