A BlackRock Perspective on The Upcoming Australian Proxy Season

BlackRock's Managing Director, Investments and Stewardship in Australia, Iris Davila sat down with Jana Jevcakova, Morrow Sodali’s Managing Director – Corporate Governance International, to discuss the Australian proxy season and her expectations for 2022.

How did the proxy season in Australia compare to previous seasons for you, and what has kept you busy over the past 12 months?

In terms of what kept us busy as a team globally, and more specifically in Australia, our Climate Universe was a central component of both our engagement and our voting activity.

As you would know, in 2020 we committed to making sustainability a key feature of our investment platform, and we highlighted a list of companies that we classified as our Climate Universe. We expanded that list of companies last year.

Originally it covered roughly 70% of the carbon emissions profile in our client portfolios and in 2021 we bumped it up to 90%, which entails a list of 1,000 companies globally. To drill down in the APAC or Australia / New Zealand context, that brought it to about 40 odd companies that we’re really focusing on for Climate Universe reasons.

Anything with an ‘S’-related issue certainly was highlighted. From the fallout over Juukan Gorge, to Black Lives Matter and just generally COVID, our engagements focused quite a bit on some of those topics as well.

From a sectoral perspective, anything REITs-flavoured was problematic for us. And interestingly it wasn’t just from our stewardship team’s perspective but also our fundamentals team, it does seem to be a very challenging sector in terms of moderation with regards to remuneration, and one where we spent the most time really trying to go dig through some of those remuneration reports and frankly trying to justify supporting them.

You engage with pretty much all our clients, I would imagine that engagement also took up a lot of your time during 2021?

Engagement does take a lot of our time, and I want to bring out an important theme here. I know it’s slightly controversial, but Proxy Advisor services is very important to investors. It’s a bit of a nuance in Australia, which is actually quite a competitive market in that space. So for instance, in Australia we subscribe to three proxy advisors whereas our global counterparts might be subscribed to only two.

It is important and a very useful tool for investors. But ultimately, we do spend most of our time, energy and effort in the engagement part and we come to our own independent view on some of these issues. We have our guidelines, which we try to be very transparent about and they’re on our website.

There was a letter sent to BlackRock clients recently discussing BlackRock giving more voting power to its clients. I was kind of surprised by that when it first came out, because in Australia, to my knowledge, many Blackrock clients and beneficial owners vote on their own, but this is clearly not the case in the rest of the world. What are the key differences between Australia and the rest of the world when it comes to beneficial owners or the investors themselves voting?

Yes, it’s interesting, it’s one of the nuances of the Australian market that perhaps is not more broadly appreciated. In Australia, we hold carriage for any ASX listed companies, irrespective of where it’s held globally in the BlackRock portfolios. So that’s why we do the engagement from here and the voting from here.

I want to stress that we’re not trying to save the world, to be do-gooders, this is very much grounded in the view that climate risk

But a lot of our clients in Australia, if you think of the large institutional mandates, have the ability to set their investment management agreements, and that power that they have in terms of having a separate account with us does include the ability to retain their voting rights.

Now that’s an Australian anomaly that’s been a default market practice here. As you can imagine, it’s quite operationally complex if you think about the plumbing that’s involved, and so it’s not something that we did more broadly because of the complexities.

However, the appetite for that has certainly increased globally, and so we’re offering that to our clients globally, now that the infrastructure has evolved, as the plumbing has evolved. It’s a direct response to client demand.

Blackrock has updated their voting guidelines and obviously that’s an ongoing process. What are the key changes that everybody should be aware of for 2022 for global policies and for Australia when it comes to BlackRock voting?

Hopefully this year it’ll be more of an evolution again than a revolution. No surprise that climate risk again is one area that we are focusing quite a bit of attention on. I want to stress that we’re not trying to save the world, to be do-gooders, this is very much grounded in the view that climate risk is a financial risk.

If you think about our holdings across our various portfolios, the majority are very much long-term, a lot of our exposure is index-related, so we do need to think about these things from that long-term perspective.

And so we’re really trying to focus on climate risk and how companies are managing that, and trying to provide a little bit more clarity on what we mean by net-zero-aligned business. Metrics, target setting, all of that is very important.

We’ve tried to be very transparent on this topic, and for the benefit of all companies involved we’ve published who is on our Climate Universe, again it’s ~1,000 companies and it’s on our website.

And if you’re on that, then we’re taking a much closer look at how you’re managing your climate risk. And if there is a view that we are not seeing the transparency that we need to feed into our systems, then we’ll be taking voting action at AGMs against directors who are not managing that climate risk appropriately.

And probably no surprise, the second one is board diversity, it’s certainly one that we have felt very strongly about in the past and one we continue to really want to encourage companies to think about. And I want to be very clear, it’s not just through the gender lens, it’s really trying to work through what is proper diversity of thought and experience.

Importantly on this point, we’re trying to bring out underrepresented groups, depending on where you are and what jurisdiction you’re in, really trying to ensure that companies are thinking about that for board diversity.

Number three, also no surprise to anyone, is sustainability reporting, we’re really trying to encourage companies again on the point of transparency and fleshing out their sustainability reporting. We’ve worked closely with SASB, now the Value Reporting Foundation, so we’re really encouraging companies to think about looking at and using that framework to try to bring that investor perspective.

On ESG and executive compensation, we certainly don’t have a binary view on it. If you’re including ESG metrics in your executive compensation, that’s great, but again you need to tie it back to the long-term strategy and the long- term shareholder experience. To be blunt, just because you’ve included an ESG metric doesn’t mean you’re going to automatically get a tick of support.

I think 2022 is going to be a really difficult year for remuneration. It’s year three of a COVID-tainted world, and I think employees are feeling tired, motivation is difficult for many people out there.

I think it is going to be a really difficult balance of where the markets are headed, real labour shortages, inflation, and just trying to balance those tensions and retaining and motivating your employees in that environment without getting maybe overly silly in compensation.

I think that’s probably going to be one of the biggest challenges that boards face this year. I’ll bring it back to transparency: if you can articulate in a cogent way why it is you’re doing what you’re doing, then I think investors will be supportive, but again we’re always mindful of the free kick here.

So how do you balance those two pressures?
Good luck, because I think it’s going to be difficult!