BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Hello, everybody. We're going to get the next presentation started here in Confluence C. Appreciate you all taking part in the event with us this week. We're really happy to see you all again in person. ESG has been a really important part of many of the presentations that we've seen so far this week. APA Corporation got a question for it after their presentation yesterday because they didn't include a slide on it, and we heard Tom Petri talking about it again today as well. A lot of that is being driven by people like BlackRock. So we're really excited to have them join us virtually today. Unfortunately, they couldn't make it in person. We hope that they'll be able to in the future. The BlackRock has been a really important voice in this conversation. And joining us on their behalf today is Danielle Sugarman, Director of BlackRock's Investment Stewardship team. She serves as the lead analyst for their energy utilities, pharmaceutical and biotech portfolios in the Americas. Go ahead and listen to Danielle's presentation now. Thank you all.

Good afternoon, everyone. Thank you so much for having me here. I wish I could be here in person with you and hoping that next year, I will be able to do just that, but thrilled to have the opportunity to speak to you today about BlackRock and our approach to ESG. I'm hoping that -- I've spoken to many of you before. And if I haven't spoken to you in the past, please do feel free to reach out and open the lines of communication. As you heard, I am Danielle Sugarman, I am a Director with BlackRock's Investment Stewardship team. BlackRock Investment stewardship activity is a crucial component of our fiduciary approach to our clients. This is particularly important to our index holdings on behalf of clients, which who are essentially permanent holders in the company. Investment stewardship is how we use our voice to help influence the market and to convey our thoughts and our leadership to the companies with whom we invest on behalf of our clients. BlackRock's Investment Stewardship team is strategically placed as an investment function within BlackRock. The team bridges BlackRock's various portfolio management groups and aims to deliver meaningful value to our clients through a range of activities. When we think about ESG and stewardship, we are charged with 3 primary activities and ones that I think impact the companies sitting here today on a regular basis. One is through the value of engagement, which is building our understanding of a company's approach to governance and to sustainability and to building sustainable business models for the future. We seek to provide feedback to communicate our views to help companies understand our expectations. We vote to signal our support for or concern about a company's governance or business practices. We do so by performing independent research on behalf of our clients to carefully arrive at informed proxy voting decisions that we feel are aligned with our clients' long-term economic interests. And we vote on behalf of our clients where we might see a shortfall in the company's management practices or disclosures. And this could include voting against directors or voting in support of a shareholder proposal on an E&S or G topic. Lastly, the stewardship team seeks to provide thought leadership and to participate in the broader community to publish insights, to be transparent and to make sure that we're actively participating in private sector initiatives and the public policy debate. In 2020, BlackRock had written to clients about how we were making sustainability central to the way we invest, manage risk and execute our stewardship commitments. As stated by our CEO, Larry Fink, there is no company whose business model won't be profoundly affected by the transition to a net-zero economy. As the transition accelerates, companies with a well-articulated long-term strategy and a clear plan to address the transition to net zero will distinguish themselves with their stakeholders, with customers, with policymakers, employees and shareholders by inspiring confidence that they can navigate this global transformation. So in approaching the universe of ESG topics, BlackRock and the Investment Stewardship team have taken a number of steps to ensure that ESG is integrated across our businesses and our activities. This starts with our engagement priorities and our voting guidelines. Recently, we updated our voting guidelines in 9 different markets to align with sustainability commitments. We've mapped our engagement priorities to the UN sustainable development goals and added key performance indicators of how we expect to hold Boards accountable. The priorities are aligned with the firm's commitment to make sustainability our standard for investing and to support the goal of net-zero greenhouse gas emissions by 2050 or sooner. We published 7 thematic commentaries that are available on our investment stewardship web page, if you Google it, that describe our approach to engagements across different ESG themes. We engage with public companies to promote sound corporate governance and sustainable business models. And each year, we prioritize our work around engagement themes to help encourage sound governance and deliver sustainable long-term financial performance for our clients. Our approach emphasizes the direct dialogue with companies. We can't understand how to do our job better without speaking to each and every one of you and understanding the company's goals, it's aspirations, how it sees its position within the broader society. Sustainability is core to our stewardship. Our efforts around sustainability, as with all of our investment stewardship activities, seek to promote governance practices that help create long-term shareholder value for clients. The vast majority of whom, as I mentioned, are holding in stocks for their long-term goals such as retirement. And this reflects our view and our approach to sustainability across BlackRock's investment processes in which we use environmental, social and governance factors in order to provide clients with better risk-adjusted returns. This is in keeping with both our fiduciary duty and the range of regulatory requirements that we're seeing around the world. As a result, we really have this responsibility to our clients to make sure companies are adequately managing and disclosing sustainability-related risks and to hold them accountable if they're not. So our sustainability approach when we think about ESG, how do we come to those universe of topics that are relevant and meaningful to each and every one of you? The way BlackRock approaches these issues starts with materiality. We focus on ESG issues that are relevant to a company's business and potential drivers of long-term financial performance. We look at industry relevance, comparing company performance to that of its peers engaging in similar economic activity so that it's an apples-to-apples comparison and that we're not comparing one company in one industry to a subgroup and another of varying size and capabilities, which would put those companies in an unfair position. And finally, we're looking at operational excellence, expecting companies to perform to a higher standard in order to mitigate risks, leverage opportunities and generate sustainable financial rewards over time. So when you think about the subset of ESG issues where companies in an industry can currently have material environmental or social dependencies or externalities. There are numerous topics that come to mind. On the environmental side, we look at things like carbon intensity, toxic emissions and waste, energy efficiency, natural resources, water stress, among others. On the social side, topics like labor management, health and safety, human capital development and human rights are primary. And on the governance side, we really look to see the driver of a company's success is stemming from the quality of its leadership and the engagement of its Board of Directors, thinking about who the company has chosen to make up its board, whether those individuals are of varying backgrounds and expertise to help lead the company along its stated initiatives and strategy and whether they have the foresight and experience to take the company into the future. So BlackRock's Investment Stewardship has had 5 engagement priorities. Almost every year, we look at them and we refresh them in order to have that transparency with the market. So that when you're having a conversation with BlackRock, you know what it is we may be asking about, what might be on our minds. And the 5 engagement priorities, as they currently stand, are as follows: so the first is board quality and effectiveness. And this is within the context of us really seeing the G, the governance piece, as the driver of the EMES functions, that a well-governed Board is more likely to be able to identify the key risks and opportunities to a business, including the E&S topics and will be more likely to make more robust decisions for the company and to the future. So when we look at board quality, we look at the leadership and its essentialness to the company's performance. We look at the board composition, the diversity and accountability, and those factors remain top priorities. So to the extent the company reaches out to engage, we really welcome the opportunity to speak, not only with senior management, but with members of the Board to understand their oversight and how they go about structuring committees and interfacing with the senior leadership and the day-to-day people within the company. Our second priority has to do with climate and natural capital. Climate action plans and targets in advance of the transition to the low-carbon economy have become paramount. And I'll touch on this in a little bit more depth in a few minutes. But understanding how a company is poised to make that transition is key for our long-term holders and being able to have assurance that the company is well placed for continued success in the future. Our third engagement priority has to do with strategy, purpose and financial resilience. A purpose-driven, long-term strategy underpinned by strong capital management is very much supportive of financial resilience in the future and being able to speak to companies and understand how they see their purpose, how they've developed their strategy to help actualize that purpose and to bring employees the business customers, all of its stakeholders along with it. Our key most -- every company within the universe has some stated purpose. Other -- sometimes it's well articulated, sometimes companies haven't really stopped to think about what do I mean in the context of the broader society and the people who rely on me and being able to have those conversations and understand that purpose is primary to our day-to-day interactions with companies across industries. Our fourth priority has to do with incentives that are aligned with value creation. Compensation is a key driver of performance and retention for valuable leaders and day-to-day employees and understanding how a company structures its compensation plans to drive talent to hold on to its people, but also to demand a level of rigor and outperformance relative to peers can be a signal of outperformance or lagging performance by a particular company. And finally, the last engagement priority has to do with the company impacts on people. Because there is this strong belief that sustainable business models create enduring value for all key stakeholders. So understanding how the company is operating, how it treats its employees, how it treats the communities and which it operates, the nature of its supply chains and vulnerable populations. All of those topics are going to be key to the company's reputation and its long-term risk and opportunity set. In 2021, we updated our stewardship expectations related to these 5 priorities in a number of different ways that I feel, like, are important to highlight to this group to get a sense for where our thinking is, where it's going to be going over the next number of years and what we are hoping to see from companies. On the sustainability front, broadly, we expect boards to shape and monitor management's approach to material sustainability factors in the company's business. We want to understand how sustainability is front and center in a company's operations and in its disclosures. With regards to diversity, equity and inclusion, in the wake of the tragic murder of George Floyd and the unrest that we've seen over the last 17 months, I think we've recognized more than ever the importance of our people, the importance of inclusion and equity, strengthening our focus on ethnic and gender diversity, both on boards and within the population of companies more generally. Understanding how shareholders are impacting the company's operations and how companies promote their culture and their diversity, equity and inclusion. in their workforce are also top of mind. We also have been very focused on climate risk. We expect companies to disclose a plan for how their business model will be compatible with a low-carbon economy. That is one where global warming is limited to well below 2 degrees Celsius with net-zero greenhouse gas emissions by 2050 or before, and in alignment with some of the key reporting frameworks such as the TCFD, the Task Force on Climate-Related Financial Disclosures and on SASB. The other topic is with regard to natural capital, which I mentioned in the broad engagement bucket. A more holistic view on our perspectives and expectations around biodiversity, water resources in general and how that interplays with climate, including things like deforestation, ocean acidification, understanding how each company relies on natural capital and also will be impacted by shifts in natural capital as we continue to go forward into this century. So in 2021, BlackRock specifically committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. And this has created a number of expectations for companies and particularly relevant here in oil and gas conference, amongst individuals who understand and take these risks extremely seriously. We are looking to ensure that companies in which our clients invest are mitigating climate risk and are considering the opportunities presented by a net-zero transition. We're asking companies to disclose their business plans, aligned with the goal of limiting global warming to below 2 degrees and consistent with net zero by 2050. And we've also increased the role of our voting, both in the context of director elections and supporting for shareholder proposals that relate to sustainability topics. So for several years, we've been engaging with companies to enhance climate risk disclosure, and we've taken a number of specific steps that I think are important to highlight here to this audience. In 2021, we clarified our expectations for companies to demonstrate how climate and sustainability-related risks are considered and integrated into their business models. In 2020, we had identified 244 companies that were not adequately addressing their exposure to or management of climate risk. And one year later, we're encouraged to see a lot of meaningful progress by many of these companies in their energy transition journey and their disclosure of those steps. In 2021, we expanded our climate-focused universe to over 1,000 carbon-intensive public companies representing roughly 90% of the global Scope 1 and 2 greenhouse gas emissions for our clients' public equity holdings within BlackRock. And in that 2020 to 2021 proxy year, we voted against 255 director elections and against 319 companies over concerns related to climate and how that could negatively affect long-term shareholder value. When we think about what does it mean to meet BlackRock's expectations with regard to climate, we don't want this to feel out of reach for companies. We recognize that the transition is a complex one, and one that will require continued investments, technological innovation and change, but it also requires more thought. And so with regard to our expectations, we've really been looking for companies to look at the TCFD and SASB frameworks to think about how they report on and take action related to climate in order to have that beta level engagement where the market is privy to the same level of information. And compare apples-to-apples, we need to continue to work towards a consistent reporting framework in the belief that climate risk is an investment risk. We understand that climate is already having a profound impact on businesses and will ultimately shape how investors evaluate those companies. We also know that we want to get to net zero. We just need to have a realistic map for how to get there. So we need to see companies both disclosing and taking action now. In terms of the transparency piece, we want to understand, in line with the TCFD, the ways that climate risk will impact the company's ability to continue to operate and to grow and to understand how companies are preparing for the future. In the context of SASB, we recognize the need for a consistent framework within industry so that a company is being appropriately compared to its peers. And so we are encouraging companies to also look to SASB or other similar frameworks to be able to provide uniform disclosures for shareholders like BlackRock. But we also need to work collectively towards a consistent standard taxonomy for sustainability reporting, so that we can have a single standard by which to assess these companies. And some of the action factors that stewardship and the market have looked at when we've considered climate as sustainability risk are companies disclosing their Scope 1 and in many instances, their Scope 3 emissions, as well as the management and Board's oversight of strategic risks and opportunities. We want to understand that the companies are actually taking action to set targets on greenhouse gas emissions, including methane and that the company's strategy, including the net-zero transition includes details on the company's CapEx spend and its R&D investments towards a low-carbon future. With regard to diversity, another key point. We've had roughly 2,100 engagements on board quality and effectiveness. And looked at changes over time in the composition of boards, including a 30% increase in board seats in the S&P 500, the 30% of the board seats being held by women, up from 24% in 2018. And all of the companies in the S&P 500 having at least 1 woman director as of June 2021. We think this is really an important advancement and especially true in the oil and gas industry that had, for a time, been somewhat slower than other industries to incorporate gender diversity. We're asking companies at this point in time to continue to advance to disclose workforce demographics such as gender, race, ethnicity alongside the steps that the company is taking to achieve diversity, equity and inclusion. And we -- in the Americas and in Europe, we're also encouraging boards to have, in addition to other aspects of diversity, at least 2 women on every board. In more developed Asian markets, we are also introducing some minimum gender diversity targets. So in close, this is a quick, but hopefully gives you a sense of the universe of ESG topics and why they are so key to driving alpha for BlackRock. We've seen record inflows in our sustainable investing funds that are focused on topics like transition readiness or strong governance factors. We've seen a tremendous growth in client interest and initiatives related to these topics. And we want to see each and every one of your companies be able to participate in those strategies, and to be able to continue to advance your journey, both with regard to your action and reporting on the full suite of ESG topics. Again, I really appreciate your attention. I hope that you'll feel free to reach out to me to continue this conversation. We feel that companies that build strong relationships with all of their stakeholders are more likely ultimately to meet their own strategic objectives, and that poor relationships may expose companies to legal and regulatory risks as well as operational challenges. And most importantly, we would like to see sound relationships develop to help advance the company's social license to operate. So please do reach out. Enjoy the rest of the conference, and I hope to see you again in the coming year. Thank you.

Thank you all. Again, Danielle was very open to people reaching out to her. So if you all are trying to get in touch with her, please just let a member of our team know, and we will pass your contacts along to her so that you can connect. Give us just a minute here to set up for the ESG panel, and then we will get that rolling.