Nigel Grant, ASB Head of Wealth Product, interviews Iris Davila, BlackRock's Head of Investment Stewardship for New Zealand and Australia, to understand how BlackRock undertakes investment stewardship for the assets they manage on our behalf; global and emerging markets equities.
"Stewardship has several roles" Iris begins. "First is corporate engagement, meeting with companies year-on-year to try and drill down the material risks and opportunities that they have so we can ensure that they're there for today, tomorrow and the long term. The second part is voting, our engagements help inform how we vote at annual shareholder meetings. The third part is speaking to clients and other industry stakeholders to educate them on how we add value over time."
Iris considers these as part of the 'stewardship toolkit'. "Engagement is where we spend majority of our time, we're meeting with companies, aiming to cover around 75% of the assets we hold, and then voting is the second part of the stewardship tool kit, deciding whether we're going to support or vote against companies, management and boards that ultimately helps advance our clients' long-term economic interests."
BlackRock has been managing our global and emerging markets equities portfolios since 2017, but we're not the only investment provider that they do this for.
"We're a fiduciary on behalf of many clients. That means it's not our money and we have to be very responsible, considerate, and careful about how we're managing that money. In order to be a good fiduciary, we think good stewardship is understanding how companies are managing future and potential risks. We're not focused on values; we're focused on protecting the value of the investments that we hold on behalf of clients."
Iris continues "Often times there is a view that we should be activist investors. We're not activist investors; we don't tell companies what to do.
We are active stewards. We take an active approach to protect and maintain long term value of the companies on behalf of our clients."
ASB uses an index tracking approach for our global equities and emerging markets portfolios. Iris discusses how stewardship can be achieved with index tracked investments.
"We are holding these companies through the good, bad, and ugly. So, that means we need to take a constructive, long-term approach. We actively engage companies to understand the risks and opportunities that would be material to how they can deliver long-term financial value for their shareholders."
"If a company is going through several issues the engagement might look like several times a year. Eighty percent of companies, particularly in a developed market are travelling alright, so we'll meet them once a year to try to inform our voting at Annual General Meetings" Iris explains.
"Then you have problems or activist situations where you might need to get involved because there is something on the ballot that you need to be informed about and to make a view. Our approach is to try to understand both sides of the equation and then come to a conclusion."
Our global equities and emerging markets portfolios have investments in many countries. Iris explains how BlackRock navigates different laws and customs of each country.
"I think this is where BlackRock really shines because we have a team of 70 plus people - one of the largest investment stewardship teams globally - that are organised regionally worldwide. We have teams on the ground in various markets. For instance, we have a team based in Singapore engaging in Southeast Asian markets. Having knowledge of the nuances of the local regulation of the market practices is a value add."
"It also depends on market structures, in developed markets, shareholders do have quite a few rights and abilities to engage with companies. In some emerging market countries, it's a little more challenging at times because your average shareholder wouldn't have the same level of access, so you do have to approach it differently."
As part of our selection process for BlackRock as an underlying manager for our global and emerging markets equities portfolio, we assessed their stewardship policies. Iris explains BlackRock's stewardship focus areas.
"It's important to get the principles and basics right. We always start with corporate governance because if that is not right, all the other issues are going to fall into place. We spend a lot of time on board effectiveness, that allows you to have various conversations and bring in whatever thematic is currently in place, whether its labour shortages or electricity prices."
Iris goes on to discuss emerging trends. "We talk a lot about how we are going to manage that generational way of working, attracting human capital, keeping it, and having enough skillsets in certain industries. It is an iterative process. Companies are learning and improving, and then you continue to raise the bar as standards evolve and expectations increase from investors or their own employees."
It's often hard to link stewardship efforts to end value, Iris discusses how we can think about value from stewardship.
"It's hard to be specific about how you measure things, but it is that improvement year over year" Iris observes. "If we think about where climate-related disclosures were in 2017 versus where they are today, this has vastly improved. This is important because it really helps us as investors to understand how companies are managing climate risk. The better those disclosures are, allows investors to decide which companies are better prepared for the transition, then investors can make the decision on whether or not they want to take on that risk."
Iris comments on how they handle difficult engagements. "We might have a conversation with a company over a few years, so we try to be patient investors and focus on the long term. If we believe a company is beginning to be a laggard on a particular topic, then we will take voting action at a director level to demonstrate our patience is wearing thin. But the following year the same company may have started to make progress, so we will vote in support."
"Some companies don't respond well to negative votes and cut off ability to speak to them. That's why we try to have that structured long term perspective. We think there's value in engagement and we will continue to focus most of our efforts on engagement."
To finish off, Iris discusses key topics BlackRock are focused on in the next twelve months.
"We've developed a climate universe, a group of 1,000 companies that cover about 90% of the carbon emissions in our equity book. We're hoping to continue to evolve that and think about how we can quantify some of the impact we have. Climate risk continues to grow so we want to see more companies focused on transparency."
She adds "we will continue to be focused on board diversity, it is important and something we saw through COVID period and with demographic changes there is a bit of 'over-boarding' for certain directors, as in one board member sitting on too many boards, so we need to see generational succession. We want to see new faces at board tables, preferably a diversity of faces at board tables. True diversity is having diversity of thought, background, and experience."
Lastly, Iris notes that "managing the post-COVID experience is one that many companies are challenged with in terms of return-to-work mandates, how do you get people back in, so that's a potential risk. What does that mean for the long-term prospects of that company? If they can't attract any employees, they'll have an issue."
This material has been created with the co-operation of BlackRock Investment Management (Australia) Limited (BIMAL) ABN 13 006 165 975, AFSL 230 523 on 12 September 2023. Comments made by BIMAL employees here represent BIMAL's views only. This material provides general information only. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product in any jurisdiction.