In recent years, one of the most significant developments in corporate governance has been the adoption and expansion of voting choice programs by the largest institutional investors.  Such changes have come in response to growing scrutiny and pressure from asset owners and regulators with diametrically opposed and fervently held views on the role of environmental and social issues such as climate change and diversity, equity and inclusion (DEI) in investment decisions.  In furtherance of this trend, BlackRock has now adopted separate voting guidelines tailored towards specific funds and investors.

This week, BlackRock released climate and decarbonization stewardship guidelines for its funds with explicit decarbonization or climate-related investment objectives or other funds where clients have instructed BlackRock to apply these guidelines to their holdings.  These new guidelines will supplement BlackRock’s benchmark policies applicable to all assets under management and will focus attention on how companies have aligned their business model and strategies to meet the goals of the Paris Agreement.  A total of 83 funds with $150 billion of combined assets are expected to be covered by the new guidelines.  BlackRock has indicated that it will apply the guidelines to those companies held by covered funds and clients who have opted into the guidelines and that produce goods and services that “contribute to real world decarbonization,” have a “carbon intensive business model” or face “outsized impacts from the low carbon transition,” based on their Scopes 1, 2, and 3 greenhouse gas emissions.

The role of the board and management is one focus area of these new guidelines.  BlackRock will seek to understand, among other things, the level of board oversight over climate and low-carbon transition-related business risks and opportunities and lobbying practices, whether management has developed a transition framework and capital management strategy and the integration of transition risk planning into enterprise risk management processes and reporting.  BlackRock will also expect covered companies to make disclosures aligned with the climate and sustainability reporting standards developed by the International Sustainability Standards Board and disclose and monitor material Scope 3 emissions.

In contrast to the new guidelines for its green funds, BlackRock last month announced the addition of Egan-Jones’ Wealth-Focused and Standard proxy voting guidelines to its voting choice program.  Egan-Jones’ Wealth-Focused proxy voting guidelines will oppose proposals seeking to advance climate and environmental, DEI, human rights, and freedom of association initiatives, except in “rare cases” where such proposals are deemed to be in “the best long-term financial interest of shareholders.”  The Wealth-Focused proxy voting guidelines will also oppose shareholder proposals seeking disclosures of political contributions and lobbying expenditures.  BlackRock has also indicated that it will support certain clients in implementing custom voting guidelines reflecting their investment goals and preferences.

BlackRock’s decision to concurrently introduce separate voting guidelines that advance or oppose energy transition and decarbonization efforts underscores the ongoing debates over environmental and social issues that have divided its client base and attracted the attention of regulators and political leaders.  The decision to adopt policies applicable to green funds also reflects the growing pressures of regulatory scrutiny on greenwashing and diverging opinions on whether “green” investment strategies can produce outsized returns.

Looking ahead, companies and boards seeking to navigate the evolving and increasingly differentiated preferences of their shareholder base may do well to not only assess the stewardship and proxy voting policies of the specific funds that have invested in the company, but also to understand the policies and priorities of large asset owners who are increasingly publicly voicing their perspectives on engagement priorities and proxy voting.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “BlackRock’s Voting Choice Program Expands to Accommodate Diverging Client Priorities with More Tailored Voting Guidelines,” dated July 3, 2024.