Responsible Investment

Responsible investment is constantly growing in importance for funds and entities around the world. BlackRock is the biggest investment management organisation in the world, with their managed assets worth a total of 10 trillion dollars and using a wide variety of investment strategies.

Their Engagement Priorities document, published in the first quarter of 2022, states five key points which act as quality standards. These five pillars are closely linked to the UN Sustainable Development Goals (SDGs) and also include specific KPIs with which to measure performance. By sharing their commitments, BlackRock looks to highlight the main risks and opportunities relevant to the businesses that their clients invest in, including those related to environmental, social and governance topics (ESG).

1. Management quality and effectiveness

Quality leadership is key to a business’ performance. The makeup of the board of directors, as well as their effectiveness, diversity, and responsibility, continue to be priorities. The company’s success and their investor support depends on those who run the business. To measure this, two KPIs are used:

• Board effectiveness: this is measured through the relationships established between the directors and board members with their clients. The aim is to forge close relationships and to encourage communication between them.
• Board quality: this seeks an approach that ensures company board diversity. Companies are encouraged to disclose the profiles of their board members to encourage diversity in these positions in different contexts (law, strategy and business model).

2. Financial strategy, purpose and resilience

This is based on a long-term strategy of efficient capital management. It seeks to understand how each company operates and its process for integrating shareholder needs. The selected KPI measures how companies integrate sustainability risks and opportunities into their business, thus helping investors to understand their performance, whilst also demonstrating the company’s commitment to their strategy.

3. Incentives aligned with value creation

With the right incentives, board members will be able to develop sustainable long-term value strategies. A strategy with appropriate rewards should be chosen. It should be linked to relevant strategy metrics, especially those which analyse operational and financial performance. To measure this, companies will be reviewed to ensure that they are transparent in their incentives and how they implement them.

4. Climate, natural capital and sustainability

Company leaders are informed about the climate risks and opportunities for their business. This provides the opportunity for analysis of factors related to the company model and sector. The objective is to provide greater clarity and to detail how they are adapting to climate change. There are two KPIs to take into account:

• Climate: BlackRock encourages companies to show how their business is adapting to the effects of global rising temperatures.
• Natural capital: it is recommended that companies detail their management of natural resources.

There are various tools that can be used to improve natural capital management. Adequate due diligence helps to demonstrate that the business makes good use of their resources. Alongside this, the TNFD (Taskforce on Nature-related Financial Disclosures) provides an framework which facilitates mechanisms for environmental risk management and reporting.

5. Company impact on the public

Sustainable businesses create lasting value for stakeholders. BlackRock looks at companies that demonstrate a robust approach to human capital, as well as those that report on the ways that they support diversity in the workplace. In addition, they are interested in those who discuss the impacts of due diligence. This, in turn, affects the people practices of the business.

As put by BlackRock themselves:

in our experience, companies that build strong relationships with their stakeholders are more likely to meet their own strategic objectives. That’s why we ask companies to disclose how they consider the interests of their workers in business decision-making and how they implement processes to identify, manage and prevent adverse human rights impacts that could expose them to material risks.

BlackRock Investment Stewardship – Engagement Priorities, 2022

This is linked to the EU Due Diligence and the UK´s Modern Slavery Act. The former offers information, tools and resources for businesses, so that they can carry out adequate diligence in their supply chains. 

The UK offers a framework to put an end to modern slavery. The Modern Slavery Act includes a national referral mechanism, or reporting obligation, if unethical cases are detected. In this way, businesses can demonstrate that they don’t use slave labour in the UK nor in any other country in the world. 

Ultimately, BlackRock seeks to promote responsible and ESG investing. These five points highlight its commitment and show which organisations the company will be interested in. Sustainability is increasingly important in the financial sector, which aligns its standards to the ethics of ESG criteria, which are becoming essential in investment projects. When it comes to managing aspects such as sustainability, digitalisation is the way forward.

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