Michelle Edkins is Managing Director in BlackRock’s Investment Stewardship team, which seeks to promote governance best practices that help create long-term shareholder value for clients. Ceres talked with Michelle about BlackRock’s engagement strategy on climate change and deforestation and why more investors should be boosting attention to these systemic financial risks. It comes as deforestation – and associated greenhouse gas emissions and climate impacts – are mounting in many regions of the world. What follows is a lightly edited Q&A.
The Q&A is part of Investors Talk Deforestation, a series of interviews with influential investors and partner organizations who supported the development of the Ceres Investor Guide to Deforestation and Climate Change. The Guide aims to engage investors on deforestation emissions and other related risks across their portfolios and drive more corporate action on the issue.
Question: As the world’s largest global investment manager, BlackRock’s focus on climate change and deforestation sends an important signal about the urgency of these twin challenges. When did BlackRock start engaging with companies on deforestation and why?
Answer: We started to address deforestation several years ago, as part of a longer-term engagement strategy pertaining to sectors covered in the OECD’s Responsible Business Conduct Guidelines and the impacts of companies’ operations and products. This led us to start prioritizing companies with the highest risks in the palm oil sector, as well as other agribusinesses such as livestock and food staple companies. The deforestation we were seeing in Asia, primarily in Indonesia and Malaysia, prompted us to focus our engagements with companies producing and sourcing palm oil.
Q. Was there a specific event or set of concerns that prompted BlackRock to focus on deforestation, such as economic risks, business risks or overall materiality?
A. Our reasoning behind engaging on deforestation is really about a company’s ability to sell products into a global supply chain, which is obviously a business risk that needs to be well managed. Global consumers who are increasingly concerned about climate change are pushing for sustainable agriculture products. Companies need to be able to demonstrate that’s what they are producing, whether it’s forestry products or food products.
Q. The Ceres Investor Guide to Deforestation and Climate Change provides a framework for investors to engage on deforestation as a driver of climate change. How do you see these issues—deforestation and climate change—as intertwined?
A: Deforestation and climate are clearly issues for the global economy and they’re closely interconnected. There’s the impact of a company’s business on the climate and the impact of climate change on a company’s business. It’s a two-way interaction.
For agricultural businesses, the long-term sustainability of their business models depends on being able to produce food, even as adverse climate impacts are jeopardizing some of their production and shifting where it can be done. We saw this in the last growing season, with U.S. crops being flooded during the peak growing season and with Australia experiencing significant droughts and fires. Extreme weather events that were once considered 50- to 100-year events are now happening with much higher frequency.
Q: For companies that are not as far along in addressing deforestation, what should they be prioritizing?
A: They can start by looking at what their industry is doing and seeing what tools are available that they can learn from. The key point for companies is to understand the risks and the best practices, and then devise a strategy based on these best practices for their operations and supply chains. They also need to disclose the practices and policies they put in place to ensure that issues are being addressed appropriately, and to be accountable if something goes wrong.
Q: BlackRock’s engagement on deforestation risks has a big focus on company supply chains, and in particular, understanding and addressing Scope 3 GHG emissions. Why is this so important and also so challenging?
A: Because supply chains are distributed, it may be less obvious to companies how much aggregate risk or impact there is. There’s a lot of work going on to measure Scope 3 emissions in a way that makes it meaningful for companies to start to monitor it and, in time, to set [reduction] targets. But, overall, we’re still in the very early stages.
Q: How does BlackRock structure engagement conversations with companies on deforestation, especially when it comes to their supply chain exposure?
A: We engage with companies on supply chains more broadly. Clearly, in the current environment with COVID-19 response and recovery, there are different conversations to be had regarding supply chains. In terms of deforestation, the core question is: “Do companies have a clear sense of who they are doing business with, the business practices and potential risks of these suppliers, and how they are monitoring and managing all of these risks?”
It’s an incredibly complex challenge for large global businesses with thousands of global suppliers. And it’s important to understand that we are not technical experts on every single aspect of every company’s business, such as assessing the quality of a company’s supply chain assurance. Our role is to make sure that the board is overseeing the management’s approach to these key operational risks – and opportunities, potentially – and how they are ensuring that the company’s practices are robust.
When you have a fully engaged board with directors who understand the operational risks, are asking really on-point questions, and are holding management to account for evolving business practices, that’s when you see good practices, good outcomes, good disclosures.
Q: The vast majority of the $3 trillion in equities that BlackRock manages are invested passively in managed index funds. Does this create challenges for managing deforestation and other risks?
A: An active investor has more discretion on which companies are in its portfolios. We also offer clients choice; they can choose to invest in indexes with positive ESG tilts. But in terms of our index strategies, the work of the Investment Stewardship team allows us to address these issues with companies across a sector. We do a fair bit of what we call ‘thematic engagement’ on trends and issues that have a substantial impact across a particular sector. In the agribusiness and food manufacturing industries, absolutely, supply chain resilience, including deforestation, is a thematic engagement we conduct with a significant number of the companies in the index holdings that we manage for our clients.
Q: Are you seeing some progress as a result of your engagements?
A: We’re seeing enhanced disclosure on policies, practices, monitoring and outcomes. We’re also seeing clear articulations of company supply chains, the complexities in them and the key risks they’ve identified such as choosing the right partners, monitoring and addressing problems. We’ve definitely seen a few examples of corrective action where companies, such as Unilever, reported that they have removed suppliers from their supply chains because of problematic practices that were not remedied. But there is still much room for improvement, for instance on verifying the suppliers a company’s suppliers depend on and companies demonstrating that they are meeting the requirements of the industry initiatives or global standards that they observe. This is why we think the investor guide Ceres is publishing will help investors in their engagements. We continue to focus on disclosure and data as this enables us to assess companies’ progress and get a sense over time of shifts in practice.
Next up in the Investors Talk Deforestation series: Lauren Compere, managing director and director of shareholder engagement at Boston Common Asset Management, discusses how her firm is engaging banks and other companies on the systematic financial risks related to deforestation.
Tweet me: Introducing Investors Talk Deforestation - a series of convos with investors + stakeholders who helped develop the @CeresNews Investor Guide to Deforestation. First piece features @blackrock - read more: https://bit.ly/2Zplxb7
KEYWORDS: CERES, Deforestation, Michelle Edkins, BlackRock, climate change