Jessica McDougall is a vice president at BlackRock Investment Stewardship and Corporate Governance. She talks to Ben Ashwell about her preferences for engagement – both during proxy season and off-season – and ESG reporting
How large is the stewardship team at BlackRock? It’s about 45 individuals across the globe. We have three regions: Americas, EMEA and Asia-Pacific.
How long have you worked for BlackRock? I joined right at the beginning of 2017.
Which sectors do you focus on? I cover industrials and materials in the US and Canada. I cover approximately 800 companies in those sectors and am responsible for the engagement and proxy voting with those firms.
How does your work complement the work of the portfolio managers and analysts at BlackRock? Broadly speaking, our team is responsible for engaging with the companies we’re investing in, to have an ongoing dialogue to understand how they incorporate ESG into their decisions, so we can make informed voting decisions on behalf of our clients.
Our integration with other teams at BlackRock has historically been very organic. We share information across a uniform platform that allows portfolio managers to see engagement notes and our views on companies based on our analysis. There’s been more effort since January to integrate more seamlessly with our portfolio managers, ever since our CEO Larry Fink released his statement to other CEOs saying that climate risk is investment risk, and we need consistent and comparable data.
There’s also been a concerted effort internally to make sure our communication flows freely and organically within the firm. It’s been a value-add for some portfolio managers to understand our view. Sometimes we talk to different people at the same company – portfolio managers talk to the CFO or the IRO, whereas my team talks to the general counsel, sustainability team, human resources officer or board members.
Bringing together the different conversations our teams might be having helps us understand how well these elements are integrated into a company strategy. For instance, is it housed with one person who has been trained to talk about sustainability or is it ingrained in the company and how it thinks about its future?
Jessica McDougall, BlackRock Investment Stewardship and Corporate Governance
Do you work with your in-house corporate access team around shareholder engagement? Yes – we put requests through a centralized team to really make the best use of a company’s time and identify where there are opportunities for BlackRock to bring investment professionals together more efficiently. We now have several examples across the firm where I have an ESG view of a company and a fundamental analyst may have a different view and we work together to build a fuller view of that company. It’s this idea of trying to understand a firm from a variety of perspectives and make the best investment decision with the information we have.
What are BlackRock’s engagement goals in 2020? Over the last four years our engagement priorities have been roughly the same. We cover five broad ESG topics: board quality, environmental risks and opportunities, corporate strategy and capital allocation, compensation that promotes long-termism and human capital management. These priorities were stated in 2017 as the team was expanding and we were trying to provide more transparency about the type of conversations we were having with companies.
How have your conversations with companies evolved since 2017 around these goals? I’m happy to report that many of these topics are blurring together in the way we’re addressing them and companies are communicating them. For example, there’s a key focus on climate change and climate risk. Companies have been largely familiar with increased focus on environmental risk and reporting on carbon emissions and greenhouse gas emissions, but I’m excited that they are starting to talk about opportunities in their business. They’re not just talking about cutting their carbon footprint, but also showing an awareness of a changing marketplace and consumer demand. When I think back to 2017, these conversations were much more about risk, but now they’re also about finding value.
It’s really telling that the human-capital management topic has evolved so much, too. It’s become increasingly obvious that firms need to consider how they engage their workforce and how they create productive and inclusive workplaces. The workforce is not just a cost for the company; it’s also something to be invested in and refined.
How do you engage with the companies you cover? There are typically two different parts to the year. In spring until annual meeting season, I will reach out to a company to clarify a voting issue before I submit our votes, particularly if it’s related to a shareholder proposal or executive compensation question. Those questions are purely related to ballot items and tend to be narrow because we have so many meetings to get through.
Then, starting around July until the end of the year, we have our off-season engagements, which are opportunities to talk in more detail. They’re a much deeper dive, where we discuss strategy, reporting considerations, the role of the board and year-on-year progress.
There has been a lively debate about the role of proxy advisory firms in the US during the last couple of years, culminating in the SEC’s recent decision to impose stricter rules on the profession. How do you use proxy advisory firms when making voting decisions? We use them as one input. We look at their recommendations but we have our own market-specific policies that are publicly posted to our website. Our own analysis is the primary driver for our decisions. We have sector-specific analysts like me who have an eye on what’s occurring in the market and what’s considered best practice .
It’s especially important on compensation to understand what the normal pay structures and commonly used metrics are within certain peer groups. That sector-specific knowledge is a key component in our voting decisions.
How has off-season engagement changed since you joined the BlackRock stewardship team? I would certainly say the volume of engagement has increased. Companies are also much more prepared when they’re coming to speak with us. They have topics they’d like to highlight or they’re seeking our feedback on. Now there are fairly directed conversations, highlighting a specific part of the strategy, areas of growth since our last conversation and also speaking about the board’s role, composition and approach to finding new directors.
Do you contact portfolio companies or do they get in touch with you? It’s probably a mix. It’s also often just a matter of who reaches out first. Most companies these days have an annual reminder to send a note. We use our corporate access platform and that has helped to streamline requests.
Stewardship professionals can be critical about issuers’ outreach for off-season engagements, especially if the request for a meeting doesn’t explain why the meeting should happen. Have companies improved their outreach? The outreach we receive from companies now is much more specific. We want to understand the structures they have in place and why they feel the decisions they’ve made are most appropriate for them. It gives us insight into why the board thinks a certain way or shines a light on nuances that may be present for specific companies.
It also definitely helps to have a consistent point of contact both for me and for the company so that we’re not starting again each year. For most of the companies I’ve had regular engagements with, it’s really important to continue to move the conversation forward and have a productive dialogue each year.
How do you expect Covid-19 to influence off-season engagement this year, if at all? I anticipate that all of my engagements will be virtual. We’ll be asking about companies’ response to Covid-19, especially during the first wave that we experienced in the US – from March until May – and trying to understand the steps companies took to protect employees, as well as understanding whether there were salary cuts for executives and layoffs or furloughs for other staff.
Some companies have articulated that they will be taking a look at their compensation structures for 2020. Many companies don’t expect to meet the targets they had originally set for this year and it’s up to them to explain what the decision-making process looks like for the compensation committee. We’ve seen a few companies announce executive pay cuts – whether to base pay or short-term bonuses – though it all needs to be understood in the context of other pay decisions at the company. But there’s still a lot of uncertainty and it’s too early to say how those conversations will go.
To my surprise, we’ve seen quite a few companies continue to be very focused on increasing their reporting on climate risks and communicating that they’re eagerly reporting on the Sustainability Accounting Standards Board’s (SASB) metrics. It’s been an interesting opportunity to see whether companies that have talked about ESG priorities have actually acted on those words. As investors, we’ve had a chance to see how it all plays out. What is your preferred ESG reporting framework? We’ve been talking about these frameworks for the past several years but we have accelerated our focus on encouraging companies to focus on SASB and the Task Force on Climate-related Financial Disclosures (TCFD) reporting.
There may be instances when companies don’t feel SASB is right for them, and that’s fine – we know there are companies that are blends of sectors and they may not fit into SASB’s definitions, but for most companies it’s a great starting point if they’re looking to provide decision-useful information. Our goal is to streamline this data to make sure it’s comparable and consistent, so we can make the best use of companies’ time when engaging with them.
At the companies you cover, where is ESG information most often published, and where would you like it to be published? Most frequently I see ESG information in stand-alone documents, whether that’s a stand-alone TCFD report or a stand-alone sustainability report. Slowly, companies have been asking for feedback from investors about whether it’s appropriate to put [ESG information] in annual reports, maybe just as a high-level summary.
As teams like mine continue to try to assess how the board considers risk within ESG – particularly climate risk – I think it’s helpful to have a bit of that information in the proxy statement, whether it’s in the beginning summary or simply [accessed from] a link to additional sustainability reporting elsewhere.
When I’m voting, my primary document is the proxy statement, so the easier it is for me to find ESG information, the better. Like many other organizations, BlackRock published a position on advancing racial equity this year, following the Black Lives Matter protests around the world. How will this influence the work you carry out? Workforce diversity is a topic we are regularly talking to companies about. It’s our fundamental belief that diverse groups bring benefits [to firms] through their different skillsets and backgrounds. As long-term investors, we believe diversity is important for both the composition of the board and the whole workforce. What else are you focused on this year? A goal of ours is to be much more transparent than we have been historically, and that means publishing more content. This year we produced a sustainability report that highlighted some of our voting and case studies to detail our thought process on a number of issues. We’ve also provided voting bulletins that give real-time rationales in the middle of proxy season to explain the conversations we’re having and the way we’re analyzing them. A key aim is to try to provide our clients and stakeholders with more transparency on how we’re doing this work.
