Private View Blog: Asset managers shunning chance to change corporations’ climate behaviour

Shareholder voting is one of the most powerful tools asset management firms have to drive behavioural change of investee companies and combat climate crisis. Yet they are not making the most of it. They are, in fact, totally shunning their responsibility towards increasingly environmentally conscious investors. Similarly, asset allocators should be more aware of the risk return opportunities inherent with the transition to a low carbon economy, and contribute to fill the huge funding gap needed to achieve climate targets.

It was shocking to read findings from a recent report by Majority Action, a US non-profit organisation, which analysed how the world’s 25 largest asset managers, collectively managing more than $38tn, voted on director elections and “say on pay” votes at large-cap US energy and utility companies.

Votes on director elections and on top executive compensation are important mechanisms for shifting corporate behaviour, priorities and management incentives. But the large majority of firms analysed by the report (85 per cent) voted company sponsored directors more than 90 per cent of the time. They also voted in favour of energy and utility ‘say on pay proposals’ more than 80 per cent of the time.

The largest shareholders, in particular, bear the greatest responsibility to push for corporate climate action. Yet, BlackRock and Vanguard, the world’s largest asset managers, supported management at oil and gas companies practically every time.

Findings from a recent study from Carbon Tracker, a financial think-tank, are also worrying. The study revealed that none of the largest listed oil and gas companies ­– directly accountable for global warming and the rapid decarbonisation required to combat the crisis – are making investment decisions in line with the Paris agreement, aiming at keeping global warming well below 2°C above pre-industrial levels.

 “One of the biggest failures of the asset management industry is that asset managers may claim to be engaging on issues like climate change, and they may well be engaging, but they are not voting to reflect that,” says Natasha Landell-Mills, head of stewardship at Sarasin & Partners.

The key issue lies in the short-termism dominating the asset management sector. Portfolio managers, who may be responsible for voting, are more interested in securing their quarterly performance-related bonus than addressing longer-term concerns.

Another problem is lack of transparency on how asset managers are voting and engaging, and therefore lack of scrutiny. If asset managers were being scrutinised for how they voted on a regular basis, they would start voting better, believes Ms Landell-Mills. Moreover, there is lack of awareness, as most savers do not even realise their shares have voting power.

Asset managers should publish their voting policies and make them accessible on their websites, and report to shareholders on how they have implemented them. More generally, they should publish their climate pledge, setting out actions to align their investment process with the Paris climate accord, suggests Ms Landell-Mills. This is what Sarasin did recently.

Asset managers, as well as wealth managers and institutional investors, also need to play a greater role in the transition to a low carbon economy through their strategic asset allocation (SAA). As it is implemented over the longer term, SAA frees portfolio managers from the pressure of performing in the short term.

There is a real need to accelerate the flows to achieve this transition. The amount of capital that needs to be deployed globally to achieve the Paris accord is $3tn a year, versus the less than $1tn a year which is being deployed today.

The challenge today is how to incorporate climate risk in long-term return forecasts, to reflect the shift to a low carbon economy. This would lead asset allocators to revise earnings growth rate of the oil and gas sector, and reduce exposure to it, while increasing allocations to renewables.

“Once climate scenario is becoming properly embedded in SAA prices, it will give people the confidence to shift more quickly,” explains Craig MacKenzie, head of strategic asset allocation at Aberdeen Standard Investments. He believes renewables are great portfolio diversifiers and are expected to generate attractive returns over the next few years. They currently represent 10 per cent of Aberdeen’s discretionary portfolios.

The global shift towards a low carbon economy may have started, but asset managers and asset allocators can do a lot better.

Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter  @elisa_trovato 

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