Why Asset Managers' Climate Stewardship Matters More Than Ever

Three months ago, the most significant global threat to humans and the financial system was climate change.

It still is today. But now the World Health Organization declared the coronavirus a pandemic and governments around the world have responded with unprecedented measures to contain its spread. The human death toll continues to mount. And the economic consequences have pushed the world into a recession that the International Monetary Fund expects to be deeper than the one caused by the global financial crisis just over a decade ago.

But beyond the immediate threat of the pandemic, climate change is taking a more gradual and a more destructive path, both in economic and human terms. In fact, the pandemic underscores the urgency of transitioning to a low-carbon economy: Pandemic risk itself increases as the planet heats up, as explained here. A warming planet is vulnerable to a range of new risks that threaten global financial stability and that exponentially complicate strategies for dealing with the pandemic crisis.

Investor efforts to address climate risk matter more than ever. Asset managers are focusing on climate change and some are positioning climate risk at the center of their stewardship. However, it’s not always easy to see what this means in practice.

In a new paper, we analyze asset managers' reporting on these engagements to see what we can learn about their impact and how they view their role as stewards of capital.

Long-Termism Is a Source of Resilience in Facing Down Crises According to the paper "Fiduciary Duty in the 21st Century" from the UNEP Finance Initiative, "Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty."

Indeed, the ability of governments to manage the economic fallout of the COVID-19 pandemic will depend largely on the resilience of the global financial system. Financial market supervisors, regulators, and large investors have come to recognize long-termism in financial decision-making as the key to sustainable business, and sustainable business as the key to the resilience of economies.

The global investor stewardship movement grows out of this insight. Now, new stewardship codes, investor initiatives, and commitments are requiring investment fiduciaries to exercise their influence as financial stakeholders to advance sustainable business practices across markets. In particular, these expectations are set on large asset managers, due in part to the growth of passive investing and increasing concentration in the asset-management industry.

Asset Managers Are Practicing Climate Stewardship, but Their Impact Is Unclear Our survey of 20 large asset managers' climate-related engagement disclosures finds that climate change features as a central theme. Sixteen of the 20 asset managers discuss climate risk as a stand-alone engagement theme, and 13 place climate risk at the center of their engagement strategy.

However, these engagements are often private and multiyear, spanning more than just one issue. For this reason, it can be difficult to judge how effectively asset managers conduct engagements based only on what they claim in their engagement reports. Transparency is an important part of investment stewardship and, in general, engagement reporting does not provide enough insight into climate-engagement measurement and outcomes.

Main Drivers of Climate Stewardship for Asset Managers At least two mindsets drive asset managers' climate engagements: a focus on portfolio risk mitigation, and a marketwide (or systemic) approach to effecting change.

When asset managers engage companies and advocate for climate policy action collaboratively and then together follow a coordinated strategy, they are acting as stewards of capital markets.

Our survey finds that the large European asset managers more frequently participate in or lead collaborative engagements than U.S. asset managers do. These collaborative engagements may include pushing for: disclosures that are aligned with the Task Force on Climate-related Financial Disclosures, better climate governance, and emission reductions. Additionally, more European asset managers had signed coordinated initiatives calling on governments to act on climate change.

Transparency About Outcomes Is Key to Engaging for Impact Overall, asset managers with a marketwide mindset on climate stewardship take a more outcome-oriented approach to engagement reporting. They disclose engagement activities against clearly stated expectations and offer useful quantitative and qualitative descriptions of climate engagement activities. However, only one asset manager, LGIM, offers a concrete summary and explanation of its climate engagement successes and failures.

The survey identifies several best-practice examples for asset managers who are looking to improve their stewardship transparency and increase their influence. These examples illustrate cases where asset managers have:

• adopted climate change as a stewardship priority,
• described one or more climate-specific engagements,
• identified companies engaged on climate risk, and
• measured and disclosed progress on climate engagements.

These indicators can also help investors compare and evaluate asset managers’ climate engagement disclosures, which can help them select funds whose asset managers sufficiently address climate risk in their engagements. Asset owners can use this approach in selecting and monitoring asset managers on the basis of their climate stewardship.

The quality of engagements that occur between investors and companies in the months and years ahead will play a crucial role in building valuable social capital and long-termism into markets. In turn, that will shape how governments and economies respond to--and avoid--future crises.