Asset managers and climate change – what, if anything, should they be doing?

Christopher Hohn, the billionaire hedge fund manager, recently accused two of the world’s largest asset managers, Blackrock and Vanguard, of taking “insufficient and ineffective” action against climate change. In a world where climate change has become an increasingly prominent issue, this brings to mind the question: what, if anything, should asset managers be doing about it?

To answer this, we need to look at where their responsibilities lie. Historically and theoretically, a company’s single objective has been to maximise shareholder value. After all, why would anyone buy shares in a company that didn’t in some way – either a through a dividend or an increase in share price – reward them for the risk they took? Since shareholders own the company, management is instructed to run it in such a way that it generates a profit and maximises value. Vanguard, Blackrock and most other asset managers are no different. Both privately owned Vanguard and publicly traded Blackrock have a clear responsibility to their respective shareholders; this simplification, however, fails to consider additional stakeholder responsibilities.

Recently, the purpose of a business has been under scrutiny. In 2019, the Business Roundtable (an association of leading executives from the largest companies in America) released a statement signed by 181 CEO’s, stating what they believed to be the purpose of a business. Amongst others, one point stated that companies should “protect the environment by embracing sustainable practices across our businesses.” Whilst it is important that executives state what they believe the purpose of a business should be, the shareholders should have an input – as executives are employed to maximise shareholder value. Thus to address the question of what, if anything, asset managers (and other kinds of businesses) should be doing regarding climate change, we have to consider what shareholders think.

Research commissioned by Ernst & Young on 200 institutional investors suggests that shareholders do indeed care about the environment. 36% of investors have already divested assets in response to environmental, social and governance (ESG) factors, while a further 27% said they would be carefully monitoring the risks associated with non-climate friendly assets. The data certainly suggests that shareholders could be warming to the idea that a company’s purpose includes some responsibility for the environment. Given this, it is implied that asset managers (and other kinds of businesses) do have a responsibility to consider climate change.

If it appears shareholders are deciding to take responsibility for their climate impact, and thus consequently the companies they control are too, the second half of the question comes into play: what should they be doing? While the answer to this is dependent on the individual company, Blackrock recently set a good example for asset managers by disclosing plans to sell 500 million USD of coal investments. This will not change the world yet it is a step in the right direction – as long as shareholders continue to want to take responsibility for the environment, the companies they own should have to as well.

In conclusion, it appears shareholders care about more than just profit – they consider the environment too. This implies that asset managers should be minimising their impact on the climate in conjunction with profit maximisation. Ways they can do this include divesting from fossil fuels (as Blackrock has started to do) and investing in renewable, green energy; as some asset managers have done via the creation of specialist ESG funds.

Analyst: David Bendle

Sector Head: James Float

Editor: Harry Forbes-Nixon

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