Asset Managers and Climate Change 2021
How the sector performs on portfolios, engagement, and resolutions
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FinanceMap's Asset Managers and Climate Change for 2021 looks at the sector's performance on portfolios, stewardship (engagement), and shareholder resolutions. The portfolios managed by the top global firms continue to be misaligned with Paris climate goals in key climate-risk sectors of automotive, oil/gas/coal production, and electric power. The world's auto-makers are not introducing EVs at a fast enough pace, while thermal coal production and power generation are not being phased out quickly enough, especially in Asia. Despite this, efforts to accelerate the transition of these companies through engagement and shareholder resolutions by the large asset managers remain mixed and nowhere near forceful enough to drive the necessary changes. Large US managers continue to lag their smaller European peers in this respect.
The world's 30 largest asset management groups were found to be - through their equity holdings - between 8% and 27% deviated from a Paris-aligned target, with variations arising due to geographic differences in markets they operate in. They are overweight in companies deploying brown technologies and underweight in those deploying green technologies in four climate-critical sectors: automotive, oil & gas production, coal production, and electric power. Companies with a total of over $20Tn in market value (as of Dec 2020) are active in these sectors, placing them at the center of "stranded asset" climate risk highlighted by the CIO of BlackRock in November 2020.
This report shows the most robust engagement with companies continues to be from the European giants BNP Paribas Asset Management, Legal & General Investment Management, and UBS Asset Management. All score in the "A" grade and are fully transparent in their stewardship processes and show specific evidence of engagement with companies on the transition of the business model and lobbying practices.
Japan's largest player Sumitomo Mitsui Trust Asset Management which manages close to $1Tn in assets also scores highly (a "B+") for climate engagement. This stewardship will be critical in nudging Japan's electric power sector away from thermal coal power and towards renewable energy. The Paris-misalignment of this sector in Japan is the main cause of the -29% misalignment of the TOPIX index of the 1,600+ Japanese companies, the highest among major markets. In contrast, the US S&P500 and MSCI World indices show misalignments of -11% and -17% respectively.
The leadership on climate engagement from European players contrasts with the US-based giants. Four asset managers control around 20% of the world's listed markets (with aggregate $20Tn AUM) based on 12/2020 data: BlackRock ($7.3Tn), Vanguard ($6.2Tn), Fidelity Investments ($3.3Tn), and State Street Global Advisors ($3.0Tn). BlackRock now leads the big four on its climate engagement, with State Street Global Advisors close behind. Both are 2020 entry-signatories to the Climate Action 100+ process. Fidelity Investments and Vanguard remain out of the Climate Action 100+ process and their transparency on the climate engagement process is poor with minimal references to transitioning companies in line with Paris goals or governance of lobbying practices.
Resolution voting is a powerful tool to challenge companies on their individual performance as well as a signal to the wider market on climate governance issues. The research shows overall support for climate-relevant resolutions increased during the 2020 proxy voting season compared to 2018 and 2019 levels. Despite this market trend, big US players, namely BlackRock, Vanguard, Capital Group, and Fidelity Investments, still declined support for 75% or more of climate-relevant resolutions. While this represents a slight improvement over 2018/19, they lag top scorers, namely the asset management arms of AXA, BNP Paribas, Legal & General, Aviva, and Allianz all of whom support 80% or more. The lack of support from the world's largest asset managers on resolutions relating to lobbying, energy transition plans, and other key climate issues remains a barrier for forceful stewardship by investors on the climate emergency.
If global investors wish to remain active in climate-risk sectors including automotive, energy, and fossil fuel production and at the same time show Paris alignment in their portfolios, then more robust engagement with the relevant companies should be a priority. This engagement should focus on the twin goals of accelerating the individual corporate transitions to low carbon technologies and getting companies to align their policy lobbying in line with Paris as well as climate risk disclosure issues.
Ultimately the stewardship of companies and shareholder resolutions need to be judged on their ability to achieve desired outcomes. In the case of the CA100+ engagement process, an objective is to transition the companies in line with the goals of the Paris Agreement. The success of these engagements will be judged by verified, real-world measures of improvements in the target companies. With the CA100+ now in its fourth year, 2021 will see the increasing availability of such measures and corresponding accountability by the asset managers on their engagement performance on climate change.
Given the huge influence these asset managers have over the global economy, it is vital they take action to ensure the world can meet the climate goals of the Paris Agreement. However, this latest report shows most asset managers are still moving too slowly when it comes to using their clout to drive change in investee companies.
Once again, we see European asset managers taking the lead over their US competitors. This report highlights the need for giant US asset managers to step up and take stronger action – especially given their market dominance and unique ability to send a clear signal to the rest of the economy. In addition, even for those asset managers who lead on stewardship, the ultimate test will be real-world improvements on climate change by problematic companies. This needs to be demonstrated sooner rather than later if high climate-risk companies are to remain in portfolios.
We welcome InfluenceMap’s Asset Managers and Climate Change 2021 report which provides critical analysis to help track and inform institutional investment strategies and good governance on climate change. As the report highlights, while there are many investment managers leading on climate, there are still numerous laggards and urgent action is needed to align portfolios with the goals of the Paris Agreement.
Successfully addressing climate change will require ambitious commitments from the entire investment industry and at the PRI we’re working to help accelerate this progress. In December, we co-founded the Net Zero Asset Managers Initiative to mobilize action by the asset management industry, including through both investment and engagement. We’re also working with asset owners through the Net Zero Asset Owner Alliance to engage with managers on their portfolios and performance as well as through Climate Action 100+ on their engagement with corporates. In addition, since 2020, we’ve been requiring investors to report on climate change indicators in their PRI Reporting, part of which will be publicly disclosed for the first time this year.
This latest research by InfluenceMap reinforces the findings of our own research that when it comes to systemic issues like climate change, asset managers simply are not doing enough to facilitate the low-carbon transition. As we move further into this critical decade of action where nothing short of radical transformation across the corporate landscape is required, the need for more forceful engagement by investors, particularly around voting, is paramount.