The world’s fifteen largest asset managers command $37 trillion in assets under management, giving them huge influence over the global economy. But they are collectively failing to drive forward the transition needed to support international climate targets, finds a new report by InfluenceMap.
These institutions manage portfolios containing a fifth of the total value of world capital markets, but the UK-based think tank reveals that their investments in sectors of crucial importance to climate change are significantly at odds with the rapid transition to a low-carbon economy needed to support the Paris Agreement goal of "keeping global warming well below 2°C while aiming for 1.5°C".
Thomas O’Neill, research director of InfluenceMap, said: "If global asset managers wish to support the Paris Agreement and remain invested in the automotive, power and fossil fuel industries then they must engage robustly with companies in these sectors to accelerate their switch to low carbon technologies and ensure their policy lobbying supports climate targets."
Christiana Figueres, founding partner at Global Optimism, and former executive secretary at UNFCCC, said: “The asset management industry is only starting to be aligned with the Paris Agreement. In the face of the climate emergency, it is critical for investors to show companies the path to follow.”
'Asset Managers and Climate Change' is the first study to analyze the nature of asset managers’ engagement with companies on climate, highlighting the fact that the global leaders’ shareholdings and relationships give them huge leverage to drive corporate action to support the Paris Agreement.
Companies’ climate engagement performance is closely reflected in their record of voting on shareholder resolutions designed to support the Paris targets. BlackRock and Capital Group voted against 90 percent of resolutions in 2018 while other US asset managers voted against the majority.
The report also highlights five smaller US and UK asset managers “who appear to be doing the ‘heavy lifting’ for the entire industry”, for example, filing 20 percent of all climate resolutions in 2018: Trillium Asset Management (which filed seven resolutions); Hermes Investment Management; Sarasin & Partners; Walden Asset Management; and Zevin Asset Management.
Fiona Reynolds, CEO of the Principles for Responsible Investment, said: “InfluenceMap is providing an invaluable knowledge base to investors, policy makers and civil society in exposing the pernicious negative climate lobbying activities of many business groups. We are pleased to see their analysis now extending to investors' portfolio alignment with the Paris Agreement and corporate engagement programs on climate."
Reynolds continued: “Investors have a key role to play in addressing climate change and they need to use all the tools at their disposal. While there are many climate leaders in the investment community, there are also many laggards.
"This new work by InfluenceMap will become another significant reference point in the finance sector to help track and inform decisions around institutional investment strategies and good governance in responding to the climate challenge."
The study is the first output from InfluenceMap’s FinanceMap project, which aims to provide a public benchmark on how well the asset management sector is performing on climate change.
The project notes growing demands for radical action to address the climate emergency from both the public and institutional investors, notably the Climate Action 100+ investor engagement process which is prioritising the transformation of corporate business models and lobbying on climate.
FinanceMap analysed 50,000 listed funds managed by 150 financial groups and identified $8.2 trillion of holdings in four key industrial sectors: oil & gas; coal mining; automotive; and electric power.
It identified 850 companies held by these financial groups, assessed their production plans and compared them with the transition to low-carbon technologies that is consistent with limiting global warming to 1.75°, using the International Energy Agency’s Below 2 Degrees Scenario (B2DS).
It found that the equity portfolios of the top 15 asset management groups were misaligned with this goal, with a deviation of between minus 16 percent and minus 21 percent from a portfolio of investments aligned with the Paris target. This implies they are overweight in companies deploying brown technologies, and underweight in those deploying green in four key sectors: automotive, oil & gas, electric power and coal production, which represent roughly 10 percent of global equity markets.
The report notes that the portfolio misalignment reflects the fact that these asset managers are “universal owners” investing in the entire market, and recognises that divestment or significant underweighting of certain sectors may be difficult, especially given the current widespread use of index-driven portfolio allocation.
Forceful engagement with the companies in these sectors to hasten their transition to low carbon technologies must occur if the finance sector wishes to align its portfolios with climate goals. The majority of companies in these sectors are very far from aligning their business models to meet the goals of Paris.
The portfolio analysis reveals that “despite an almost continuous drumbeat of commitments and pledges from the world’s automakers to electrify their fleets” the automotive sector is the one which is furthest away from alignment with the Paris Agreement.
In 2018 the world's automakers produced 96 million vehicles across all platforms, of which 1.4 percent were electric (EVs). FinanceMap’s analysis suggests this will evolve by 2024 to 101 million vehicles in total, of which 4.2 million (4.2 parent) will be electric. However, the IEA's B2DS scenario requires at least 9.2 million EVs by 2024, illustrating the sector's very significant misalignment with a 1.75°C pathway.
In the US, industry lobbying has prevented Obama-era efficiency standards being implemented and, at a global level, the industry has strongly opposed binding policy to achieve a transition to electric vehicles in line with the Paris Agreement.
This sector-wide lag in EV uptake by the automakers and their lobbying to delay EV regulations illustrates the difficulties investors will have in using portfolio allocation alone to drive climate goals in finance - hence the focus on changing company behavior by engagement.
This article is based on a press release from InfluenceMap.