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FinanceMap's Asset Managers and Climate Change 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.