You can’t please all the people all the time.
That old adage is uncomfortably relevant for some top asset managers, who’ve been trying to craft sustainability policies to please clients ranging from oil-loving Texan officials to green-hearted Scandinavian pension managers. This balancing act is looking increasingly tough, as I explain below.
SUSTAINABLE INVESTING
Asset management’s green shake-out
Asset managers are suddenly caught between a US rock and a European hard place.
On one side of the Atlantic, their business has been under threat from Republican state officials who have begun to pull billions from managers deemed too keen on climate action and social justice.
In response to this (and to separate legal threats), some of the biggest asset managers have been quitting climate alliances and turning against green shareholder resolutions. But that has created a new risk: the loss of investment mandates from green-minded European pension funds.
The latter challenge has emerged in earnest only recently, but judging by new research from the Principles for Responsible Investment — a UN-backed body for institutional investors — it could create a worsening problem.
The PRI study highlights a considerable divide on sustainability between asset owners — typically pension funds, insurers and foundations — and the asset management companies to which they outsource much of their investment.
On a wide range of green and social issues, asset owners tend to take a more active approach than asset managers, according to the report, which analysed survey responses from over 3,000 PRI signatories.
Fifty-eight per cent of asset owners use climate scenario analysis to assess risks in their portfolios, for example, compared with 29 per cent of asset managers. Forty-one per cent of asset owners are willing to go public over environmental, social and governance concerns around bond investments, versus 21 per cent of asset managers.
This is not all that surprising when you consider the different duties and incentives facing these two types of institutions. Pension funds are obliged to consider the interests of beneficiaries several decades into the future. Asset managers, who live in fear of ruinous fund outflows, have a strong motivation to prioritise near-term performance.
A November 2023 study gave another window into this tension. It looked at climate-related shareholder votes at listed companies, comparing the voting decisions of big UK asset owners and a dozen major global asset managers.
That study found that the misalignment between the two groups steadily increased between 2021 and 2023, with asset owners much more supportive of green resolutions than the asset managers studied. But it also found a growing divergence among asset managers themselves. While US managers’ support for these resolutions has plunged, the rate among their European peers has remained far stronger.
Those European managers may now start to reap some benefits. Among the most consistent backers of green resolutions has been Paris-based Amundi, Europe’s biggest asset manager with over €2tn ($2.2tn) under management.
Amundi was the main beneficiary of a recent decision by the UK’s People’s Pension, a multi-employer scheme, to pull £28bn ($36bn) from US-based State Street following a review of its responsible investment policy. Amundi has been handed £20bn of that money, to manage with a focus on “sustainability, active stewardship and long-term value creation,” said Mark Condron, chair of trustees for The People’s Pension.
This lost mandate is far bigger than any pulled by conservative US state authorities from asset managers over their prior support for climate action. It’s roughly four times the size of the $8.5bn portfolio that was withdrawn from BlackRock a year ago by the Texas State Board of Education, which accused the asset manager of restricting fossil fuel investments.
And the People’s Pension move is hardly an isolated case. Denmark’s AkademikerPension has ended a 20-year-old, $470mn investment mandate with State Street, “following an ESG review, which resulted in the lowest possible score”, the pension fund told me in a statement.
Last month a group of mainly UK asset owners controlling $1.5tn urged asset managers to improve their engagement on climate issues or risk being dropped.
Dutch pension fund PME is reviewing a €5bn investment mandate with BlackRock, because of concerns about the US asset manager’s approach to climate change. “We expect from all our managers that they align with the basic sustainability preferences of our fund,” PME responsible investment strategist Daan Spaargaren told me. “And we see that a lot of our managers are pulling back from those principles, and that is a concern to us.”
Will all this prompt the US asset managers to rediscover their old public enthusiasm for sustainability? That seems vanishingly improbable in the current political environment.
More likely is what Tom Gosling, of the London School of Economics, describes as an overdue “market sorting”, as asset owners move their money to managers who share — or are at least close to — their approach to these issues.
The biggest US managers’ retreat from ESG advocacy may have tempered the loss of business from conservative state governments (though it hasn’t stopped it, as evidenced in December when Indiana officials voted to pull money from BlackRock over its “woke corporate policies”.)
But it’s created a risk of larger losses of contracts with climate-aware asset owners — and not just in Europe. The biggest US public pension plans — those in California and New York, with over $1tn in assets between them — continue to stress the importance they attach to climate concerns. The opportunity for the likes of Amundi seems real.
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