Originally published Feb 21st, 2023

The Role of Asset Managers in Managing the Climate Crisis …

There is a thinking that one way to force companies that make widgets and extract resources from the ground or ocean to improve their products, processes and policies is via the funding channels. In other words, if one chokes off capital flow to (say) oil & gas companies then the industry will either die or will change for the better. To some extent, this is the premise of Net Zero Asset Manager initiative, a coalition of 301 Asset Managers committed to reducing GHG emissions. Vanguard, an asset manager, last month pulled out of this alliance saying that its approach to climate change is clear, complete and timely disclosures by the investee companies. “We don’t believe that we should dictate company strategy,” said Tim Buckley, CEO of Vanguard. “It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that the risks are appropriately disclosed and that every company is playing by the rules.”

Vanguard would prefer Washington, Brussels, New Delhi, Beijing, … and respective regulators to set the rules “to achieve a just transition to a lower carbon economy”. The problem, especially in Washington, is that some politicians are slow to act (if they act at all). As the saying goes, “they are mowing their lawn while the house is on fire”. Vanguard also warned investors of returns on ESG focused funds. “We cannot state that ESG investing is better performance-wise than broad index-based investing,” said Mr. Buckley. That is not a great revelation. It is after all constrained optimization. “Our research indicates that ESG investing does not have any advantage over broad-based investing.” It however, depends on your investing horizon.

For long-term investors, ESG highlights risks to investee companies business model, markets, supply chain, employees, customers, … We do think that unlike asset managers who largely focus on public markets, private asset managers (equity and credit) have greater sway over the affairs of the investee companies. And, if you are paying attention, the PE firms are racing ahead with incorporating climate and ESG risks into their portfolio management practices.