Carolyn Hayman, OBE: What should asset managers do differently as a result of COP21 in Paris?

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As the dust settles from COP21, the question is no longer: was it a ‘Diplomatic triumph?’ – or, at best – ‘a first step response to the climate change crisis?’ – because it was both. The more relevant question for the future is: ‘What can/will we do differently as a result of the decisions taken in Paris?’
This question is particularly urgent for the asset management industry, because the largest fund managers massively outweigh the GDP of many countries. Accepting that GDP is an annual flow, and assets under management (AUM) is a market value, nevertheless the comparisons of scale are startling. Blackrock has AUM of €3,844bn, equivalent to the GDP of Japan at circa €3,784bn. Vanguard runs €2,577bn, close to UK GDP of €2,426bn. State Street (€2,023bn) tracks the GDP of India (€2,051bn), while Fidelity’s assets (€1,595bn) are on a par with Russia’s GDP (€1,530bn). Invesco and Legal and General, the largest UK based asset managers (€654bn) equate to Turkey (€656bn). For the full table and sources click the Preventable Surprises blog link
Climate change was recently cited in a pre World Economic Forum poll as the biggest risk to the global economy, above the spread of weapons of mass destruction, water crises, mass involuntary migration and a severe energy price shock. This makes a strong case for action on climate change being a fiduciary responsibility for asset owners – i.e. part of their day job – rather than that of the niche ESG team. The companies they own have been enjoined by Mark Carney and the Financial Stability Board (FSB) to disclose their exposure to carbon. But, to move from disclosure to taking action requires investors to be supportive. The recent departure of David Crane from NRG, the US power company, is a warning of what can happen when CEOs take seriously climate change , and the long-term opportunities it offers, and their investors (and hence board directors) don’t.
Investors remain firmly anchored in a world which prioritises short term financial returns and links remuneration to those returns. No-one would want to swim upstream in that particular river and we don’t have time to transform this deep rooted culture.To cut this Gordian knot requires a strategy that is minimally demanding on asset owners, while having the biggest impact in spurring companies to go beyond disclosure to strategies that adapt to climate change. They also need to do this not just by modifying their ‘business as usual’ activities, but by employing the deep innovation that will enable them to thrive in a world shaped both by climate change and by government responses to it. These 2-degree transition plans are roughly equivalent to getting to Mark Carney’s ‘net zero’ carbon world by 2050-2085. This requires robust engagement, whereby asset owners vote for AGM resolutions that ask companies to develop, share and implement transition plans to a 2-degree world. It has the advantage of being transparent – investors have to stand up and be counted – unlike the default strategy of ‘a quiet word in the ear’ of the Chairman or Chief Executive. It has a ‘demonstration effect’ to the rest of the sector. It can be applied on an industrial scale, at least to those companies that are listed in the main markets. And the impact could be rapid enough to be felt in the vital window 2015 – 2025.
Large pension funds are already starting to look for alternatives to divestment, as evidenced in the recent announcements from the Ontario Teachers’ Plan and the Canadian Pension Plan Investment Board that they ‘prefer to engage with investee companies, challenging them to explain their business plans in a world transitioning to a low carbon economy’.
But to date the largest mainstream asset owners appear to be ignoring the problem. They have not, apparently, reflected on the question this article started with: ‘What do we do differently as a result of COP21?’ The answer needs to be: we take on board systemic risk, and we move from private chats to public voting. Then, the strategies that are published for all market participants to see, can help push the ‘invisible hand’. This gives us an approach that is as open and transparent as the divestment campaign, but which will have a direct impact on emissions.
Large investors are systemically important and have a strong public interest element. Therefore, as a last resort, litigation may be required to join the dots between what they know, and how they act. The ‘books and records’ lawsuit from the New York State Attorney General’s office to Chevron and Exxon Mobil may just be the beginning.

Carolyn Hayman, OBE, is Chair of Preventable Surprises