What can asset managers do to effect real change

Hans Stoter, Global Head of AXA IM Core, discusses the need for asset managers to keep challenging climate change targets.

The financial sector may not be the solution to climate change, but it might be the agent of change. Our task will be to deliver capital to the companies, projects and innovations that we identify as the best placed to support and to profit from that transition.

Change will be a collective effort, alongside governments, regulators, corporations, banks and individuals. While governments are arguably the most powerful, we can’t sit back and wait for them to bring us the solution: the common good is a common responsibility. And in that common effort, asset managers will put to work the power of some $100 trillion¹ .

That collective power comes from the ability to decide whether to allocate or withhold capital. It comes from skilful engagement to drive management decision-making as we seek to support the development of a sustainable global economy.

But what is crucial right now is the integrity of that commitment.

We all want to set ourselves challenging targets and show that we are bold pioneers on the road to net zero. But that aspiration has been the source of negative criticism, with corporations and financial institutions alike accused of ‘greenwashing’, and of getting their marketing machine in order before their operations have caught up. Our sector too faces similar accusations, and this creates two clear problems.

First, if our investee companies think we only talk about ESG for communication purposes, or in response to regulation, then it significantly reduces the power of our engagement with those firms. It is hard to overstate just how important credibility is for a responsible asset manager seeking to persuade a CEO to adopt a more sustainable business model. 

Second, if asset owners do not believe in the value of ESG integration and impact investing, then not enough money will be directed into these strategies. That will mean that not enough differentiation is made in the cost of capital between the best and worst behaving companies. And that risks slowing or derailing our collective efforts.

So, what do we need to do?

Asset managers need to show the world that we are serious about creating real change – and be clear about the reasons why.

We must be open about our responsible investment objectives and about the impact our conviction has on things like stock selection and asset allocation.

And we must provide good arguments, anchored in the transition mindset, when we decide that a greenhouse gas emitting business should remain in our portfolios.

If we are to continue providing investment products that will deliver returns through the coming years, we cannot, en masse, dump every business that produces a kilo of CO2. Not every trustee will be comfortable leaping from the cosy world of traditional utilities or transport to the bleeding edge of renewables start-ups.

The pace of change must be sensitively managed, the best-in-class companies rewarded, transitioning companies supported, and our rationale clearly communicated.

Of course, we will provide the capital that brings a new net zero cohort to scale, but we will also fund the visionary incumbents determined to adapt.

We also need to show courage in our engagement with companies. We should demonstrate a proactive, objective record on the levers we can use, such as voting, to influence corporate decision-making around climate change.

We must also be clear that a more sustainable investment approach will deliver stronger and more resilient financial returns over the years and decades to come. And that with significant climate change comes significant risks.

Our conviction must be to build for long-term prosperity, by addressing long-term challenges, rather than focusing on next quarter’s percentage return. In practice this means a host of things that we need to do now.

These include engaging the biggest carbon emitters to force them to change – and to divest if they refuse or go too slow; financing the transition for companies that are committed to building more sustainable operating models; using and continuing to develop tools around ESG to pinpoint risks and opportunities; and taking the lead, as we need an industry-wide push to be most effective.

Our industry needs major investors who are committed to this right now.

The risk of greenwashing is real. But while we are right to closely scrutinise corporate commitments (and take care with our own), we must not end up anchored by inertia as the tide rolls in.