Asset managers can’t have it both ways on sustainability

US-headquartered global managers — the largest in the world by assets, with a global client base — have recently been trying to show that they could cater to all sides, from asset owners that have spent years integrating sustainability into their investment strategies to anti-ESG elected officials in states like Texas.

It’s not working. Global asset managers can’t have it both ways.

Asset owners — a category that includes pension funds, sovereign wealth funds and foundations — are expressing concern as some managers appear to waver under political pressure. These investors have spent much of the last decade refining how they manage material risks and they’re taking notice when managers compromise those principles.

At a recent meeting convened by the Global Unions’ Committee on Workers’ Capital (CWC), asset owners from around the globe met with BlackRock, and cautioned that corporate engagement should not be reduced to inconsequential exchanges of information. The asset owners made their client expectations clear: they want meaningful and effective stewardship, not fence sitting.

Asset owners around the world are getting fed up with their providers who appear more focused on placating anti-ESG politicians than protecting long-term value. The NYC Comptroller and the Netherlands’ PME, have placed some managers on notice. Some asset owners have downsized (e.g., People’s Partnership in the UK) and even ended (e.g., AkademikerPension in Denmark and PGGM in the Netherlands) mandates with some US global managers that were underperforming on stewardship.

So BlackRock might’ve recently regained favour in Texas — at least enough to be removed from the state’s blacklist for the time being — but the broader question remains, will they win back Texas only to lose the rest of the world?

Asset managers don’t need to lose clients — they could be winning them.

Analysts at JP Morgan estimate that global demand for sustainable investing represents a $7.3 trillion opportunity.

But there’s a precondition. Seizing this opportunity will require managers to demonstrate that their stewardship activities — dialogues with companies, voting at annual general meetings, etc — are genuinely encouraging companies to mitigate sustainability risks and achieve goals that are in line with the values of their asset owner clients.

As much as some politicians and asset managers would like to pretend that climate and social risks aren’t real, investors continue to be exposed to company and portfolio level risks that emanate from being on a course for temperature increases of up to 3.1 degrees, according to 2024 UN estimates, and a sharp escalation in violations of fundamental labour rights around the globe, according to the Global Rights Index.

Whether investors treat those matters through an impact, a financial materiality, or a systemic risk lens, a growing number of asset owners are concluding that “information sharing” conversations between investors and companies is not a good way for managers to steward their assets.

While some US managers have created sustainability-focused products for specific client segments, most of their assets continue to be behind their weaker “benchmark” policies. The CWC estimates that (merely) 3 per cent of BlackRock’s public equity assets are captured by its sustainability guidelines – with the remaining 97 per cent of assets being subject to its benchmark policy.

US managers who have adopted a twin-track approach to stewardship could thus engage with the same company using two different outlooks on sustainability risks. One type of engagement, backed by a larger asset base, can consist in “information sharing” dialogues with a company on climate risk, while the other, backed by a smaller asset base, can ask the same company to decarbonise its operations by 2050.

The sustainability opportunity — as identified by JP Morgan — lies with managers who adopt well-defined, organisation-wide (entity-level) commitments to stewardship, as opposed to a product-by-product approach that caters to different client segments.

Innovative asset owners have spent a decade developing comprehensive risk and opportunity analyses that help them navigate serious portfolio and systemic risks. Global asset managers aren’t going to hold on to their business by weakening their stewardship even further.

Hugues Létourneau is the director of investor leadership at SHARE, a collaborative team of changemakers working to facilitate meaningful transformations across capital markets.