British Columbia Investment Management Corporation (BCI), the C$295 billion ($214 billion) asset manager for public sector bodies in Canada’s western most province, oversees a C$20 billion ($14.5 billion) allocation to private debt in a strategy that is defined by a few key characteristics: a large and growing allocation to co-investments, an avoidance of mega deals and an expansion into Europe and APAC.

Around 65 per cent of the private debt allocation is direct or in co-investments via partnerships with external firms, which although not unique, sets BCI apart from many other investors and reaps benefits like diversification, deeper relationships, deal selectivity and lower fees.

“Not everyone can do direct or co-investments but having an overall portfolio of 65 per cent in direct and co-investments is a high number, and we are looking to do more,” says Daniel Garant, executive vice president and global head of public markets, in conversation with Top1000funds.com.

BCI has been doing direct lending in the US ever since the portfolio was launched in 2018. But moribund M&A activity continues to push private credit firms to jump on every opportunity. It’s drawn huge investor flows into US private debt and tightened credit spreads. The fiercely competitive market for lenders has propelled BCI into new geographies – first Europe and more recently, Asia Pacific.

“For the last three years, we have increased our allocation to Europe for the simple reason that credit spreads and returns are currently attractive. Having a portion in Europe, and a growing portion in Asia Pacific, is helping us as these markets will develop over the years. They won’t get to the same size as the US, but private debt in Europe and Asia will get a growing share of this portfolio,” he predicts.

Another important seam to strategy involves avoiding mega deals where “everyone” is bidding. It’s not that these deals aren’t interesting, says Garant, it’s just that they are competitive and tightly priced. Instead, he is focused on transactions that are less crowded to get a better spread, calling on BCI’s strong partners to bring deal flow in the upper middle market and middle market.

Another reason to avoid mega deals in private debt includes competition in the space from broadly syndicated loans (BSLs), which corporate borrowers can tap into as an alternative to private debt. BSLs are usually cheaper, and lenders don’t ask for as much spread as private credit investors. In return, they don’t have the same flexibility.

“A private debt loan is more flexible, but it is more expensive,” he says.

Adjacent opportunities

Another successful seam to strategy includes adjacent opportunities. In one example, the team has broadened its remit and ventured into more asset-backed lending. Garant says it’s less competitive and offers a better risk return, and although deals are more complex, BCI can draw on its deep internal expertise and talent pool for support – around 85 per cent of BCI’s total assets are managed internally.

Traditionally, asset-backed lending where loans are secured against property or equipment, consumer loans or credit card balances, used to be the domain of banks. Unlike direct lending which involves analysis of the corporation, financial projections and strategy, investors in the asset-backed space must also ensure they have the capacity and infrastructure to successfully select the assets that sit behind each deal.

“This is where the secret lies,” he says, adding that managers (and their selection) play a key role in sourcing the assets that back the loans. “Asset-backed lending is usually part of a broad diversified portfolio and that requires technology, including AI tools, to better enable us to see the portfolio behind it because this is where the risk sits.”

Adjacent opportunities also include looking for openings in investment-grade (private) debt where investment-grade corporates go to the private market in search of a more flexible portion of funding.

It’s a strategy that also plays into another inherent strength of the portfolio.

The public markets team oversees both the allocation to private debt and absolute return strategies, alongside more obvious public allocations to passive and active public equities, government and corporate bonds, derivatives, trading and FX and managing portfolio leverage. Garant believes the hybrid portfolio works particularly well given today’s demands on investors to remain flexible, and the fact that the lines that used to define markets are increasingly blurred.

“Investment grade private debt is a hybrid between corporate bonds which are investment grade, and private debt per se, so having the view of both markets is essential in my view to do a good job in terms of capital allocation and risk return.”

Absolute return and synthetic index replication

The C$12 billion ($8.7 billion) absolute return portfolio, the other slight anomaly in BCI’s public markets allocation, seeks opportunities that are uncorrelated to equity – namely unique, idiosyncratic investments that are expected to perform well in all market environments.

The strategy provides a welcome corner of active risk in an equity allocation that has steadily moved into passive.

At 23.6 per cent, BCI’s current allocation to public equities is a smaller proportion of assets under management than it used to be and subjects the portfolio to less volatility than in the past. Of that, the majority is passive in index strategies for rebalancing.

Absolute return investment opportunities have a specific risk-return profile that typically comprises low downside risk and a capped upside, but which is above the market beta return. Absolute return implementation comes via an overlay above public, indexed equities whereby BCI’s clients receive the beta of equities, and a value add over the benchmark from uncorrelated strategies.

“Of course, the quid pro quo is if the downside is capped and limited, the upside is also going to be capped. The key success factor is the right partnership and sourcing, as well as the skill of the team and being agile and nimble to look at opportunities that are a bit different,” he says.

The largest exposure is to a long-short market-neutral credit manager. Other uncorrelated instruments providing strong returns in the overlay strategy include transactions in litigation finance and structured debt instruments with penny warrants. Here, the downside credit protection caps potential losses and the upside comes via the interest rate paid on the debt instrument and potential equity returns from the penny warrants.

In keeping with BCI’s overarching approach, the structure of the overlay is managed internally with capital allocated to partners where BCI will co-invest if the team decide they want more exposure to particular opportunities. “The positions are not short-term, we target transaction maturities to be within five years – we don’t aim for short-term tactical positions that are, say, three months.”

It’s a topical point. As more investors explore tactical asset allocation in the current climate, Garant remains lukewarm.

“I’m not a strong believer in tactical asset allocation. Our strategy is not based off short-term market moves.”

“Tactical asset allocation requires coping with significant mark-to-market volatility with features such as stop losses, and although some firms are good at it, many aren’t because it’s extremely difficult to time market movements. If you want to perform, you need to change positions quickly, and positions need to be large to have a meaningful impact on your return. For example, relative value trades between equity and bonds consume a lot of active risk.”

BCI has no edge investing tactically, he continues. It’s much better to invest the way they are, whereby partners bring opportunities, the internal team hunts for specific returns and risk profiles, and where transactions are less crowded.

A second active equity strategy in addition to absolute return comes via synthetic indexation, where the team move investment between physical and synthetic index replication according to market opportunities.

The physical allocation involves trading a basket of stocks alongside a synthetic index replication exposure via swaps, he explains. Every year, the team has added value by doing synthetic index replication and he concludes that the strategy is important because active equities are difficult in the current market.

“In public equity markets, we have never seen this type of market concentration before. In Canada, we are used to having a few stocks dominating the benchmark, but in the US, this is a new feature in the modern era. It adds complexity for long-only public equity active investors.”

When Google’s chatbot, Bard, made a factual error, the company’s shares plunged 9 per cent in a single day, temporarily wiping off $100 billion in market cap. Last year, OpenAI was fined €15 million ($17.5 million) for processing users’ personal data without adequate legal justification, violating the European Union’s General Data Protection Regulation.

By 2024, Google’s carbon footprint had increased by 48 per cent since 2019 due to energy use associated with GenAI, jeopardising the company’s commitments to reach net zero by 2030. Meanwhile, in Chile and Uruguay, the company is under pressure for its excessive use of freshwater in new data centres.

AI medical diagnostic systems can have racial and gender biases – skin cancer is under-detected in black patients as training materials use images of mostly white skin, for example, and many large companies have experienced data breaches where attackers used AI technology to expose employee and customer data. So the list goes on.

Much is written extolling the investor opportunities inherent in AI at a time when policymakers tilt towards prioritising deregulation and innovation over safety, but a ground-breaking report from £34 billion Railpen on the risks AI holds for investors’ portfolio companies provides a valuable reality check.

Most companies have adopted AI in at least one business function, ranging from informing decision-making to supporting physical operations. Although investors know the financial impacts of these risks can be significant, research and knowledge around financial materiality is scarce and many struggle to price AI risk.

In partnership with Chronos Sustainability, Railpen’s report highlights the short-and medium-term risks and sets important guidance on how investors can assess companies’ preparedness for what lies ahead via an AI governance framework.

Data, climate and cyber

The report authors argue that large data (and energy) requirements of AI expose companies to vulnerability related to both data provenance and security. Uncritical interpretation of inputs is another risk, producing outputs deemed harmful or that reproduce biases present in the training data. Similarly, AI systems possess no inherent ability to discern between true and false information and AI models are increasingly ‘black boxes’ – the larger and more complex a deep learning system is, the more difficult it is to trace the origin of a particular output.

Cyberattacks are an issue across all companies using IT systems but the increasing use of AI significantly amplifies the risks they pose, alongside data privacy and security.

AI has the potential to transform the nature of labour across the whole economy, although estimates of employment gains/losses and wage growth/stagnation remain highly speculative. It’s been estimated that up to eight million UK jobs may be at risk, and 11 per cent of tasks are already exposed to the ‘first wave’ of automation. Lower-paid ‘routine’ cognitive and organisational tasks are at the highest risk, with a disproportionate effect on women and youth.

What can investors do?

The report suggests investors begin by identifying where AI is (or may in the near future be) most significant for the companies in their portfolios. This identification is crucial for prioritising their stewardship efforts effectively. The level of risk (and opportunity) a company faces varies based on its role in the AI value chain, its operational dependency on AI, and how its sector uses AI.

The more a company relies on AI, the greater the related risks. High dependency on AI means that incidents can lead to larger financial, operational, legal or reputational consequences. Therefore, categorising companies by AI significance provides a practical way to allow investors to prioritise where the risk will be most material.

Questions investors should know the answer to include if a portfolio company is an AI developer, deployer, or both. How significantly is AI being used within the company and how does the company’s sector use AI? Is AI oversight structured at the senior leadership or board level and in what ways does AI influence strategic decision-making? Investors should also be mindful of what information the company discloses about its AI operations.

“We encourage investors to participate in dialogue with companies who are at the forefront of AI development and deployment. We also encourage investors to proactively feed into the emerging policy and regulatory discussion on the management of AI risks, and the effective harnessing of AI opportunities. Our sense is that the investor perspective is missing from these policy debates,” wrote the report authors.

Railpen is rapidly developing its AI policy. The investor expects companies developing or deploying AI to demonstrate accountability across the AI value chain, with actions proportionate to their risk exposure, business model, and potential impact. This includes clear board oversight, robust risk management, and transparency.

Where these expectations are not met, and there is evidence of egregious social or environmental harm and inadequate governance, Railpen may vote against the director responsible for oversight.

“We may also support shareholder resolutions addressing AI-related reporting, board accountability, human rights, misinformation, and workforce implications. Plus collective initiatives and policy advocacy,” said the authors.

To help investors assess companies’ approaches to risk management, Railpen and Chronos Sustainability have developed a stewardship framework that moves the responsible AI principles from theory to practice.

Although the long-term capabilities and associated risks of AI remain largely unknown, the framework allows investors to understand companies’ preparedness for these uncertainties as well as the steps that companies may need to take to manage the risks and harness the opportunities.

“Systemic risks are large-scale threats that cannot be diversified away by individual investors or asset owners, as they affect the entire financial system and economy, and therefore all portfolio constituents.

“To address these portfolio-wide risks, investors should consider deploying system-wide stewardship strategies to help understand and mitigate a range of challenges such as climate change, biodiversity loss, wealth inequality – and the rapid development of AI,” it concludes.

Reducing exposure to the risk of falling profits in coal is particularly challenging for South Africa’s 2.38 trillion rand ($122 billion) Government Employees Pension Fund (GEPF).

While other investors like the $82 billion United Nations’ UNJSPF, Norway’s $1.9 trillion sovereign wealth fund and the Netherlands’ $608 billion APG have cut or set key thresholds on their exposure to coal, GEPF’s direct exposure to the fossil fuel accounts for around 6.5 per cent of the portfolio.

Around half of that comes via GEPF’s 50 per cent, predominantly passive, allocation to listed shares on the Johannesburg Stock Exchange (JSE) in a country where the mining industry and the development of the public equity markets have grown hand-in-hand. On top of that, GEPF also has an 84 billion rand ($4 billion) stake in coal-reliant Eskom, the South African power utility, primarily in listed bonds.

But the indirect exposure is even more. Coal and the fortunes of the South African economy – where GEPF invests 85 per cent of its assets and is the equivalent of owning around a third of the economy – are also deeply intertwined.

Coal feeds roughly 85 per cent of South Africa’s electricity capacity, yet that crumbling generation is stymying the wider economy. Rolling blackouts were estimated to cost South Africa 2.9 trillion rand in 2023 and GDP growth of 0.7 per cent that same year, according to World Bank Group data.

In another highly complex characteristic of GEPF’s link with coal, any divestment must navigate the impact on vulnerable coal communities. South Africa’s multi-dimensional poverty, low economic growth and high unemployment, including youth unemployment, making the curb of investment in the industry challenging.

“It’s a transition conversation”, Belaina Negash, ESG manager at the pension fund where she has worked in the responsible investment team for the last 13 years, tells Top1000funds.com.

“When we engage with a company in the extractive sector, we have to have a balanced conversation that takes into account the thousands of people employed in the sector. Of course, we engage on their climate change policy but change impacts profits and therefore we must be able to balance the imperative of environmental sustainability with the need to address socio-economic disparities and once you start impacting profits, it’s going to impact people in a very real way.”

Engaging for a Long-term Transition

GEPF’s ESG strategy is shaped by a systems approach that views every ESG issue from carbon emissions to addressing historical inequalities as interconnected and interdependent. ESG is viewed across all asset classes and strategy includes active ownership and specific allocation decisions. Elsewhere, the team reports portfolio emissions across all high-emitting sectors to the investment committee in an analysis that looks at the per rand invested and carbon intensity.

“We have really tried to strengthen analysis on climate change,” Negash says.

The systems approach means divestment is a last resort. Although the pension fund has divested from companies that don’t align with best practice or meet investment return requirements, it believes staying invested is a better way to effect long term change. Moreover, issues that are externalised in one portion of the portfolio are likely to reappear in another.

“We are in a position to effect change over the long term. If we divest because of climate or other ESG issues, someone else will buy that company stock and systemically, nothing will change. It might reduce the emissions in our portfolio, but you are left with an investable universe that has got more issues than when we were invested in that company. It’s better to have conversations to effect change, and over the long-term to try and create a better system underscored by sustainable financial flows.”

In reality, divestment is also hard. GEPF is by far the largest investor in South Africa and cannot diversify away systemic risk. The pension fund has exposure to every economic sector and every type of risk

“Our investable universe is small,” she says.

GEPF uses its large shareholding to engage on carbon and science-based budgets, and the extent to which a company is investing in renewables. Negash believes it does ultimately move the needle – but points to most progress in areas other than climate.

“A decade ago, we would have conversations with investee board members about ESG metrics in their remuneration policy which was unheard of. Now we see companies being open to these conversations.”

Between 2023/2024, the Public Investment Corporation, GEPF’s government-owned asset manager that invests over 80 per cent of the portfolio, voted on 2,990 resolutions at public companies at 174 meetings and engaged 104 times on 253 ESG topics, mostly related to governance (66.8 per cent), transformation (18.2 per cent), environment (10.7 per cent) and social (4.3 per cent).

The GEPF also invests directly in sustainability via its Isibaya fund. Investments promote socio-economic transformation objectives, renewable energy, healthcare, education, and infrastructure and measurable social impact includes boosting youth employment, adding electricity to the grid and student accommodation.

Asset allocation with a home bias

GEPF currently invests less than 10 per cent overseas and has the headroom to diversify more outside South Africa. But because the pension fund’s liabilities are at home, this is unlikely to change. The portfolio is split between equities, fixed income, real estate and the Isibaya Fund.

Assets under management have grown from 127 billion rand at its formation in 1996 and, according to its latest annual report, it recorded a growth of 2.6 per cent and an annual return on investment of 4.9 per cent. The GEPF’s 10-year annualised return was 7.2 per cent for the period 2015-2024 and its funding level is 110.1 per cent.

“Mitigating climate change and promoting human rights is at the heart of what we do,” she concludes. “We believe we have the capacity to make a difference and have a fiduciary duty to consider how we invest.”

Asian investors, including university endowments and family offices, are leaning into private credit hunting for returns in lower-middle market and asset-backed lending, according to Cambridge Associates which manages a $92 billion discretionary outsourced CIO business.

Appetite for the asset class is strong as these investors grow their alternatives allocations which historically have been lower compared to US and European peers, says Prabhat Ojha, OCIO and head of Asia client business at Cambridge Associates.

Direct lending and so-called speciality finance (or asset-backed lending) are two major recipients of client capital.

In terms of portfolio construction, the firm usually recommends client portfolios be underpinned by a few large, core managers who have been through credit cycles and have larger teams, as they can provide access and flexibility to multiple credit sub-strategies. But it is cautious around large funds raised by newer players who have not weathered the credit cycles.

“[There is] a lot of competition there in the large-caps space, and therefore the deal terms that we are seeing are deteriorating,” Ojha, who used to head up the firm’s Asian credit manager research, tells Top1000funds.com in an interview from Cambridge Associates’ Singapore office.

“At the same time, this is where you compete with the public markets – high yield and bank syndicated loan markets – the borrower has the optionality, not you as the lender.

“We want to lean into the lower-middle market where the competition is lower, where the deals are smaller, where the manager can take the whole piece or be really responsible for structuring the deal and the covenants.”

Smaller deals with fewer lenders also mean faster recovery in the event of restructuring, as Ojha says a one-year delay could make a significant dent on the IRR. The firm defines lower middle market as companies with $10 million to $50 million of EBITDA, and core middle market as $35 million to $100 million EBITDA.

Cambridge Associates serves a variety of client sizes, and many are willing to allocate to smaller fund managers that may not move the needle for larger asset owners.

Should tariffs or other uncertainties translate to real trouble for corporate earnings and hit direct lending, speciality finance backed by hard assets such as aircraft and ship leases and commercial real estate also provides another layer of security.

Best managers ‘just say no a lot’

Ojha advises and invests on behalf of several Asian family offices, university endowments, foundations, and corporate or pension pools. He acknowledges that there are certain anxieties among clients about private credit due to persistent media coverage of bad players and risks in the opaque asset class. This makes manager selection a critical mission particularly given the wide dispersion of performance in alternatives.

Apart from looking for managers who are lead lenders in deals, Cambridge Associates also assesses market reputation and credibility by doing off-the-list reference calls.

If the fund is leveraged, its reputation and strong relationships with leverage providers could become a source of advantage when markets get choppy, says Ojha.

“[We want] somebody who understands that even my leverage line… needs to be structured appropriately. That this leverage provider, because of the structure and my relationship, is not going to mark-to-market [when asset values fall] because there is more confidence in me and the basket of assets backing the LOC (line of credit),” he says.

“Others might get that margin call – you won’t. Therefore you’re much better protected, and you can deploy more capital in a choppy environment.”

But ultimately, the most successful players in private credit “just say no a lot” and Ojha says it’s crucial that a portfolio manager or a team have tight control over their book instead of, for example, the portfolio manager delegating to regional leads.

“I don’t like to see that. I want the PM to make decisions and control the portfolio because otherwise it becomes about asset growth [in a fund].”

Secondaries a ‘godsend’

Cambridge Associates opened its Singapore office 24 years ago and has witnessed the rise of Asian university endowments – a trend that began in the early 2000s. These funds have looked to their US counterparts, who are some of the most prolific private markets investors, and many are at an “early stage” of building out their own alternatives programs.

According to Cambridge Associates data, the average alternatives allocation among Asian endowment clients is from 25 to 35 per cent. These endowments are very much in their growth stage and universities do not rely on them heavily for cash flows.

“I wouldn’t say the risk profile of Asian endowments is as high as the more sophisticated US endowments, which can run at a risk profile of 85 equities/15 bonds, or sometimes 90/10. Only a select group in Asia aspires for that or has gotten that, and others are much more below in the risk spectrum with maybe 60/40 or 70/30,” he says.

There has been strong interest and deployment in secondaries especially for new allocators who seek vintage diversification and some immediate IRR, beating the J-curve.

Again, the smaller end of the secondaries spectrum is more attractive. “That’s where the better discounts are,” Ojha says.

“Not all of our clients are looking to write $200 million cheques per secondary fund or per GP. We can write $5 million, $1 million, $10 million sort of tickets, so we can invest in these more niche strategies which just have a better return profile from our perspective.”

“It’s different from five, seven years ago, secondaries are a big component of any privates program [now]… particularly in this environment where distributions have been slow, experiencing that liquidity come in from secondaries or private credit is a godsend.”

Fonds de reserve pour les retraites (FRR), France’s €21 billion ($24 billion) pension reserve fund, has increased its weighting to equity in line with a new strategic asset allocation to reflect the investor’s longer return horizon.

Until last year, FRR’s ability to invest long-term was stymied by a regulatory-imposed 2033 horizon that capped its ability to allocate to equity and other performance-seeking assets.

Although the new horizon is still unconfirmed, new chief investment officer Pierre-Olivier Billard who stepped up from overseeing index strategies and the strategic and tactical asset allocation to take the helm from Olivier Rousseau this time last year, says FRR can now confidently invest with a 20-year timeline.

FRR has increased the (unhedged) equity allocation to 46 per cent and the unlisted portfolio to around 15 per cent which is likely to edge higher over time.

Elsewhere, FRR’s so-called intermediary risk allocation is now around 36 per cent and comprises hedged equities with options, high yield corporate bonds and a small allocation to emerging market debt.

The investor also has an 18 per cent allocation to investment-grade fixed income comprising sovereign and French government bonds, and corporate bonds.

Selling fixed income to increase equity weighting

Rather than buy equities, FRR increased its exposure to equity in its SAA by selling all its allocation to US investment-grade corporate fixed income as well as some of its allocation to high yield debt and emerging market debt. The proceeds went to finance its annual payment of €1.45 billion to Caisse d’Amortissement de la Dette Sociale, the state-owned special financial vehicle for the financing and debt repayment of the French social security system.

“We automatically increased the equity weighting without having to buy equities. We achieved two goals in one fell swoop,” says Billard in an interview with Top1000funds.com.

Moreover, an equity option strategy enabled the fund to decrease equity risk during April’s market volatility. As FRR’s equity option positions increased in value near the bottom of the market, FRR realised gains by taking off the hedged equity exposure and then hedged again with options when the equity market was at a higher level.

“We managed to gain quite a bit of value through the volatility,” he reflects

All decision-making is done in-house, and the implementations are made by overlay managers Axa Investment Managers and Russell Investments. FRR currently has an open RFP to renew its overlay mandates.

Billard explains that any rise in interest rates supports FRR’s surplus. However, he flags one of the key vulnerabilities of the fixed income allocation comes via an increase in the spread between German and French government bonds. If France’s economic outlook decreased, it could reduce the risk premium of FRR’s investments compared to its cost of resources.

In such a scenario, he says FRR could increase its allocation to French government bonds either with real debt or with futures.

“We are cautious of any moves in the spread; however, we don’t see any signs of stress.”

Pushing more into unlisted assets

The new strategic asset allocation is also allowing FRR to invest more in unlisted assets, where Billard is focused on private equity, private debt and infrastructure with a particular focus on French companies involved in new tech that offers environmental solutions.

“We have estimated that we can invest around €500 million per year in non-listed assets to gain some extra return. We are focusing on the assets and firms that support the French and European economy, and we really try and invest where we can be useful to the economy.”

He sees most opportunities in firms developing new technologies targeting climate and/or defence where FRR is free to invest in line with its ESG policies, and targets classical defence companies to cyber. “There are firms that are developing new technologies where perhaps 20 per cent of their turnover is dedicated to defence but they are not a defence company.”

By law, all FRR’s allocations are managed externally either via mandates (around 80 per cent) or a subscription into collective open, or closed-end funds.

Responsible investment involves more engagement

In another enduring strategy, Billard is also increasing pressure on FRR’s asset managers to engage with investee companies on climate and is putting more weight on engagement in all RFPs.

FRR’s asset managers are required to apply ESG guidelines and criteria, defined by FRR, and are responsible for implementation, selection and engagement in line with the investor’s responsible investment policy. Because of this, he says it is essential that FRR sets out clear objectives at the beginning of the mandate.

“We are in the process of evaluating how to increase the effectiveness of our engagement with firms and asset management companies because we aim to have even more impact.”

FRR continues to decarbonise its portfolio in line with the Net Zero Asset Owner Alliance. So far, around 40 per cent of the equity and bonds allocation has been decarbonised. He reflects that asset owners cannot be sure their engagement will be followed by actions in the long term but he notices that it’s more difficult for companies to row back on pledges if they’ve made a public statement.

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.