Asset owners take on greenwashing by asset managers

A group of UK ethical investment institutions has launched at COP26 a drive to combat what they see as widespread greenwashing by asset managers, even those that have joined the Principles for Responsible Investment and Net Zero Asset Managers’ Initiative.

The 26 investors, with total assets of £5.9bn, have signed a declaration of Asset Owner Climate Expectations of Asset Management, setting out minimum standards they expect on decarbonising portfolios and stewardship.

“This came about from a shared frustration on standards in the market,” said Colin Baines, investment engagement manager at Friends Provident Foundation in York. “We have to wade through all asset managers’ claims about what they do on ESG, but their behaviour and practice varies enormously — so how do you judge between them?”

Friends Provident Foundation, a £30m charitable fund, has assembled the coalition, together with two NGOs: ShareAction, which promotes responsible investing, and Students Organising for Sustainability UK.

Investors founded with an explicit ethical purpose have long been in the vanguard of the responsible investing movement — and that remains the case, even after consciousness of environmental, social and governance (ESG) issues has been adopted by much better resourced mainstream institutions.

Recently, universities have joined the front rank, at the urging of student activists.

Investors in the campaign include Jesus College Cambridge, the universities of Newcastle, Bristol, Lancaster, Reading, Sheffield and Sussex, the Joseph Roundtree Charitable Trust, the Health Foundation, Jesuits in Britain and WWF UK.

Many belong to either the Charities Responsible Investment Network (Crin) or the Responsible Investment Network — Universities (Rinu). Between them they employ dozens of asset managers.

The asset owners’ growing impatience with asset managers was epitomised by two experiences. One was the annual assessment of asset managers’ ESG performance conducted by ShareAction, which provides the secretariat for Crin and Rinu.

The other was the ESG Olympics. At the beginning of 2020 charities including FPF clubbed together to create a £30m pot, then held an open, competitive tendering process. “We got 60 pitches, from some of the world’s largest asset managers,” Baines said.

They all presented publicly in front of an audience of 200 asset owners. Baines was then involved in sifting the applications over several months.

“They were all making similar claims — that they are committed to net zero or the Paris Agreement,” he said. “They are all signed up to the PRI and Climate Action 100+ [a huge collective engagement with over 100 of the world’s biggest carbon emitters]. Then you look at their actual behaviour, their voting records, whether they are willing to escalate and co-file resolutions — and there is such a breadth of performance, ranging to awful greenwashing. If you just went on what they said you would be none the wiser.”

The PRI, to which nearly all substantial asset managers now belong, has an annual disclosure and scoring process, designed to address exactly this issue.

The EU’s Sustainable Finance Action Plan, launched in 2018, also has combating greenwashing as one of its primary motivations. The Sustainable Finance Disclosure Regulation is meant to make investment firms describe the ESG aspects of their activities precisely.

Nevertheless, the result is still practices that are patchy and often skin-deep.

Evaluating and comparing investment behaviour is inherently difficult, and reports and regulations can easily become box-ticking exercises or boilerplate that no one reads.

A set of standards directly promoted by a group of the asset managers’ clients is a fresh approach that might provoke a reaction.

“I think it’s brilliant,” said Kate Rogers, head of sustainability and co-head of charities at Cazenove Capital — the eventual winner of the ESG Olympics. “It’s really important that asset owners use their voices to set expectations and asset managers work collaboratively with their clients to create the actions we need. We’ve been hearing a lot of commitment, a lot of intention, but we now need to move more towards action.”

The asset owners make eight demands. Four of them concern engagement — investors asking companies to perform better on ESG issues.

This is one of the easier aspects of investment practice to quantify and evaluate, especially when it comes to votes at shareholder meetings — and where the disconnect between asset managers’ words and deeds can seem most glaring.

“I haven’t seen all the voting records from this year’s AGM season, but it’s going to be enlightening on the claims made by larger asset managers,” said Baines.

After vehement criticism, BlackRock last year said it would change its voting policy and much more often support shareholder resolutions on ESG issues — which it usually used to vote against.

“BlackRock’s voting performance was terrible,” said Baines. “It has to have improved dramatically if their claims are going to be taken seriously.”

The institutions want asset managers to engage actively with companies they invest in, to persuade them to set science-based targets to cut emissions in the short and medium terms, including 45% by 2030 and to zero by 2050. Corporate transition plans should cover lobbying, capital expenditure, pay and ensuring a just transition.

Managers should also devise and publish expectations on decarbonisation for each sector, with timebound targets.

For companies that fail to improve, asset managers should apply policies to escalate engagement with tougher measures: public statements, voting against management resolutions such as to re-elect directors, co-filing resolutions and ultimately, in active portfolios, divestment or refusal to buy new bonds.

Up to now, shareholder motions on ESG issues have been quite rare in Europe. They are more common in the US, but still not frequent enough to offer a comprehensive gauge of asset managers’ commitment to ESG.

But Baines sees voting as both a telltale sign and a valuable tool in itself.

Some asset managers do not disclose how they vote — or even what investments they hold. “We want to see voting records published as soon as possible after AGMs,” Baines said.

The asset owners demand detailed and prompt disclosure on holdings, voting and engagement activities.

Managers should also, they argue, as a matter of course vote in favour of shareholder resolutions on climate change, and explain when they do not do so.

“There are different approaches,” said Baines. “Some firms only vote well in their ESG funds or take clients’ direction on it. We are saying they should be voting the right way across their entire portfolios.”

While some asset managers vote in favour of ESG motions 80% or 90% of the time, others vote against them by as large a margin.

“If they say they support the Paris Agreement and net zero transition, their votes are one of their main tools,” Baines said. “If they use it to vote down motions, it’s preposterous — but so common.”

The group want asset managers not just to support motions, but to propose more of them.

“We need to see a lot more resolutions,” said Baines, “and to see them passing. Then we will start to see real change.”

FPF was one of the co-filers of a shareholder resolution at HSBC in January, co-ordinated by ShareAction, calling on it to publish a strategy to reduce fossil fuel financing. The authors withdrew it after HSBC’s management proposed its own climate resolution.

“It was very successful,” said Baines. “We’ve had lots of engagement [from HSBC] since the management resolution passed. There is stuff happening that’s positive — we need the bigger managers to be doing it as standard.”

Rogers at Cazenove welcomed the asset owner group’s “recognition that active ownership is so crucial”, arguing that this was a vital direction of travel as the investment industry became greener.

“What we really need is investors having intelligent conversations about decarbonisation with companies they invest in, and being able to get meaningful targets,” she said.

“There do need to be more teeth in some of these engagements,” Rogers added. “We are not talking to companies now to understand what their processes are.”

Using the example of engaging with a bank, she said: “It’s ‘how do you go from lending this much to fossil fuels to not doing it at all?’”

Beyond engagement, the group wants asset managers to make an active commitment to investing in solutions to climate change and a just transition. ESG impact should be measured and reported.

Their other three demands concern the tricky issue of how to decarbonise investment portfolios. This poses two sets of difficulties: the will to act and the ability.

Asset managers have a wide spectrum of views on how hard they can push towards greening their investments. Some are confident that it is clearly the right thing to do and clients will agree with them.

Many have tended to be more cautious, saying they invest other people’s money and can only make investment choices consistent with making the best possible financial return for clients.

This middle ground — exemplified by BlackRock — has shifted recently, to a stance in which the asset manager will try to guide and help clients make the right choices that lead to net zero emissions by 2050.

The Net Zero Asset Managers’ Initiative, launched in December 2020, aims to regularise and structure that approach. Signatories — of which there are 220 with $57tr of assets, after 92 joined at COP last week — commit to “work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management”. This implies a progressive transfer of AUM to following a net zero target.

The NZAMI involves further commitments about what to do with portfolios once they are on the net zero track, including setting “interim targets for 2030, consistent with a fair share of [a] 50% global reduction in CO₂”.

Here, asset managers encounter the technical challenges. They often complain about shortages of data and metrics, but the fundamental issue is that there are not enough sustainable companies to invest in. By and large, big asset managers have to invest right across the economy, in sectors clean and dirty.

The NZAMI is not even a year old, but those at the more ambitious end of the green investing scale are not impressed so far.

When the Initiative released its first progress report last week, ShareAction dissected it. Only 43 signatories had contributed figures, and among them, there was a wide variance. Eleven members had committed 100% of their assets to reaching net zero, but the average for the 43 was 35%. Others had put barely any assets on this path.

They have latitude in how to set targets, too — many try to cut emissions intensity, which theoretically means absolute emissions can still rise.

NZAMI asked members to say what barriers they were encountering to committing 100% of assets to net zero. They pointed to: client mandates; lack of methodologies for measuring net zero in some asset classes (derivatives, cash, private equity, green bonds, sovereign bonds, covered bonds and structured products); data availability; and policy uncertainties.

ShareAction dubbed this “excuses, excuses”.

“You can say ‘we’re signed up [to NZAMI] but we are only looking at net zero for about 10% of our portfolio,” said Baines. “It just makes a bit of a mockery of it. We understand some of the standards might not be in place across the entire [asset management] house, but they need to be rolled out.”

He also said the NZAMI “doesn’t really cover behaviour and voting”.

Baines does not buy the asset managers’ argument that they cannot go faster because asset owners do not want them to. “Asset managers I’ve spoken to that have good performance say they are doing it because of client pressure,” he said.

The asset owners expect asset managers to have investment strategies to achieve net zero portfolio emissions by 2050 or earlier, and a cut of at least 45% by 2030. They should use scenarios aligned with limiting global warming to 1.5°C and not rely excessively on negative emissions technologies. Responsibility for it should be at board level and pay should be linked to achieving climate objectives.

“We want their investment strategies to cover all their AUM and for them to have science-based targets that are about absolute emissions reductions,” said Baines.

Corporate lobbying, including through trade body membership, should be aligned with net zero.

The group also wants managers to exclude coal and tar sands oil from actively managed portfolios, following the Global Coal Exit List maintained by Urgewald, a German NGO. It encourages them to exclude other troublesome sectors, such as unsustainable forestry and agriculture that causes deforestation.

“None of the [net zero] initiatives mention fossil fuels,” said Baines. “It’s the elephant in the room: how are you going to phase out fossil fuels? There are a few policies out there, but too many are basically designed to allow the world’s largest coal miners to remain on their books.”

Investors and banks often exclude “direct” financing of activities such as new coal plants or Arctic oil drilling, which only covers asset-specific project finance — or bar companies with more than a certain percentage of revenue from coal, a threshold that Glencore and BHP do not meet.

Baines is even sceptical of the Net Zero Asset Owners’ Alliance, led by some of the world’s largest insurance companies, which now has 61 members with $10tr of assets. “Those signed up to it have a wide variety of practice and behaviours,” he said. “All these initiatives say sign up to net zero by 2050, but that doesn’t mean an awful lot. What would be even better would be just to adopt a transition plan that’s climate science-aligned and involves halving emissions by 2030. None of the coalitions go that far. We need to see real action now that changes the business models of companies we invest in.”

Cazenove Capital has put 100% of its assets on a net zero path and its parent Schroders is at 70%, with private assets not covered yet. The firm is applying to have a Science-Based Target validated.

Just as a much livelier, more informed dialogue between asset managers and companies is needed to get the low carbon transition moving, so is a fuller interaction between asset managers and asset owners.

“It makes a huge difference if our clients are saying ‘this is what I want’,” said Rogers. “There’s been a great increase in the number of consultants or asset owners asking about ESG. What I find interesting is that it’s still very focused on what you own and don’t, rather than active ownership. Either you divest or it’s not enough. But the whole thing relies on systemic change. Everybody has to transition.”

The asset owners’ group are demanding action on both fronts. “We want to send a very strong signal that this is the baseline,” said Baines. “If your policies and practices are below that, this is greenwashing and we will not accept it.”