Asset managers: It’s time for a new era of climate leadership

On the heels of a historic season for investor action on climate change, the spotlight has never been brighter on where the world’s largest asset managers go next.

Ben Ratner, Associate Vice President, EDF+Business

As a centerpiece of the financial system, asset managers direct the flow of trillions of dollars in the global economy. Their leadership may well be the missing link in solving the climate crisis. Meeting the moment requires walking the walk on net zero by converting aspirational pledges into concrete plans that deliver tangible progress.

That is why EDF and Legal & General Investment Management America – the American subsidiary of the global top 20 asset manager Legal and General Investment Management (LGIM) –  have announced a partnership to raise the bar for climate leadership in the asset management sector and accelerate corporate progress toward net zero. With an initial focus on the oil and gas and transportation sectors, we will define science based, sector-specific climate leadership expectations to enhance corporate engagement and accelerate net zero progress.

This first-of-its-kind collaboration sets the stage for an innovative approach to climate-aligned asset management, one attuned to shifting asset owner demands, the power of proxy voting, and the importance of public policy for mitigating financial risk. Through this partnership, we aim to galvanize a race to the top in asset managers’ climate performance.

Asset owners want climate leadership

Climate leadership is becoming core to how many public pension funds, endowments, and other asset owners select asset managers. The Net Zero Asset Owners Alliance, for example, consists of more than 40 members representing roughly $6.6 trillion in assets under management, sending a clear demand signal for climate-aligned investing.

Last January, the £30 billion Brunel Pension Partnership stated that it would abandon investment managers that do not take climate seriously. The world’s largest institutional investor, Japan’s $1.5 trillion Government Pension Investment Fund, has adjusted its fee structure to incentivize ESG issue engagement.

As asset owners become increasingly focused on climate change and attuned to the role that their investments can play in mitigating it, climate leadership will become a commercial differentiator and competitive advantage.

To attract and retain valuable pension and endowment clients, asset managers will need to integrate climate across the board, from the people they hire to the investment portfolios they construct; from the agendas they set for management team dialogues to the public policies they advocate.

The power of the proxy

Touting Paris-aligned or net zero goals is one thing, driving those goals through the day-to-day operations of a large financial firm is another.

As a starting point, delivering on climate commitments will require asset managers to align investment stewardship decisions with net zero goals. Asset managers are well positioned to influence corporate behavior and can use their leverage to raise private sector climate ambition.

LGIM has a strong track record of using its $1.7 trillion in assets to promote responsible climate management. Through its Climate Impact Pledge, LGIM evaluates companies based on sector-specific indicators, engaging with firms that fail to meet expectations and voting for climate-aligned shareholder proposals.

This transparent stewardship strategy helps LGIM hold climate laggards accountable. In 2020, LGIM supported 100% of climate-critical resolutions among their assets under management, far exceeding the voting record of most other firms. LGIM has even dropped companies that do not meet climate standards. This model of shareholder engagement needs to become business as usual.

Driving investor policy advocacy

One of the financial community’s most impactful tools is also one it wields far too infrequently – public policy advocacy. Ambitious government action is essential to create tailwinds for climate-aligned investing, helping both asset managers and the companies whose shares they hold achieve bigger carbon reductions – faster and at less cost.

But historically, asset managers have ducked policy debates, wed to outdated industry myths that discourage public policy engagement. In light of the systemic risks posed by climate change, it is high time that investors advocate for public policies that limit sectoral climate risks by supporting rapid decarbonization.

Whereas most large investors have stayed on the sideline of critical public policy opportunities, LGIM has led, for example supporting European standards for cleaner gas, U.S. standards for reduced methane emissions, and a Texas crackdown on wasteful flaring.

Advocating net zero public policies must become just another day at the office for investors with net zero pledges. It’s not only a litmus test for the credibility of climate pledges, it’s the critical path for unlocking de-carbonization at scale.

A part of something bigger

Today’s climate finance arena is incredibly dynamic, including excellent organizations and initiatives like CERES, the Interfaith Center for Corporate Responsibility (ICCR), and the Institutional Investors Group on Climate Change (IIGCC), to name a few. EDF is delighted to contribute through our independent model, deep science and policy expertise, and track record of partnering with industry leaders.

We look forward to collaborating with climate finance leaders from all corners to achieve the greatest collective impact and solve the existential problem of our time.