Joeri de Wilde: Don’t expect climate action from universal ownership
This column was originally written in Dutch. This is an English translation.
By Joeri de Wilde, Senior Economist at Triodos Investment Management
With government climate policy falling short, one would hope that the private sector would step up its efforts. But even those whose interests supposedly align with the global economy are doing virtually nothing.
Around the turn of the century, a promising economic theory emerged: that of universal ownership. According to this theory, financial institutions that effectively own a large proportion of the global economy would, as a matter of course, begin to act more in line with the public interest.
Because these institutions would hold a stake in virtually every listed company, they would increasingly come to regard themselves as ‘shapers’ of the economy, rather than ‘beneficiaries’. They would then use this sense of self-awareness to encourage companies to become more sustainable. After all, their broad exposure to the global economy would mean they have a financial incentive to minimise economic damage caused by climate change as much as possible.
For a long time, this theory sounded plausible. But the complete lack of climate action by the world’s largest asset managers is now putting pressure on a key assumption: just how universal is their ownership, really?
Large listed companies are Western
Two recent studies show where theory clashes with practice. Firstly, it appears that the portfolios of the world’s largest asset managers are not nearly as globally diversified as the term universal ownership suggests. At both BlackRock and Vanguard, more than 90 per cent of assets under management are invested in companies based in wealthy countries. This is not surprising: these firms primarily track market-capitalisation-weighted indices, in which companies with a higher market value are given a greater weighting.
If we look at BlackRock’s thirty largest ETFs, it turns out that 85 per cent of the assets are invested in companies based in North America and Europe.
The main interests of these asset management giants therefore lie with large Western companies. As a result, their financial incentive to limit global climate damage is less strong than the theory of universal ownership suggests. It is precisely those economies hardest hit by climate change that are largely located in the Global South. Yet these economies are scarcely represented in the portfolios of the largest asset managers.
Part of the supply chain falls outside the portfolio
Even within individual production chains, there is little evidence of universal ownership. A good example is the palm oil chain. The major asset managers have barely invested in the upstream part of the chain: the smaller, lower-cost plantation companies directly involved in deforestation. Their investments are mainly downstream, in the large companies in the consumer goods sector, such as Nestlé and Unilever.
It is precisely the companies directly involved in deforestation that are most exposed to the resulting environmental damage. Because the major asset managers have invested very little in these plantation companies, they are therefore only marginally affected financially, through their portfolios, by the damage caused in this part of the supply chain. The researchers therefore conclude that the portfolios of the major asset managers are not significantly exposed to the climate damage associated with deforestation.
Universal ownership does not exist
Just as the myth that ‘the market solves everything’ has long been debunked, we would do well not to rely on the financial incentive that universal ownership might supposedly provide. Whilst the largest asset managers do hold stakes in thousands of companies, their portfolios are highly concentrated both geographically and within supply chains. As a result, it is precisely those parts of the economy hardest hit by environmental damage that fall outside their direct financial exposure.
Government intervention therefore remains crucial. This may be an unwelcome conclusion at a time when governments are acting slowly or actively undermining climate policy. It is precisely in such a situation that the temptation is great to hope that large asset managers can make up for the lack of government policy. But we should not expect too much from them: their financial incentive to limit global climate damage turns out, in practice, to be much less than theory suggests.