World’s Big Three asset managers helping to curb carbon footprint

In evidence of the power of corporate engagement to combat climate change, new IESE research shows that the world’s largest asset managers are having a positive impact in reducing the CO2 emissions of their portfolio companies.

The research by a team of IESE professors, which will be published in the Journal of Financial Economics, sheds light for the first time on the role BlackRock, Vanguard and State Street Global Advisors (the so-called “Big Three” largest asset managers) are playing in reducing carbon emissions around the world.

The research is particularly relevant today because while asset management firms have publicly committed to help tackle climate change, until now there has been scant data on whether these corporate efforts have any effect. This research changes that, by examining: a) whether the Big Three are engaging with their portfolio companies on environmental concerns; and b) whether these engagements are actually effective in reducing carbon emissions at those companies.

Impact from large firms with large emissions

The paper is coauthored by IESE professors Jose Azar, Miguel Duro, Igor Kadach and Gaizka Ormazabal. The professors analyzed two novel datasets: carbon emissions data for a wide cross section of firms between 2005 to 2018, complemented with data on Big Three engagements with their portfolio companies.

The paper finds that:

• The Big Three focus their engagement efforts on large firms with high CO2 emissions and in which these investors hold a significant stake.
• Consistent with this engagement influence being effective, the study shows a strong and robust association between Big Three ownership and a subsequent drop in carbon emissions.
• This pattern becomes stronger in the later years of the sample period, when the three institutions have publicly committed to tackling environmental issues.

Unlike previous studies that look at institutional investors in general, the authors focused only on the Big Three due to their unique characteristics and position in the global economy. Together, the Big Three manage $16 trillion and control approximately 20% of the shares of the S&P 500. In addition, the authors focus on carbon emissions as opposed to environmental scores. According to them, this is important, “as changes to a firm’s environmental score could reflect ‘greenwashing’ rather than actual environmental improvements.”

Economic incentives to reduce greenhouse gases

The paper also shows how, beyond altruistic reasons, there could be important economic incentives for the Big Three to engage with firms on environmental issues. One reason could be a belief that reducing CO2 emissions increases the value of their portfolio (reflecting a growing awareness of the financial implications of climate risk); another is that pushing firms to reduce carbon emissions can help attract or retain clients sensitive towards environmental concerns.

According to the authors, “one of the main conclusions of our research is that the Big Three, contrary to what many believe, have both the incentives and the means to get CO2 emissions reduced. And our empirical evidence suggests that, through engagement with their portfolio companies, they have already been playing a positive role in this important dimension of corporate governance.”

Still, they caution that the magnitude of these carbon reductions may not be enough on their own to tackle the climate challenge we face. As such, the authors stress that the research points to how the Big Three could contribute to reducing world carbon emissions, alongside other approaches already underway or under study, such as carbon pricing.

 “Climate change is a major global problem which requires coordinated global action” say the authors. “That’s where the unique size and reach of the Big Three may help. While the Big Three’s importance to the global economy is controversial, their almost supranational status means that, when they engage with companies on environmental issues, they can avoid the global coordination issues that hinder the quick implementation of other full-scale regulatory solutions. In doing so, our research suggests that they can offer a complementary way of addressing climate change, alongside other efforts.”

The paper “The Big Three and Corporate Carbon Emissions Around the World” will be published in the Journal of Financial Economics. You can download the paper here.