Let Experts Lead Engagement

Jessye Waxman, Senior Campaign Strategist at Sierra Club, highlights the risks of dual-track approaches to climate-related stewardship.

In recent months, both BlackRock and State Street have announced that they are launching stewardship programmes for clients that want a more comprehensive approach to managing climate-related risks. While these are welcome steps in the right direction — given the recent backtracking among US asset managers on prior climate commitments — there are significant questions about how these companies can deliver risk mitigation results for their clients when stewardship teams are split.

Rather than have multiple stewardship teams meet with portfolio companies, as recently suggested by Karen Wong – Global Head of ESG and Sustainable Investing at State Street Global Advisors – the simpler and stronger approach would be for decarbonisation or sustainability stewardship teams to take the lead on engagements with high-emitting and high-impact companies that are pivotal to the net zero transition.

New offerings

Engagement of portfolio companies is a key feature of these new investment management offerings, in contrast to the extant voting choice programmes, which only cover proxy voting. Corporate engagement complements proxy voting, allowing shareholders the opportunity not only to gain a better understanding of a company’s risks and strategies, but also to provide input on important policies and practices. Many asset managers have argued that productive engagement can prevent the need to raise matters on the company’s proxy.

Engagement is also a useful tool to encourage companies toward stated investment objectives that serve the long-term interests of diversified shareholders. For institutional investor clients that understand the risks that climate change (and other systemic risks) pose to their portfolio returns, engagement is an invaluable tool to help mitigate climate-related risks. This is, presumably, what the new BlackRock and State Street stewardship programmes offer: the opportunity to have their voices heard at the companies whose business plans will make a meaningful difference to achieving global climate goals and the sustainable growth of the global economy.

A stewardship programme that offers comprehensive engagement on climate and sustainability issues to responsible investment clients is commendable, provided it is done effectively. However, the question remains whether the programmes now being developed will deliver success if they are bifurcating their engagements.

Wong recently stated that “State Street’s two stewardship teams will be involved in company meetings together.” But it’s hard to imagine how those engagements would go given the team’s different objectives. How is an issuer to weigh different perspectives backed by teams representing vastly unequal assets under management?

To put this in context, BlackRock’s decarbonisation stewardship track launched with US$150 billion in assets under management, less than 2% of its total AUM. To have both stewardship teams meet with the same issuer, at best, does a disservice to more climate-conscious clients and, at worst, greenwashes the product altogether. A dual engagement track would likely fail to deliver on the client objectives represented in these new stewardship plans.

Mitigating risks at source

Responsible risk management requires mitigating risks at their source. For climate-related financial risks, decarbonisation and real-world emissions reductions are essential. Such outcomes help high-emitting companies to avoid stranded assets and greater transition risks, and help reduce emissions that will lead to enormous sustained losses to the global economy and investment returns (without action, research from BlackRock estimates a 25% loss in global economy output in the next two decades).

Minimising climate-induced market losses is especially important for long-term, diversified investors, particularly those using index investing strategies that don’t adequately account for climate risks. This issue is very relevant and important for clients of State Street, the vast majority of which are passively managed index funds.

Like all asset managers, State Street and BlackRock can and should work toward more fully integrating climate risk mitigation measures into their standard investment management practices. But, for the time being, they should at least structure their most serious offerings on climate stewardship in a way that doesn’t ultimately risk greenwashing, and allow their relevant experts to lead engagement with the companies that are most needed to deliver climate results.

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