Over the past few months, a culture war has engulfed the investment community. As part of a growing backlash against environmental, social and governance (ESG) investing – which takes into account the environmental or social externalities of a business – a group of anti-ESG proponents, mainly from the US and with ties to the Republican Party, have doubled down on the idea that asset managers’ sole mandate should be to generate the greatest returns for their clients and not be led by ethical considerations.
However others – including the think tank Carbon Tracker, which recently published a report revealing that the world’s largest 90 asset managers currently hold $376bn (£300bn) of investments in 15 oil and gas majors – argue that investors’ inability to transition their portfolios away from fossil fuels amounts to a “mainstream financial risk”.
Carbon Tracker’s data shows that of the top 40 asset managers exposed to 15 international oil majors, just under half (19) have increased their stake in these firms over the past year, with 17 retaining the same position. (The oil majors were all assessed by the think tank as “un-aligned” with the target temperature of 1.5˚C over pre-industrial levels, as aspired to by the Paris Agreement on climate.)
US asset managers such as BlackRock, Capital Group and Fidelity are among those highlighted as having “doubled down on oil and gas”; their combined position of $192bn (£154bn) in 2022 represents a 64 per cent increase on 2021. The UK firms Legal & General, Schroders and Abrdn are also shown to have increased their exposure to those 15 oil companies, with a much smaller combined stake of $22bn (£18bn) in 2022.
While rising commodity prices in light of Russia’s war on Ukraine will have played a part in inflating the monetary value of these investments, Carbon Tracker’s figures show that a plurality of investors have increased their stake as a proportion of the companies’ outstanding shares, though usually by less than one percentage point.
Notably, just under half of the investors with the greatest exposure to oil and gas are signatories of the Net Zero Asset Managers Initiative, part of the wider Glasgow Financial Alliance for Net Zero (Gfanz), established by ex-governor or the Bank of England Mark Carney in the run-up to Cop26.
The report’s author Maeve O’Connor said that members of this coalition are risking “their reputation among climate-conscious asset-owners” by investing in companies that are not aligned with this goal.
Many of the oil and gas companies cited in her report, including British oil majors BP and Shell, have committed to reaching net zero emissions by 2050. Carbon Tracker’s assessment looks “beyond” these stated targets, focusing on their continued investment in new fossil fuel projects, and failure to make significant investments in low-carbon alternatives.
The think tank argues that by continuing to invest in these oil majors, asset managers risk falling behind the wider economy, which is rapidly shifting towards renewable energy.
As oil and gas demand declines, investors exposed to devalued fossil fuel assets could be exposed to devastating financial losses, according to analysis from the climate group Sunrise Project.
Carbon Tracker’s report also reveals that more than 160 funds marketed with the labels such as “ESG”, “sustainable” or “climate” hold a combined $4.6bn (£3.7bn) across the 15 oil and gas firms. The think tank claims this risks “misleading” clients, exposing them to risk of litigation. Last May, police officers raided the offices of the German asset manager DWS offices over accusations of greenwashing.
“It’s really important that regulators use the appropriate rankings and metric” for ESG funds, said Mike Coffin, Carbon Tracker’s head of oil, gas and mining. He added that they must also “hold companies to account when there's a gap between their positioning on climate and what they're doing to in practice”.
Regulators in the US, EU and UK are currently in the process of finalising guidance on sustainable fund definitions.
A spokesperson from BlackRock told New Statesman Spotlight that they “clearly disclose the objectives of each fund”, emphasising that it does “not make commitments that constrain our ability to invest our clients’ assets consistent with their objectives, nor do we move clients’ assets to reach certain targets, unless they explicitly ask us to do so”.
Under the Net Zero Asset Managers Initiative, members must work in partnership with clients on decarbonisation goals, consistent with reaching net zero emissions by 2050 across all assets under management, though investors are not explicitly required to limit fossil fuel investment. This is in part due to concerns around antitrust laws, with anti-ESG proponents claiming collaboration on shared climate goals could reduce competition and distort prices.
This has emerged as a contentious subject over the past few months and is thought to be behind the recent decision by a handful of members to quit the group, including the Vanguard Group in the US and Munich Re in the EU.
There is no record of anyone successfully suing investors for their climate actions on antitrust grounds to date, but the threat of antitrust allegations forced the Race to Zero campaign, which provides accreditation to Gfanz, to water down its rules on members’ coal commitments last year.
Many asset managers like BlackRock, which offer predominantly passively-managed index funds, claim that their hands are tied when it comes to divesting. However, they are able to effectively exercise their influence over these companies’ climate plans using their proxy voting powers.
An Abrdn spokesperson told Spotlight that “in cases where we do not see appropriate progress [towards net zero], we may use tools such as our voting powers to drive change”.
A spokesperson from Schroders said it is proud of its approach of “successfully supporting emissions reductions – particularly in challenged industries”, noting that the alternative of “avoiding or divesting from those companies would be akin to crossing the street and ignoring the problem and the opportunities of investing in the transition to net zero”.
A January 2023 analysis by the non-profit ShareAction shows, however, that there is little evidence that members of the Net Zero Asset Managers Initiative vote significantly more in favour of climate resolutions than non-members, despite the group requiring members to engage proactively with their portfolio companies’ transition plans.
[See also: Rishi Sunak pledge tracker]