F Scott Fitzgerald famously wrote that “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function”.

Editor’s Letter - “Stewardship is undermined if shareholder voting is seen to achieve very little in many cases”

The operative part of this aphorism is the “ability to function”– being able to reconcile contradictions within a rational framework of thought.

As the debate on ESG becomes increasingly polarised, can asset managers credibly serve clients with opposing views on portfolio decarbonisation or net-zero targets?

Asset management CEOs certainly tell us they can. The basis on which they would win business from, say a public pension plan in Texas, while also operating credibly in Sweden, would be by foregrounding their role as agents serving each institutional investor according to their requirements. Functionally this is perfectly true.

Most asset managers would be able to honestly state as part of any RFP from, say, the attorney general’s office in an anti-ESG US ‘Red State’, that they are not activist investors and do not themselves boycott any sectors. 

Likewise, they could also tell the board of a Scandinavian institutional investor the same, but that they have impeccable ESG credentials, for instance, through research capabilities, stewardship and a track record in such strategies.

This is all very well, but it does somewhat contradict a narrative of the late 2010s and early 2020s whereby asset management CEOs – perhaps most famously by BlackRock’s Larry Fink – emphasised their ‘agency’, or influence, as stewards of capital and their ability to effect change through not just the direction of capital but by mere pronouncement – for example in the form of Fink’s annual CEO letter.

The combination of two factors – greater regulatory scrutiny of asset managers’ ‘greenwashing’ claims and an anti-ESG backlash mainly in the US (and some parts of the EU) – have changed the narrative completely. 

The pronouncements from on high, particularly on social issues, have been toned down and there is also more emphasis on real-world transition than on client portfolio transition. 

Many asset management CEOs emphasise that beyond the rhetoric on ESG, most clients can coalesce around significant common ground, such as the need to decarbonise, and the need to be mindful of downside risks to portfolios while being aware of the significant investment opportunities that arise through the greening of the economy.

Some asset managers have modified their engagement and stewardship policies, withdrawing support for activist proxy resolutions to sidestep suspicions that they have been trying to effect social change by stealth at the AGM ballot box. 

Fearing legal repercussions and the perception of anti-competitive practices, some US managers have withdrawn from global initiatives like Climate Action 100+.

It is welcome that asset managers have toned down their less credible rhetoric on ESG and that regulators have stepped up scrutiny of greenwashing. Perhaps it is welcome that some managers have woken up to the fact that support for initiatives like CA100+ needs to be more than skin deep.

But there is also a significant emerging fault line as US managers withdraw from global investor alliances at the same time as several European institutional investors are divesting from the oil and gas sector and withdrawing their shareholder stewardship.

Of course, it is right that investors should make the decisions they see fit – whether that be investment, divestment, engagement or activism.

But do some pension funds risk holding contradictory ideas at the same time?

Many pension investors’ decision to withdraw from oil and gas is based on the sector’s lack of credible transition plans. By extension, an implication must be that stewardship has not achieved the desired aims.

Looking ahead to this year’s corporate AGM season, can investors still lay claim to large-scale change through voting power?

Stewardship is a core component of many asset managers’ ESG propositions, particularly for passive managers, but this proposition is undermined if shareholder voting is seen to achieve very little in many cases.

And if a significant number of institutional investors have woken up to the limitations of stewardship, what does this say about the strategies of those pension funds that have already divested from oil in gas? 

Some funds say they now want to focus on engaging with large energy users. Perhaps they will want to focus attention on hard-to-decarbonise brown sectors like cement and steel.

Will they simply end up frustrated and disappointed in a few years’ time if their aims are not met? For some large pension funds, it might be time to reconcile contradictions in their thinking.

Liam Kennedy, Editor