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Voluntary action isn’t enough — sustainable finance needs better climate policy

As ESG priorities shift, it’s time for investors and asset managers to rethink their industry association relationships.

Two binders on a desk

Image via Shutterstock/Zerbor

InfluenceMap, a think tank that maintains a database following large companies and investors’ lobbying activity related to climate policy, last week shared its assessment of 45 of the world’s largest asset managers.

Their hold-you-back-a-grade performance made plenty of headlines, with the analysis focused on the glaring lack of alignment between equity portfolios and the goals of the Paris Agreement, along with weakening support for ESG resolutions. 

The report’s assessment of asset managers’ policy influence was also poor, with the two leading American industry associations, Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), each receiving a D-minus.

Ouch. But this dismal outcome provides an opportunity for stakeholders — fund customers, civil society, employees and others — to encourage asset managers to use a wider breadth of tools to orient capital markets toward sustainability during what remains of this decisive (and now hottest) decade. 

It’s the policy, stupid

Investors treading the path to net zero — over $100 trillion worth represented via the Glasgow Financial Alliance for Net Zero (GFANZ) — have been clear about two critical needs for their success: consistent and comparable sustainability information; and proper policy. 

As GFANZ has noted, the massive investor coalition can, with ambitious action "guided by best-practice tools and methodologies and supported by clear policy signals from governments … help enable an orderly, real economy transition to net zero."

Investors have been demanding sustainability information, and they’re getting it. But, as InfluenceMap found of U.S.-based asset managers in particular, none "stands out as a positive advocate on sustainable finance policy," and their "asset management associations, which represent the sector through their policy engagement activities, continue to oppose key sustainable finance policy efforts."

SIFMA, for example, opposed California’s SB 260, a bill that subsequently didn’t pass but would have required Scope 1, 2 and 3 disclosure from companies operating in the state and generating over $1 billion in gross annual revenue. 

ICI, in an essay late last year from its general counsel, opposed the Security and Exchange Commission’s proposed "Names Rule" update. The change, which remains a proposal, seeks to "enhance and modernize the Investment Company Act Names Rule to address changes in the fund industry" — such as the $35 trillion that flooded into sustainability funds — and “address fund names that are likely to mislead investors about a fund’s investments and risks."

Engagement isn’t the only answer

As pressure has mounted for asset managers to address their climate impact in line with the Paris Agreement, many have touted stewardship and engagement as their sharpest tools to affect change. 

When wielded well in combination with clear engagement escalation policies, stewardship can indeed be a powerful lever in addressing real economy sustainability. This process pushed the world's largest fast food chain, McDonald’s, to perform an employee racial equity audit. It was also effective in signaling majority investor concern on lobbying disclosure and oversight at one of the largest culturally influential media firms, Netflix. 

But 2023 saw a major global decline in support for ESG proposals, with only 2.4 percent of environmental- and social-related shareholder proposals winning a majority, down from over 10 percent in 2022. Climate change proposals — this year’s largest category — grew in volume but lost overall support, down to a 22 percent average from over 50 percent in 2021.

Should those who seek to push and hold investors accountable for how their portfolios align with climate action start shifting more attention to how asset managers and their industry associations are pushing for, and not thwarting, government policy action? 

How often do we hear discussion on the sustainable finance circuit about the ICI, the leading association representing investment funds, playing an active role in slowing the SEC’s efforts? I’d say not enough, if at all.

Asset managers that find themselves between a rock and a hard place — balancing demands from stakeholders who call for increased climate action with those who insist they cease — are right to say that while individuals can vote with dollars, asset managers can’t vote with clients’ dollars. 

That said, they can influence the third-party groups that have been lobbying against their own purported demands for climate policy in Washington.

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