At a time of climate emergency, most of the practices of asset managers are still not aligned with climate science. Yet, their main clients, asset owners, will be hit hard by the climate crisis. Asset owners are increasingly realising that they will have to act urgently to mitigate the climate risks that threaten their portfolios and the global economy in the long term. Some of them are already stand out through their good practices, for example by refusing to appoint managers that don’t meet climate-related criteria. Reclaim Finance calls on all asset owners to take inspiration from these examples.
While the anti-ESG movement is encouraging managers to drop their climate commitments, [1] asset owners have a key role to play. They can push for the acknowledgement of systemic climate risks by asset managers, and influence managers to improve their climate practices. Reclaim Finance has analysed how asset owners engage asset managers, and offers an overview of best practices that can be replicated.
Assessing asset managers based on climate criteria
Often, climate-conscious asset owners take climate criteria into account when selecting and monitoring managers. Criteria may be included as early as the call for tenders process, or as part of an internal rating of managers, sometimes with the sending out of a questionnaire. Some asset owners rely on external analyses to develop their internal rating. Reclaim Finance’s assessment of the climate practices of asset managers, which analyses support for fossil fuel expansion of large asset managers, is one of the tools at their disposal.
The choice of criteria sets the level of climate ambition. For example, French insurers Abeille Assurances and Macif expect their managers to adopt engagement and/or exclusion measures for companies involved in the development of new fossil fuel production projects, and will decide in 2025 whether or not to continue their relationship with those who don’t comply. [2] By going beyond a mere mention that they have ‘integrated ESG criteria’ into their selection process, these insurers are lending credibility to their engagement, even if they leave the door open to continuing the relationship with managers that don’t comply with their expectations. [3]
It is important to formalise these climatic requirements in the legal documents of the mandate to ensure that they are systematically complied with, and to report regularly on the progress of the dialogue with asset managers on these expectations.
Publishing clear expectations and engaging in an active dialogue
During the mandate, asset owners can use their position as clients to engage their managers.
To give credibility to this dialogue, it is essential that asset owners publish their expectations for asset managers. For example, as part of the COP 26 Asset Owner Declaration, [4] a group of UK universities and foundations published a letter calling on asset managers to halt new primary market investments linked to fossil fuel expansion and to vote against the re-election of directors of fossil fuel developers. Some asset owners specify their expectations in their policies or in dedicated statements, such as Alecta. [5] Others send letters to their managers, like the comptroller of New York City pension funds [6], Storebrand [7] or Phoenix [8].
More recently, a group of 26 UK asset owners, representing over $1.5 trillion in investments, issued a statement calling on their asset managers to develop a robust engagement strategy to address climate risks [9]. In particular, the group highlighted the need for clear timeframes for escalation and the use of under-utilised routine votes, such as director re-election or executive remuneration.
Once the expectations have been defined, asset owners can start a dialogue with their managers. It often takes the form of private bilateral meetings, but the influence is multiplied when it is exercised publicly and collectively. For example, several asset owners reacted publicly to the withdrawal of managers from the Climate Action 100+ initiative. [10] Faced with anti-ESG attacks by some US Republican states, others, such as Danica Pension, [11] have publicly reaffirmed the need to consider climate risks.
However, in the absence of sanctions if managers fail to comply with the expectations, dialogue with them is likely to be fruitless.
Refusing to entrust new assets to managers not aligned with climate science
Only a few asset owners have planned sanctions for managers who don’t comply with some climate requirements. For example, the Dutch pension fund PME announced that it was considering ending its business relationship with Blackrock because of its departure from the NZAM initiative. [12] The Swedish pension fund AP7 made a similar announcement, indicating that it might not renew its mandates with Blackrock. [13]
Once the decision has been taken to stop entrusting investments to a manager, another good practice is to make a public announcement and justify the decision on climate grounds. This is what the British pension fund The People’s Pension did when it pulled £28 billion from State Street because of its retreat from ESG, [14] as did the Danish pension fund Akademiker Pension which pulled a mandate from the same manager based on an internal ESG assessment. [15]
Even fewer asset owners have defined a precise schedule for engaging their managers. Following an announcement in 2022, the French insurer MAIF decided in early 2024 not to entrust any new investments to managers who had not defined a strategy for phasing out thermal coal by 2030. [15] Although rare, this type of measure is one of the best practices on the market and should be generalised.
Worsening climate change will affect the global economy, and therefore the investments of asset owners. To fulfil their duty to act in the interests of their current clients and future generations, asset owners must use all the levers at their disposal, including influencing asset managers. Their priority demands must focus on ending support for fossil fuel expansion, which is a red line in a 1.5°C trajectory.
