Issue #13                                                                                              January 2020
Are the Big Three’s corporate governance activities contributing to reducing carbon emissions?
by Professor José Azar

Large asset managers have faced increasing popular demand to pressure their portfolio companies to reduce their greenhouse gas (GHG) emissions. Last month, former US vice-president Al Gore stated that “the large passive managers have a real difficult decision to make. Do they want to continue to finance the destruction of human civilisation, or not? Their model makes it difficult for them to execute some of the strategies that active managers have available to them, I understand that. They are trying, they are not succeeding yet.”
On the other hand, the Big Three asset managers (i.e., BlackRock, Vanguard, and State Street) have expressed their awareness of the risks that climate change creates for investors, and their willingness to act accordingly. For example, BlackRock’s Vice-Chairman Phillip Hildebrand, and Global Head of Impact Investing Deborah Winshell recently stated in a jointly written report that “[i]nvestors can no longer ignore climate change. Some may question the science behind it, but all are faced with a swelling tide of climate-related regulations and technological disruption.”
In a new joint study with IESE professors Miguel Duro, Igor Kadach, and Gaizka Ormazabal, we examined the evidence on change in ownership of companies around the world by the Big Three, and its effect on GHG emissions by portfolio companies. Our analysis indicates that an increase in ownership by the Big Three is associated with a statistically and economically significant reduction in emissions.
This may seem puzzling, given that the Big Three have been criticized for tending to vote against climate-related shareholder proposals. However, the Big Three have stated that direct engagement with management is their preferred mechanism for pushing companies to reduce emissions. And we do in fact find evidence that the Big Three’s engagement activities are responsive to emissions by companies, which suggests that emissions are an important factor that leads to more engagement.
The motivation for the Big Three’s engagement on climate issues goes beyond possible altruistic reasons. An important part of the motivation is that companies with high GHG emissions face increasing climate risks, especially as countries ramp up climate regulations.
Solving the externality problem generated by GHG emissions and climate change is complicated due to coordination problems across countries. In other words, we face a global-scale “tragedy of the commons”. When the necessary global political leadership to solve this problem is scarce, the role for socially responsible corporate governance to reduce emissions becomes more salient. Contrary to what many believe, the Big Three have both the incentives and the means to reduce carbon emissions, and the evidence suggests that, through their engagement with portfolio companies, they have already been playing a positive role in this important dimension of corporate governance.

José Azar
Professor of Economics
IESE Center for Corporate Governance
IESE CCG-ECGI Corporate Governance Conference

The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE's Barcelona Campus on October 25-26, 2019. The high-level event gathered the leading scholars in the field, CEOs and top executives, chairs of boards, investors, regulators, and multilateral organizations. Check out the highlights of the conference in this summary video:


Corporate Governance News

Causes and consequences of ownership concentration
The decline of public equity markets across developed economies is one of the factors that explains ownership concentration, which raises a host of new concerns such as the erosion of competition… read more
What 600 institutional investors have to say about ESG
In an interview with Axios, American giant public relations and marketing consultancy firm Edelman discusses some of the findings from a survey answered by institutional investors regarding ESG factors… read more
Bank of England to perform “climate stress tests”
According to sources consulted by Axios, the Bank of England will test the resilience of the banking system in the UK to financial risks stemming from global warming. Specific details for the test will be provided in April… read more
The EU, a net-zero emitter by 2050
The European Commission prepares an ambitious “European Green Deal” to curve greenhouse gas emissions in the EU, the third largest emitter in the world. The plan considers crafting a new climate law within the next 100 days… read more
Amazon and big tech companies subject to climate pressure
According to Axios, climate activists are focusing on big tech companies for their heavy reliance on fossil fuels in their operations… read more
The most comprehensive consumer privacy protection law in US history
The California Consumer Privacy Act (CCPA), which took effect on January 1, 2020, gives consumers more control over their data. CCPA has been called “GDPR-lite” for its resemblance to the EU’s General Data Protection Regulation… read more
Disclosure of CEO pay ratio for FTSE companies enters into effect
This year, publicly listed firms with more than 250 UK employees must disclose the ratio between CEO pay and that of their average workers, and explain the reasons for their executive pay ratios… read more

In Case You're Interested...

Principles for Purposeful Business

The Future of the Corporation is one of the largest and most ambitious programs ever conducted by the British Academy, the UK’s national academy for the humanities and social sciences. It delves into the heart of the future of capitalism, the future of humanity and the future of our planet. The academy has recently released the 2019 report, which addresses key issues of the program agenda… read more

2019 Edelman Trust Barometer Special Report: Institutional Investors 

This research surveyed 607 institutional investors across six countries (US, Canada, UK, Germany, the Netherlands, and Japan), representing investment firms that collectively manage over $9 trillion in assets. Edelman’s report reveals that investors believe companies must address the needs of a wide range of stakeholders, not just shareholders, and must implement effective environmental, social-impact and governance (ESG) practices to win trust across all these audiences… read more

Ownership, Agency and Trusteeship

In this paper, Professor Colin Mayer, Saïd Business School, remarks that capitalism should be redefined as a system where corporations produce profitable solutions to problems of people and the planet where ownership is not only a bundle of rights but also of responsibilities towards the corporation’s purpose… read more / read summary

Owners of the World’s Listed Companies

Informed policy making with respect to corporate governance policies and regulations requires reliable and up-to-date information about corporate ownership structures. The distribution of ownership among different categories of owners is of particular interest, as is the ownership concentration in individual companies. This report provides a detailed picture of the ownership structure of listed companies worldwide with a combined market capitalization of $75 trillion… read more

Top Challenges Facing Boards in 2020

Host TK Kerstetter and PwC’s Paula Loop share their predictions for the coming year. True to form, Kerstetter and Loop discuss and debate the top five items they believe will be on corporate board agendas: What are the top strategic or governance issues facing corporate boards in 2020?… watch here

PwC’s 2019 Annual Corporate Directors Survey

734 directors from US publicly listed companies participated in the survey offering insight on different aspects related to board refreshment, board practices, board diversity, ESG factors, culture and talent management… read more

IESE's Recent Research on Corporate Governance 

“Political Connections and the Informativeness of Insider Trades”
Journal article (Forthcoming)

Journal: Journal of Finance
Authors: Jagolinzer, Alan D.; Larcker, David F.; Ormazabal, Gaizka; and Taylor, Daniel J.
Read summary

“Beyond the Target: M&A Decisions and Rival Ownership”
Working paper (December 2019)

Authors: Antón, Miguel; Azar, José; Gine, Mireia; and Lin, Luca Xianran
Read summary

Upcoming Research Seminars

“Corporate Governance and Social Impact of Non‐Profits: Evidence from a Randomized Program in Healthcare in the Democratic Republic of Congo”

Prof. Caroline Flammer, Boston University
January 14, 2020 – 12:30-14:00 pm
Barcelona: Q-101 & Madrid: Room 127

Distinguished research seminar

Prof. Alex Edmans, London Business School
March 23, 2020 – 12:30 - 14:00 pm
Barcelona: Q-302 & Madrid: Room 131

Upcoming Programs

Executive Program: “Consejos de administración responsables”

Date: January 28-29, 2020
Location: IESE, Madrid Campus

Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 18-21, 2020
Location: IESE, Barcelona Campus

Visit the program website
A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo