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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
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