Engage or withdraw? What do the largest fund managers do?

Some of the largest fund managers in the world have been criticized for not divesting their portfolios from companies with high greenhouse gas emissions. But what do they really do across their firm? Jonas Zink looked at the five largest active managers in the US and compared their practices with regards to climate change with the average fund.

To do this, he looked at funds by the five largest active managers in the US (American Funds, Fidelity, Vanguard, T. Rowe Price, and JP Morgan). He explicitly excluded index funds where active engagement and divestment practices are much harder to do, and he only looked at US funds investing at least 80% of their assets in the US to make sure different practices across regions don’t spoil the results. In total, the funds of these five companies account for c.60% of the actively managed money in the US.

The first result may sound negative, because the results indicate that compared to the average fund in the US, these five large companies are less likely to exit companies with high greenhouse gas footprints and are less likely to vote in favour of investor proposals to reduce greenhouse gas emissions and other environmental proposals. But that is not a bad thing in my view. As I state time and time again, I reject divestment campaigns and I do not think that investors should shun difficult investments in companies with high climate risks or high greenhouse gas emissions. Instead, they should become stewards, pushing these companies towards a more sustainable business model.

And once you look into the voting behaviour of these five large asset managers that seems to be what they are doing. Zink split the individual funds of these asset managers into five groups from funds with the “greenest portfolios” that have reduced their carbon footprint the most, to funds with the “brownest portfolios” that have the highest greenhouse gas footprint. And he found a U-shaped relationship between the greenhouse gas footprint of the fund portfolio and the engagement of the fund manager.

Green funds on average are more likely to vote in favour of environmental proposals at AGMs than the average fund. These are the fund managers that run sustainable funds and they are used to actively engaging with company management on all kinds of ESG issues. But interestingly, the brown funds with portfolios full of companies that emit a lot of greenhouse gases also vote more often in favour of environmental proposals at AGMs. In fact, these fund managers vote more in favour of environmental measures at AGMs than the managers of the greenest funds. This suggests that fund managers who own portfolios with companies that emit a lot of greenhouse gases are more actively engaging on matters that are likely to bring down greenhouse gas emissions in the future.

And if you ask me, that is exactly what fund managers should do.