ESG ‘Engagement’ in Crosshairs of $10 Trillion Asset Owner Group

(Bloomberg) -- An influential coalition of asset owners overseeing a combined $10 trillion is calling for adjustments to a strategy known as ESG engagement in an effort to reduce carbon emissions more effectively.

The Net-Zero Asset Owner Alliance, which counts Aviva Plc, California Public Employees' Retirement System and Swiss Re AG among its members, said Thursday that investors should move beyond simply engaging with companies that pollute and instead use their influence to target broader structural hurdles to decarbonization.

The report exposes the limits of a strategy that's been widely embraced by asset managers pursuing environmental, social and governance goals. As opposed to avoiding bad ESG companies, investors often engage with them through dialogue and shareholder votes. The approach hasn't helped lower carbon emissions as they continue to soar. Scientists now estimate that the Earth's temperature is on track to rise double the critical threshold of 1.5 degrees Celsius.

Engagement strategies need to move beyond portfolio companies and instead target whole sectors and public policy, the Net-Zero alliance said. It also called for more engagement between investors and the asset managers mandated to handle their wealth.

On the plus side, investor engagement has contributed to “raising climate ambitions in the business community,” according to the report, which was written by Jake Barnett of Wespath Benefits & Investments and Patrick Peura of Allianz Investment Management SE. The strategy is “increasingly less effective” when investors target change that's “impractical, uneconomic or uncertain” due to the policy or economic environment.

Asset managers could do a better job of allocating resources intelligently, Peura said in an interview.

“Not every one of the 500 largest asset mangers needs board time with the same company to tell them the same thing on how they need to decarbonize,” Peura said. “At some point, this overcrowding will result in major diminishing returns that will not add to the solution.”

Systematic stewardship, as envisioned by Peura and Barnett, would see asset owners convene multiple stakeholders across industries and supply chains and have them work together to cut emissions. It also would entail calling on policymakers and civil society to ensure laws support the goal of limiting the temperature rise to 1.5 degrees, while requiring asset managers to step up their efforts.

If asset managers are unwilling to use the influence they have, then asset owners “should communicate that their best interests aren't being authentically represented, including by changing mandates if necessary,” the authors wrote.

“We need a more nuanced and practical understanding of how interactions between stakeholders work and how we can play the most proactive role to move the whole system to net zero,” Barnett said.