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ESG

US Asset Managers Bound to Resume Climate Focus

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Seeing the largest US asset managers starting to pull back from supporting climate-related shareholder proposals is "disappointing," argues Adam Kanzer, head of stewardship for the Americas at BNP Paribas Asset Management (AM). They had started to support such proposals a year or two ago, which was "very new" and "very important." But BlackRock announced earlier this year it would back fewer climate resolutions than last year. Yet Kanzer, based at the French asset manager's New York office, remains optimistic. He only sees these changes as a "temporary pullback" caused by factors such as the energy crisis and US politics.

He does not believe BlackRock will "completely back down" from the letters CEO Larry Fink wrote to investee companies in the last few years. Those "have drawn a very clear line in the sand" that the climate crisis is critical and climate action is something BlackRock would be pushing on. But large US asset managers "have never been huge fans of shareholder proposals" of any kind, and they are reluctant to approve anything they see as prescriptive — despite the fact that shareholder resolutions are nonbinding in most cases.

It is true that many proposals are "definitely getting more detailed" and sometimes "a little bit more aggressive," Kanzer tells Energy Intelligence. But "the problem, when it comes to climate, is that we do know what needs to be done, and we need to be pretty specific about it." This is creating tensions within investors and could partly explain recent hesitations. Large US firms "like a little bit more broad, ask for reports." But there has also been growing frustration over time with announcements and reports which are too vague. "Very often, when you give companies the leeway to do a report on something, you don't get what you want, you get something very generic, very general."

Divestment vs. Engagement

This could justify divestment, activists say. Kanzer thinks the threat of fossil fuel divestment has an impact and that companies are "concerned" about it. "I don't think they expect their major investors to suddenly walk away anytime soon, but it's not good for them, it's not good for reputation." Activists want to put the issue "on the table, as a question to debate, whether we can actually have broadly diversified portfolios without fossil fuels." It is indeed possible, says Kanzer, noting that fossil fuels have become a "smaller and smaller portion" of the market while low-carbon or fossil-free indexes allow for gaining exposure to a broad section of it without investing in certain industries.

Engagement is generally more effective. However, "it's not a black or white kind of debate," he insists. "For an individual company, once you sell the stock, you no longer have a seat at the table and you no longer have an opportunity to influence them." But "if the problem with the company is the core business model and you don't think it can be changed, there is a strong case for divestment." This is the logic behind some of the largest Dutch pension funds' recent decision to divest from fossil fuels, for example.

"The other thing that is important to keep in mind in the US is that there's a significant political backlash on ESG" [environmental, social and governance] in general and climate in particular. "Many in the US want to cast ESG as a political debate" and all investors, including BNP Paribas AM, are "feeling the heat on that." But "it's not a political debate, it's an effort to address a legitimate crisis."

Looking Ahead

This makes Kanzer confident that ESG and climate action will keep moving forward. "Investors are going to continue to hammer on that because they see it as a legitimate risk, and a risk that's only going to get worse." While the current political pushback is worrying, "I don't think there's a turning back, it's too late."

Critics also emphasize that ESG funds have generated poor returns in recent months. But "every time there's a conflict certain stocks do well, certain stocks don't do well, and sustainable strategies historically have not done as well during wartime as others," Kanzer emphasizes. This is because ESG funds tend to not be heavily invested in those industries that do well during crises, such as energy and defense. "But it's temporary and I think the longer-term threat is climate change and energy independence — that's not going away."

Topics:
ESG, Equity and Debt Markets
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