Will Systematic Stewardship Save the Planet?

The largest institutional investors have solidified their status as “universal owners,” holding almost eighty percent of the U.S. stock market. The growing influence of these investors over the companies they invest in has sparked optimism among scholars and activists that asset managers will use their clout to steer firms towards Environmental, Social, and Governance (ESG) objectives. But such optimism ma be misplaced. Focusing on carbon emission reduction, we argue that universal owners lack the necessary incentives and competence to pressure corporations to lower emissions. Universal owners market ESG investments with conflicting promises of “doing well while doing good.” The untenable promise that ESG investments will “do well,” or match the returns of non-ESG funds, prevents universal owners from effectively “doing good,” or meaningfully compelling corporations to reduce emissions. Furthermore, although climate change is a systematic risk, addressing it requires firm-specific engagement. Universal owners, however, lack the incentive to lead firm-specific campaigns. We further demonstrate that no other actors will emerge to provide the required firm-specific engagement. We argue that universal owners’ distorted incentives should concern even those who believe that climate stewardship is necessary, albeit imperfect, in light of government inaction. We explain why extensive disclosure requirement for ESG funds would not eliminate the distortions caused by their contradictory commitments and consider implications for the ESG movement. While universal owners are ill-equipped to direct corporations toward efficient climate solutions, these investors may nudge environmental legislation forward by ensuring that their portfolio companies’ lobbying efforts are aligned with their pledges to protect the environment.