Will the power wielded by large investors have a negative effect on sustainability?

Published on: 30 June 2022

Current issues in the field of economics, (responsible) investing, pension and income: every week an expert from APG gives a clear answer to the question of the week. This time: Head of Responsible Investment Capital Markets & RI Communications Anna Pot on whether the increasing size and power of large asset managers is having a negative effect on sustainability.


"The shareholder landscape is changing slowly, but the changes are revolutionary," wrote Volkskrant columnist Peter de Waard a month ago. "Shares are ending up in the hands of a smaller and smaller group of investors who are further away from the companies in which they put their money." In the past, shares were mainly owned by wealthy families, who voted annually at the shareholders' meeting, writes De Waard. From the 1970s onwards, new types of major shareholder emerged, such as banks, insurers and later also pension funds. Nowadays these parties partly outsource their investments to large asset managers such as BlackRock, State Street and Vanguard, companies that focus on index investing, he says. As a result, they do not select shares themselves but instead follow a stock market index, and are therefore less involved as a shareholder. Doesn't this form of passive investing come at the expense of sustainability?

 

Responsible investing
According to Pot, this doesn't necessarily have to be the case. "These large parties are increasingly starting to invest sustainably. They are also investing more and more in establishing their own teams to focus specifically on the responsible investing criteria of their investments. When making investments for their clients, such as pension funds, they increasingly take sustainability considerations into account. There is a positive trend with large asset managers helping to ensure that an increasingly large pool of assets worldwide is being invested sustainably."

 

APG recently launched the iSTOXX APG World Responsible Investment Index, which is managed by BlackRock. “This index product is not actively managed in terms of risk and return, which keeps costs low. However, it is actively managed in terms of sustainability by adding different filters, depending on the client's wishes. These filters can be the exclusion of certain products, investing only in ESG leaders, reducing the carbon footprint, and including Sustainable Development Investments. The market should therefore not classify this type of investment as a traditional index product. Products like these actually form a whole new category. You could call them 'responsible index products'."

We must remain vigilant to ensure that index investing does not result in a watered-down version of sustainable investing

Trend
According to Pot, there are several reasons why the largest asset managers are also focusing more on sustainability. "First of all, customers are requesting it. More and more institutional investors such as pension funds want to invest sustainably. And there is also more demand for sustainable investment products among the younger generation of private investors. Second, is the role of legislation. In Europe, for example, the Sustainable Finance Disclosure Regulation has been introduced, which obliges large investors to report on the extent to which they invest sustainably. Third, the market has developed, offering more opportunities for sustainable investing. For example, more and more data are available on companies’ ESG performance. This is making it easier for large asset managers to make the transition to sustainable investing."


What Pot does see as a worrying development is that index investing involves little or no dialogue with the companies in which investments are made. “And that is what is needed. If asset managers want to contribute to the sustainable transition, in addition to buying a company’s shares, they also need to invest in dialogue to encourage companies to become more sustainable.”


Dialogue
The fact that the largest asset managers wield the most financial power does not have to have a negative effect on sustainability, Pot concludes. "The increase in sustainable investments is a positive trend. And the fact that the index investors offer cheap sustainable index-based solutions supports this trend. That said, we must still remain vigilant to ensure that index investing does not result in a watered-down version of sustainable investing. In our opinion, being an active shareholder means that you delve into the sustainability performance of companies, enter into a dialogue where necessary and vote at shareholder meetings in an informed way. The active dialogue we have with companies to work together to help them become more sustainable is and always will be necessary. In order for this dialogue to continue, we need to remain critical of companies’ sustainability performance. In addition, it is important that we promote our approach on active long-term corporate engagement to other institutional investors. In this way, we can ensure together that sustainability remains high on the agenda."