Do Asset Managers Call the Shots in Sustainable Investing


There has been a great deal in the news lately about greenwashing, proposed SEC regulations to combat it, and politically-motivated actions by some U.S. states to target so-called “woke capitalism” (on that last one, we believe those actions, and that phrase, reflect a fundamental misunderstanding of sustainable investing, but that’s another story). It’s hard to keep up. While much has been said on these topics, we invite you to read our brief articles, The Misguided Backlash Against “Stakeholder Capitalism” and ESG Investing, the SEC, and Fat-Free Milk for some perspective.

In this article, we address the role that asset managers play in ESG. Based on what we’ve been seeing in various news items, it appears that some people think that asset managers are trying to “force” Corporate America to do or not do certain things with respect to how companies impact the environment, treat their employees and other stakeholders, and manage their governance practices.

The fallacy in that line of reasoning is that it assumes asset managers have some power over the C-suite and the board room beyond the influence of the capital they manage on behalf of investors. That is a mistaken point of view. Asset managers are conduits for expressing their investors’ goals and preferences. If investors did not care about sustainability and the risks, opportunities, and values ESG investing represents, asset managers would have no incentive to integrate ESG into their investment practices, engage with corporations on these issues, or avoid holding stocks of companies that exhibit unacceptable ESG behaviors. 

Asset managers work for their clients, seeking to generate a competitive risk-adjusted return on their capital in a way that reflects what those clients want, not what the asset managers themselves might want. Here we summarize what we think is a clear, cogent discussion titled “Sustainability and the Power of Investing” by Suni Harford, the President of UBS Asset Management and UBS Group Executive Board Sponsor for Sustainability and Impact, published by SIFMA (the Securities Industry and Financial Markets Association). Note that we are not endorsing or recommending UBS or any of its ESG offerings; we just think this article does an excellent job of articulating a point of view that we think makes a lot of sense.

While Ms. Harford focuses on net zero commitments and the asset management community, we believe most of the points she makes are largely applicable across E, S, and G. She believes there are four parts to an asset manager’s role in this arena, and we highlight three of them below (the fourth point deals mostly with the Net Zero for Asset Managers initiative, which goes beyond what we want to address here). The three parts of the asset manager’s role that we summarize here are:

  1. To help clients
  2. To mobilize capital
  3. To engage with the firms in which asset managers invest

Ms. Harford believes the asset management community’s primary responsibility is to raise awareness of and help clients manage sustainability risks in their portfolios. As she points out, doing so allows clients to make informed decisions about their investments. Importantly, she emphasizes that this is fundamentally different from asset managers telling clients what their objectives should be. Ms. Harford states very clearly that:

  • It is not an asset manager’s place to impose its values on clients;
  • The asset manager’s job is to provide the investment approaches clients seek to effect the change they want to see;
  • An asset manager’s paramount obligation and fiduciary duty is to deliver what is says it will deliver – and to ensure that clients understand how that is accomplished.

With respect to an asset manager’s role in mobilizing capital, Ms. Harford focuses on the cost of transitioning to a low-carbon economy. Why is it an asset manager’s responsibility to help direct capital toward that effort? It gets back to what we said earlier (yes, we are quoting ourselves), “Asset managers are conduits for expressing their investors’ goals and preferences.” In UBS’s most recent survey of high net worth investors, two-thirds of the respondents said that sustainability is highly important to portfolio performance, and 78% believe sustainability will maximize their returns. In other words, investors believe that incorporating ESG into investing is likely to offer better returns than investing without considering sustainability.

Regarding Ms. Harford’s third point, she writes, “As stewards for our clients’ assets, we have a critical role to play engaging with the companies in which we invest. Investors have a powerful voice, provided they have a seat at the table.” Some call upon asset managers to divest from companies that participate in certain activities (e.g., producing fossil fuels). Most of the asset managers OWL ESG talks with believe that divesting is unlikely to have the impact that those who call for divesting think it will. Capital will come from other sources that do not care about pushing companies to improve, e.g., by pursuing carbon capture, green hydrogen, and other technologies. By engaging instead of divesting, asset managers can show that investors will reward companies for putting capital to work in a way that supports a more sustainable world.

To learn how OWL’s Consensus Scores, Fund Ratings and ESG data and analytics can help your asset management firm to better serve those who want to incorporate ESG into their investing, contact us.