Research
April 3, 2024
Material World
The financial materiality of CO2 emissions is debatable – energy costs aren’t.
March 8, 2024
Bending the Cost Curve
Good barrels and bad barrels in a decarbonizing world
December 22, 2023
Learning Curves
The trials of offshore wind and tech forecasting
August 28, 2023
The 2023 Proxy Voting Cycle in Review
Support for climate-related shareholder proposals fell once again, declining across all categories and for resolutions with a wide range of “asks.”
May 30, 2023
Webinar: “Stewarding” the Energy Transition
Nolan Lindquist hosts a discussion with Madison Condon and Ben Braun on the broader context around this year’s proxy voting cycle.
May 30, 2023
Slides: “Stewarding” the Energy Transition
A presentation outlining CAS’s findings on the 2023 proxy season, shared during the “Stewarding the Energy Transition” webinar.
February 28, 2023
Understanding the CAS Rating System
CAS rates U.S. mutual funds and ETFs based on their level of support for the climate and environment-related shareholder proposals we track.
Our theory of change is simple. We produce research and tools that inform everyday investors, in order to influence the asset management firms they rely on to put their savings to work. Two assumptions are at work here. First, that the market for mutual funds and ETFs is relatively fluid and competitive, especially outside of tax-advantaged retirement accounts, where savers’ investment options are often more limited. And second, that professional money managers have influence in America’s boardrooms, not just because of the math of shareholder voting, but also because of their informal ability to shape norms around corporate strategy and narrative-framing for the public markets.
BlackRock, State Street, Vanguard, and Fidelity became household names by offering a wide variety of mutual funds, exchange-traded funds (ETFs), and related financial services to millions of people saving for retirement and other financial goals. These four firms alone managed ~$26.8T in client money at the end of last year. 1 These conditions – a very “powerful” asset management industry, in terms of its size and potential influence on the rest of corporate America, but also a fairly mature and competitive asset management industry – developed relatively recently.
The asset management industry experienced massive growth in the 1980s and 1990s, as regulation changed, making individual retirement accounts (IRAs) and contributory retirement plans (such as 401(k)s) more popular among workers and employers, and thanks to the introduction of innovative new investment products.
- In 1974, Fidelity introduced money market mutual funds that customers could withdraw money from by simply writing a check. Today, there is ~$4.7T invested in money market funds, almost as much as the ~$5.1T held by households and institutions in cash and checking accounts. 2
- In the same year, Congress passed the Employee Retirement Income Security Act (ERISA), which reformed many features of the private pension system and, crucially, allowed for the creation of tax-deductible investment accounts outside of employer-sponsored pension plans – the first individual retirement accounts (IRAs). 3 By the end of last year, savers had ~$6.3T invested in mutual funds through IRAs, nearly a quarter of the entire US mutual fund market. 4
- In 1976, Jack Bogle launched the first passive, index-tracking mutual fund. Today, passive strategies make up 29% of professional money managers’ assets. 5
These shifts made mutual funds a much bigger component of Americans’ personal balance sheets. Between 1990 and the first quarter of 2000, at the peak of the Dotcom boom, mutual fund shares tripled as a percentage of US household assets.
The amount of money invested in mutual funds and ETFs is enormous. At the end of last year, domestic equity focused funds had ~$15.7T in assets under management, or ~29% of the entire US stock market. 6 But over the last decade, the growth of the asset management industry has slowed, with “net inflows” – savers pumping fresh cash into mutual funds and ETFs – grinding to a halt, and fees eroding in the face of competition. The rise of “environmental, social, and governance” (ESG) investing strategies has been an attractive source of growth for many firms, with ~$140b of net inflows into sustainable products from 2019-2021, and higher average fees for investors. 7
Publicly traded stocks have become a bigger share of American households’ assets over the last fifty years, and professional money managers have become much more important as intermediaries giving ordinary savers access to the stock market. These shifts have reshaped corporate governance – the range of tools investors use to keep an eye on the boards and executives they have entrusted to run companies on their behalf. This is because mutual fund and ETF managers vote on behalf of their investors on shareholder proposals that end up on the agenda at companies’ annual meetings.
In a recent paper, the political economist Ben Braun outlined three features that make the world of “asset manager capitalism” distinct from prior eras in the history of corporate governance. Ownership is highly concentrated. Large money managers are so diversified, their interests are more aligned with the universe of public companies as a whole rather than any particular company or industry – they have to worry about externalities like carbon emissions, which are at least partly internalized for holders of the market portfolio. And because the three biggest asset management firms – Vanguard, BlackRock, and State Street – are so focused on passive, index-tracking funds, they have to use their voice as shareholders to influence corporate management teams, rather than being able to threaten exit. 8
While asset management firms are potentially very powerful, as Braun observes, they often play a less forceful role in corporate governance than many would suspect, including their critics on the left, who blame asset managers for discouraging competition between their portfolio companies or on the right, who blame them for promoting practices like racial equity audits that they oppose. The legal scholars Lucien Bebchuk and Scott Hirst have enumerated many potential causes of this disconnect, from increased compliance costs to potential conflicts of interest (for example, when firms are competing for workplace investing mandates at companies they hold shares in). 9
Initiatives like BlackRock’s Voting Choice program are a great option for institutional investors, who are able to devote time and energy to researching shareholder proposals themselves. But it is not a realistic option for the average American investor, who has embraced index investing and now finds herself the indirect owner of literally hundreds of companies. Asset managers play a vital role as trustees of their clients’ voice in shareholder elections.
Climate change is a vital, systemic issue for markets. In a world headed for 3.0° C of warming or more, managing climate risk – particularly physical risk, political risk in climate-sensitive geographies, and second-order effects of shocks to commodity prices – requires using corporate governance tools to push for climate mitigation, not just a call on whether to go overweight energy stocks or not.
To hit its greenhouse gas (GHG) emissions targets, the US needs to cut its carbon footprint by 50% between now and 2030, essentially quadrupling the pace of absolute emissions reduction from 2010-2020. Getting there will require a huge shift in private sector capital allocation (especially in strategic sectors like utilities, energy, and transportation) alongside public policy measures.
“Dealing with climate change” in the 2020s means wrestling with a complex, interdependent set of problems. CAS is focused on one piece of the puzzle – studying the linkages between where US investors park their savings and what gets built in the real economy, a relationship that’s mediated by the asset management industry and by the mechanics of corporate governance.
Our inaugural project – ratings for individual funds’ proxy voting records on climate change – came out in Q1 2023. Please reach out if you would like to collaborate with us, learn more, or offer any feedback on our output.
Thank you for your time and support,
Nolan Lindquist
Executive Director
Center for Active Stewardship
1 “The World’s Largest 500 Asset Managers – 2022,” Thinking Ahead Institute, publishedOctober 17, 2022. https://www.thinkingaheadinstitute.org/research-papers/the-worlds-largest-asset-managers-2022/.
2 “Money Market Fund Assets,” Investment Company Institute, published December 8, 2022. https://www.ici.org/research/stats/mmf. “Households; Checking Deposits and Currency; Asset; Level,” FRED, accessed December 13, 2022. https://fred.stlouisfed.org/series/BOGZ1FL193020005Q.
3 Elizabeth A. Meyers, et al., “Pensions and Individual Retirement Accounts (IRAs): An Overview,” Congressional Research Service, published June 1, 2022. https://crsreports.congress.gov/product/pdf/R/R47119/2.
4 “2022 Investment Company Factbook,” Investment Company Institute, accessed December 13, 2022. https://www.ici.org/system/files/2022-05/2022_factbook.pdf.
5 “The World’s Largest 500 Asset Managers,” ibid.
6 “2022 Investment Company Factbook,” ibid.
7 “Sustainable Funds U.S. Landscape Report,” Morningstar, January 31, 2022. https://www.morningstar.com/lp/sustainable-funds-landscape-report/.
8 Benjamin Braun, “Exit, Control, and Politics: Structural Power and Corporate Governance under Asset Manager Capitalism,” Politics and Society 50, no. 4 (December 2022), pp. 630-654.
9 Lucian Bebchuk and Scott Hirst, “Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy,” Columbia Law Review 119 (December 2019), pp. 2029-2146.