The world’s largest stewards of capital are struggling to move the needle on companies’ carbon footprints and emissions reduction efforts, according to research conducted by EDHEC-Risk Institute.
The study, titled Institutional Investor and Corporate Carbon Footprint: Global Evidence, analysed panel data from 6392 firms across 68 countries between 2007 and 2018 and found institutional investors do not reduce their investees’ carbon footprints in a “meaningful” way.
Across the 11-year view of all the companies, the report said carbon intensity decreased by an average of 0.1% for every 1% increase in ownership by institutional investors. However, on average institutional ownership had no “statistically significant” correlation with emissions reduction by their investees.
Where institutional investors have made a difference is in the top 25% of polluters, with EDHEC-Risk Institute noting every 1% increase in ownership coincided with a 0.6% decrease in carbon dioxide emissions.
On this group of companies, the report added: “Considering one standard deviation increase in ownership we have a robust decrease of approximately 10.5% in emissions.”
While a smaller impact, institutional ownership of top polluters also reduced these companies’ carbon footprints, with a 1% ownership increase connected with a 0.4% average reduction in carbon intensity.
“Results show that institutional investment on average does not appear to lead to a carbon footprint reduction. However, institutional investors are associated with a limited reduction of carbon footprint for the highest polluters in the sample,” the report concluded.
“These results suggest that climate-driven responsible investors can complement but not substitute national and international climate policies.”
Gianfranco Gianfrate, professor of finance at EDHEC Business School, sustainable finance lead at EDHEC-Risk Institute and co-author of the report, added his team’s findings are damning for institutions applying or using products with active management and ownership methodologies.
In the context of the report’s findings, Gianfrate argued: “Basically, these active strategies that are so advertised by asset managers really end up being worth zero in the fight against climate change.”
He also echoed the report’s conclusion that getting companies to reduce their negative climate externalities will require more political policymaking by democratically elected entities such as national governments. He added the idea that finance alone can be used to affect positive change on climate issues is a “very dangerous way of thinking”.
Furthermore, while many have been relatively optimistic about the policy developments which followed the EU’s Action Plan for Sustainable Finance in 2018, Gianfrate is less convinced.
On the much-discussed phase one of the Sustainable Finance Disclosure Regulation (SFDR), for instance, he warned the European Commission’s policy was “sketchy” and “weak” and warned the international body is continuously lobbied to postpone phase two of SFDR further, as well as loosening criteria for reporting.
For meaningful progress to be made on reducing companies’ emissions, Gianfrate called for mandatory disclosure of carbon dioxide emissions by all companies.
As for institutional investors, he said a split focus with social and governance metrics within ESG products means environmental or climate issues are not addressed as effectively – with a lack of clarity and fears of greenwashing also acting as possible deterrents to some investors.
The findings of Gianfrate and his team will certainly divide opinion. They follow another report by the EDHEC-Risk Institute which found companies’ performance on climate metrics was only a small minority consideration in determining the constituent weightings within climate funds.