Why are asset managers investing in fossil fuel companies?

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What is an asset manager?

Asset managers invest other people’s money with the aim of growing their client’s wealth and protecting them from financial risk. By pooling lots of investors’ money they can reduce the risk to them by spreading it across a range of asset classes: stocks, property, bonds, commodities and other funds. Asset managers make money by taking a fee for providing these services to their clients.

Since the 2008 financial crisis, high fees and poor performance have seen money flowing away from “active” funds, with a manager who researches and selects investments using a particular philosophy, to “passive” funds.

What is a passive fund?

The most common form of passive investing is a “tracker fund” that follows an index such as the FTSE 100 or the S&P 500. Instead of selecting particular companies in which to invest, passive fund managers buy everything on an index and hold the shares over a long period of time.

Supporters of this approach argue it has democratised share ownership in the best companies in the world while driving down fees in the asset management industry.

Where do they get their money from?

You, most likely. If you make pension contributions every month or have invested personal savings, it is likely that this money ends up with an asset manager via your pension provider.

Even though asset managers do not own the companies they invest in, they exercise shareholder rights on your behalf, voting on directors and key company decisions. It’s a useful service. Who has time to go through hundreds of company disclosures every quarter and take a view on them? But it also means that a small group of asset managers have a big say on how the largest publicly listed companies approach the biggest challenges of our era.

How much money do they manage?

About $74tn globally in 2018, according to the Boston Consulting Group’s latest industry survey, a slight fall from $77tn the year before. In the US, which has the largest asset management industry by far, the market is dominated by BlackRock, Vanguard and State Street.

Can individual investors decide where their money goes?

Your pension provider may allow you to choose between funds, and before you invest any of your other money you can research funds and see what companies they own shares in. You could pick one that avoids polluting companies. But once your money is in a fund, you will not be consulted on every investment decision or on voting decisions.

If you have concerns about how your pension is being managed, get in contact with your provider and ask the trustees how your money is being invested and what stance they take on climate-related shareholder motions.

Why are they still investing in fossil fuel companies?

The simple answer is because they make money. For now, at least. The world needs fossil fuels and will continue to need them during the energy transition, albeit on a much smaller scale.

Publicly listed fossil fuel companies remain among the most profitable companies in the world, so if you invest in an index tracker fund, like millions of people do, they will be there. You will get Apple, Google and Facebook, as well as ExxonMobil and Chevron.

How much money are the asset managers putting into fossil fuel companies?

Hundreds of billions of dollars, but it’s hard to be exact. According to research about the three largest, the combined fossil fuel portfolio of BlackRock, Vanguard and State Street is $286bn. The figure came from analysing 1,712 funds run by BlackRock, Vanguard and State Street to determine their holdings in the 299 companies that control 95% of global fossil fuel reserves and production run by publicly listed companies.

These holdings can also be expressed in terms of potential CO2 emissions in coal, oil and gas reserves. These have increased by 17% above the rate at which money has flowed into the funds since 2016. At BlackRock potential CO2 emissions are up 5%, at State Street 23% and at Vanguard 28% when controlling for fund inflows.