Investor Alliances: The Infrastructure For Climate Stewardship

Amelia Miazad is a Professor at the UC Davis School of Law. This post is based on her recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales; How Much Do Investors Care about Social Responsibility? (discussed on the Forum here) by Scott Hirst, Kobi Kastiel, and Tamar Kricheli‐Katz; and The Limits of Portfolio Primacy (discussed on the Forum here) by Roberto Tallarita.

Investors have switched from competition to collaboration to combat climate change. In a new article, I describe the reasons for this shift, and offer the first in-depth analysis of how investor climate alliances facilitate collaborative climate stewardship.

Collaborative climate risk governance is possible because of the rise of diversified institutional investors. Given the systemic nature of climate change, these so-called universal owners seek to mitigate climate risk to safeguard the long-term value of their portfolios. However, the impacts of climate change extend beyond financial harms alone. Indeed, the all-encompassing consequences of climate change have aligned the goals of various actors, including institutional investors, faith investors, international organizations, and environmental non-profits. These heterogeneous players have vastly different motivations, stakeholders, abilities, and constraints, but share a common goal: to persuade high-emitting companies to meet the Paris Agreement’s target of limiting global warming to 1.5 degrees Celsius.

Game theory predicts that if these players can communicate with one another (and determine that they will fare better collaboratively), they will form coalitions to achieve collective benefits. My article demonstrates that such collaboration is an entirely rational choice, due to individual investors’ capacity constraints, informational asymmetries, and the complexities of climate risk. The mere desire to collaborate is not sufficient—as Elinor Ostrom’s theory of collaborative governance emphasizes, sustained collaboration or “repeat play” requires an institutional infrastructure to facilitate information-sharing and collective action. Investor alliances provide that infrastructure.

My article applies Ostrom’s theory of collaborative governance to Climate Action 100+, the first and largest investor climate alliance. Climate Action 100+ is not a separate organization or entity, but a voluntary system of rules and norms for collaborative climate risk stewardship. Established in 2017, the alliance includes over 700 global investors that manage over $68 trillion in assets across 33 markets. Its mission is to ensure that the roughly 170 highest-emitting companies improve climate governance, reduce emissions, and implement climate transition plans that meet the Paris Agreement. The alliance strives to accomplish these goals by providing the necessary infrastructure for investor stewardship. Indeed, investor alliances like Climate Action 100+ represent a breakthrough with significant implications for corporate law and corporate governance.

Corporate law scholars have long argued that institutional investors lack the capacity for meaningful or firm-specific stewardship. This is because each of the activities that comprise investor stewardship—monitoring, engagement, and voting—require bespoke information from firms. Gathering such information is costly, even for the largest investors. My article describes how Climate Action 100+ helps investors overcome these constraints. First, the alliance focuses on one risk—climate change—at a limited number of companies. Second, it focuses investors on three outcomes from these “high-emitting” companies: a governance framework that articulates the board’s oversight of climate risk, emissions reductions consistent with the Paris Agreement, and TCFD-aligned disclosures. Third, unlike most investor collaboration, which relies on voluntary and largely ad-hoc information sharing, Climate Action 100+ has designed a formal system of stewardship roles for asset owners and asset managers.

By aligning investor preferences and making stewardship more efficient, Climate Action 100+ increases the quantity of climate-related information in the public domain. More data is generally good, but excess information poses its own challenges to climate stewardship. Climate Action 100+ provides the infrastructure that investors need to both generate and effectively utilize climate-related data. For instance, the alliance synthesizes information from the Net Zero Benchmark to give its members context as to a given company’s progress on climate-related goals. Thus, my article argues that investor alliances are desirable because they produce information that is both efficient for markets and useful to society.

Despite these multifold benefits, commentators and policymakers have not yet appreciated the utility of investor alliances. This is not surprising—investor alliances challenge two stubborn corporate law norms: the private market norm and the competition norm. First, the private market norm tells us that market actors ought to prioritize profits alone, leaving the mitigation of externalities to the public sector. Investor collaboration is viewed as a “second best” substitute for such regulation and hardly a cause for celebration. But this view fails to consider that the goals of Climate Action 100+ are tethered to the Paris Agreement, which is the consensus of nearly 200 governments—not a purely private regulatory effort. Moreover, the Paris Agreement’s target has been incorporated into national and local regulation around the world, and Climate Action 100+ facilitates and encourages policy advocacy in support of more climate regulation. Thus, Climate Action 100+ is not a private regulatory effort that usurps legitimate government action, but a system that both facilitates compliance with existing regulation and encourages more regulation. Second, investor alliances are inconsistent with the competition norm, which valorizes rivalry among investors and thus paints investor alliances as cartels. This characterization also belies the fact that many of the members of Climate Action 100+ are not rivals at all, but pension funds that do not compete, at least not in the traditional sense. Moreover, though addressing systemic climate risk requires unprecedented collaboration, it is fundamentally procompetitive because it yields benefits to consumers. Despite these persistent narratives, however, today’s markets rely on collaboration because climate change demands it.

Finally, my article argues that collaborative climate stewardship is normatively desirable because it is efficient for shareholders and prosocial. Yet, this level of collaboration places novel demands on corporate law. Securities law’s narrow definition of “acting in concert,” antitrust law’s restrictions on information sharing, and a single-firm fiduciary duty obstruct investor collaboration. Certainly, such collaboration can yield many negative outcomes, from collusion to insider trading. But investor collaboration can also bring about positive outcomes, for both markets and society. Corporate law’s blunt tools are ill-suited to accommodate the level of investor collaboration that climate change demands. My article concludes with proposals for recalibrating corporate law to foster investor alliances aimed at addressing systemic climate change risk.

The complete article is available here.

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