Asset owners from Japan, the UK, and California have issued a statement describing their vision of sustainable capital markets.

By Paul A. Davies and Michael D. Green

In January 2020, BlackRock CEO Larry Fink circulated his annual letter to CEOs in which he noted, “I believe we are on the edge of a fundamental reshaping of finance”. His letter put companies on notice that climate risk and improved ESG disclosures were of fundamental importance to whether companies were “properly managing and overseeing these risks within their business and adequately planning for the future”. Further, where companies do not report such issues robustly, “BlackRock will increasingly conclude that companies are not adequately managing risk”. This message has now been reinforced by a statement issued by three asset owners — the Japanese Government Pension Investment Fund, the California State Teachers’ Retirement System, and the UK Universities Superannuation Scheme (together, the Asset Owners) — in which they noted that companies that seek to maximise revenue without consideration of other stakeholders (e.g., the environment, workers, and communities) will no longer be considered attractive investment targets.

This statement reflects the rapid changes that are occurring in the financial community as the economy moves from a shareholder-led economy to a stakeholder-led one. Environmental, social, and governance (ESG) is at the heart of this shift, as asset managers, investors, and companies seek to respond to increasing pressure from asset owners to address such issues. (See Sustainable Finance and Climate Change Risk in Financial Services and ESG in 2020: 10 Things to Look Out For).

The Asset Owners span the globe and collectively represent nearly US$2 trillion of assets under management. Their statement is a prime example of the public commitments and expectations that asset owners are calling for in respect of ESG. Highlights from their statement include:

• Reference to research, such as: (i) a large majority of over 2,200 studies show a positive relationship between ESG investment and returns; and (ii) an estimate from Moody’s Analytics that climate change alone has the potential to destroy US$69 trillion in global economic wealth through 2100.
• Asset managers that focus only on short-term financial measures and ignore longer-term sustainability-related risks and opportunities will not be considered attractive investments.
• “Entrenched interests” remain strong, and that meaningful and decision-useful ESG disclosures and analysis are the exception rather than the rule.
• Regulatory regimes that reflect a desire to shift to this longer-term investment horizon have been slow to evolve.
• Partners of the Asset Owners and the companies in which they invest should “rethink their strategy” and “enhance their disclosures” (specifically, using the guidelines issued by the Task Force on Climate-related Financial Disclosures).

This statement has already resulted in commitments from other pension funds to echo their support. More asset owners are likely to follow. All of which will put greater pressure on asset managers, investors, and companies to respond accordingly. Those institutions will need to consider carefully undertaking ESG analysis, the implications of any findings in respect of ESG matters, and how those findings will be communicated to the market, shareholders, and stakeholders.

Latham & Watkins will continue to monitor developments in this area.