Universal owners and climate change

Tom Gosling

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Universal ownership theory proposes that widely diversified investors have a financial self-interest at the portfolio level in reducing market-wide risks relating to environmental or social (ES) issues. This article sets out a double test for determining when universal owner theory justifies investor action and applies these tests to the case of climate change. When applied to the commonly adopted goal of limiting global warming to 1.5°C, universal owner theory runs into problems on both tests. First, it is uncertain whether this goal is financially optimal at the portfolio level. Second, even if it were optimal, investors have limited efficacy to achieve this outcome. This article considers goals that climate-concerned investors might set and the actions they could take that would be consistent with the tests. The actions best supported by evidence involve four areas of focus. First, engagement with investee companies based on realistic goals. Second, positive engagement on policy. Third, modest and bounded impact investments that can credibly be considered as reducing climate risk. Fourth, working to ensure that transition and physical risks are fully incorporated into investment models. Through targeting a more modest set of ambitions, climate-concerned investors can be more impactful while avoiding conflicts with fiduciary duties to clients.

Keywords: climate change; externalities; fiduciary duty; global warming; institutional investors; universal owners (search for similar items in EconPapers)
JEL-codes: G00 Q54 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-12-09
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Published in Journal of Financial Regulation, 9, December, 2024. ISSN: 2053-4833

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