finance (3/20/2023, 10:51:01 AM)

difference between ESG and universal owners

“In essence, (S)RI and ESG aim to protect individual portfolios from systemic risks; universal owners aim to mitigate systemic risks in the real world, which has the effect of internalising externalities and protecting the long-term health of the system as a whole.” (Quigley, p. 2) (pdf)

“Yet despite the significant concentration of emissions among a relatively small number of publicly listed companies – just 90 global entities account for 63% of all emissions, and the top 10 listed companies alone account for 15.8% (Heede 2014) – responsible investment has met with manifest failure. Emissions have continued to grow unabated; climate risk to the real economy has increased. ESG appears to have resulted in no genuine change in company behaviour (Busch, Bauer, and Orlitzky 2016).” (Quigley, p. 3) (pdf) concentration of emissions +  ESG resulted in no change

“Most of the efforts around disclosure, carbon footprinting, and climate risk analysis – as well as the full suite of positive and negative screens, carbon tilts, and best-in-class stock selection – are confined to public equity holdings, where asset allocation appears to have little or no direct impact3 (Kölbel et al. 2020; Ansar, Caldecott, and Tilbury 2013).” (Quigley, p. 3) (pdf) asset allocation in public equity seems to have little or no impact?

ESG world has focused on the wrong things


“Part of the reason for this failure is the ESG industry’s misplaced focus on asset allocation in public equity and its effect on individual portfolios’ performance. Most academic work on ESG – at least 2,200 studies, according to a meta-analysis by Friede et al. (2015) – centres on performance or share prices (Slager and Chapple 2016).” (Quigley, p. 3) (pdf)

risk to the portfolio

“traditional socially responsible investment (SRI), responsible investment (RI), or environmental, social, and governance (ESG) frameworks tend to adopt a climate or social risk lens, with a focus on risks to the portfolio from the real economy.” (Quigley, p. 2) (pdf)

“Disclosure frameworks such as the TCFD and SASB reveal environmental and social risks that are material to company performance, not risk that these companies pose to the system as a whole – especially in the aggregate.” (Quigley, p. 4) (pdf)


“Some studies find no correlation between disclosure and companies’ actual environmental performance (Freedman and Wasley 1990; Wiseman 1982; Ingram and Frazier 1980; Ali Fekrat, Inclan, and Petroni 1996), while others controlling for size and sector – find a negative correlation (Patten 2002; Sutantoputra, Lindorff, and Johnson 2012; Hughes, Anderson, and Golden 2001; Bewley and Li 2000); companies with worse environmental performance are more likely to issue environmental disclosures. Clarkson et al (2008) and Al-Tuwaijri et al (2004) find that companies with good environmental performance disclose more. Clark and Crawford (2011) find that poor performers are more likely to disclose to CDP publicly in response to shareholder pressure. Finally, Reid and Toffel (2009) find that disclosure does not tend to lead to changes beyond disclosure itself. In other words, the relationship between disclosure and environmental performance is mixed at best, and often negative.” (Quigley, p. 4) (pdf)

Universal are supposed to have a wider view

“To the universal owner, after all, disclosure is only useful if it also mitigates systemic risks in the real economy; materiality to individual holdings matters much less than the combined system-level risk these holdings pose to planetary health, human wellbeing, and the financial system in the mediumand long-term” (Quigley, p. 4) (pdf) Universal owners have a wider interest, not in individual stocks

tend towards active ownership since divesting can be extremely costly

“in markets with reduced liquidity, investors prefer to engage as exit is costly. For very large investors, exit is difficult because the act of selling a large block of shares can affect prices. For universal owners, then, liquidity can be a hypothetical concept. In practice, they tend to behave more like investors in illiquid markets – they default towards active ownership9” (Quigley, p. 8) (pdf)

Framework summary

“The framework below proposes: a more urgent and tactical version of active ownership within public equity; asset allocation within the primary market; a particular focus on assets transitioning from the primary to the secondary market; “ungameable” metrics linked to real-world effects; strategic engagement with public policy and standard-setting regimes; and forward signalling to reduce wastage and accelerate decarbonisation timelines” (Quigley, p. 5) (pdf)

Primary vs Secondary markets

primary market matters more

“within the primary market (bond issuance, equity issuance, initial public offerings (IPOs), private equity, venture capital, etc.) asset allocation can have impact (Oikonomou, Brooks, and Pavelin 2014; Cojoianu et al. 2019; Erlandsson 2017), especially for smaller companies (Kölbel et al. 2020) and early-stage ventures (Ormiston et al. 2015; Brest and Born 2013; Gompers and Lerner 2000; International Finance Corporation 2019), and therefore it can be directly effective to channel investments towards companies and projects that contribute to human and planetary health. A universal ownership investment framework would therefore apply a strict environmental and social mandate to all primary market investments.” (Quigley, p. 5) (pdf)

secondary market divestments do not affect share prices generally

“Within the secondary market (public equity, listed corporate bonds,6 etc.), however, evidence suggests that there is little to no additionality;7 what matters is forceful stewardship8 and companies’ internal investment decisions – it is the companies’ own capital expenditure, bond issuances, and borrowing that allocate capital to carbon-intensive or zero-carbon investments. In the secondary market sales pass shares from one investor to another, not back to the companies themselves, so it does not particularly matter which shares a universal owner owns. Indeed, evidence suggests that asset allocation – divestment – in public equity has not historically affected share prices (Ansar, Caldecott, and Tilbury 2013) except perhaps in the very short term (Atta-Darkua 2020).” (Quigley, p. 6) (pdf)

leverage point - companies seeking funding to get listed

“Thus the leverage points are when a company seeks buyers for its IPO as it lists itself on the stock market for the first time, and when it returns to the market to raise funds by selling additional shares or through bond issuances. In other words, a universal owner’s concern is the composition of the stock market – which sorts of companies are listed on stock exchanges, and therefore which sorts of companies are able to grow most easily.” (Quigley, p. 11) (pdf)

Actions for impact

Equity Divestment

divestment more likely to affect smaller companies, ad those in global south (with less liquid shares) “Divestment is more likely to affect smaller companies (such as independent oil companies) with less liquid shares or bonds. It is also likely to affect companies in the Global South more so than those in the Global North.” (Quigley, p. 7) (pdf)

at least equity gives voting rights, while debt doesn’t

“it is not appropriate to invest in the secondary market of an asset class without sufficient control mechanism to alter company behaviour, however; shareholders have voting rights, while bondholders do not.” (Quigley, p. 6) (pdf)

Debt exclusions

“Debt market exclusions already display some additionality/impact on cost of capital, perhaps due to their size and significant role in financing environmentally and socially undesirable activities” (Quigley, p. 7) (pdf) debt market exclusions as a good action mechanism?

“The top 60 global banks’ fossil fuel lending totals $3.8 trillion since the 2015 Paris Agreement alone (Rainforest Action Network et al. 2021); bank lending is the single largest source of funding additional capital – for new or expanding fossil fuel projects and companies” (Quigley, p. 10) (pdf) bank lending is the largest source of funding of fossil fuels

bonds more long-term oriented?

“Bond investors tend to be more cautious than their public equity peers, and thus could be scared away from (especially long-term) issues because they do not want to be stuck with stranded assets in the end. There can be “convexity” in the bond market, or “negative price spirals” from internal the loss-of-creditworthiness feedback loop.” (Quigley, p. 8) (pdf)

encouraging green bond issuance and purchasing them

“One way of boosting investment is for universal owners to encourage the issuance of bonds by governments, universities, institutions that use the proceeds to finance energy efficiency retrofits, soil and wilderness restoration, and renewable energy. Universal owners could then be the primary purchasers of these bonds, solving the supply issue on their end and the demand issue on the part of the issuers; universal owners would be helping to expand the green asset pool for other universal owners to invest in” (Quigley, p. 11) (pdf)

Better metrics

““a fund that successfully induces emission intensive companies to improve their practices may appear to have less impact than a fund that simply has exposure to companies that already have these practices in place” (Kölbel et al. 2020, 21).” (Quigley, p. 12) (pdf)

“More useful climate-related metrics for the universal owner might include, for example, a) what proportion of a company’s capital expenditure, research and development spending is Paris-aligned, b) whether the company is building new fossil fuel infrastructure, c) whether acquisitions and disposals13 are aligned with the Paris Agreement goals, e) the company’s total emissions (absolute emissions) across scopes 1, 2, and 314, and f) the company’s lobbying activities. Additional targets could be set for land use and biodiversity, although these are more difficult to measure and therefore more easily “gameable.”” (Quigley, p. 12) (pdf)

“The term “carbon footprint” implies that one’s investment has a direct carbon impact, which does not apply in the secondary market. Investments in the secondary market do not direct funds to companies – they direct funds towards fellow investors, and thus carbon tilts and “carbon footprinting” for listed equity do not contribute to the transition to a zero-carbon economy; “merely analyzing company impact does not provide a measure of investment impact”” (Quigley, p. 12) (pdf) wrong to refer to secondary market’s investments’ carbon footprints, as that investment did not actually cause any carbon emissions -