Factory with air pollution

A way forward for reducing corporate carbon emissions?

  • New IESE research shows a strong link between the world´s largest asset managers’ engagements with companies and a reduction in CO2 emissions of their portfolio companies
  • Using new data, the paper “The Big Three and Corporate Carbon Emissions Around the World”, forthcoming in the Journal of Financial Economics, suggests company engagements by BlackRock, Vanguard and State Street can offer a complementary approach to tackling climate change

Climate change is one of the most pressing global issues we face as a society. While ´Big Business´ is frequently criticized for its role in increasing greenhouse emissions, in recent years leading corporate figures such as BlackRock CEO Larry Fink have publicly committed to focusing on environmental issues. Yet up until now, there has been scant data on whether these corporate efforts are starting to have any effect.

New research by IESE Business School professors, forthcoming in the Journal of Financial Economics, sheds light for the first time on the role that BlackRock, Vanguard and State Street Global Advisors (the so-called “Big Three” largest asset managers) are playing in reducing carbon emissions around the world. The Big Three have come to dominate the global corporate landscape in recent years. Significantly, the study´s findings suggest that the world´s largest asset managers are having a positive impact in reducing the CO2 emissions of their portfolio companies.

The Big Three and Corporate Carbon Emissions

The paperThe Big Three and Corporate Carbon Emissions Around the World”, accepted by the Journal of Financial Economics, is coauthored by IESE professors Jose Azar, Miguel Duro, Igor Kadach and Gaizka Ormazabal.

In the paper, the authors examine if: a), the Big Three are engaging with their portfolio companies on environmental concerns; and b), whether these engagements are actually effective in reducing carbon emissions at those companies. To do so, they analysed two novel datasets: carbon emissions data for a wide cross section of firms between 2005 to 2018, complemented with data on Big Three engagements with their portfolio companies. 

Unlike previous studies that look at institutional investors in general, the authors claim they focus only on the Big Three due to their unique characteristics and position in the global economy. Together the Big Three manage $16 trillion and control approximately 20% of the shares of the S&P 500. In addition, the authors focus on carbon emissions as opposed to environmental scores. According to them, this is important, “as changes to a firm´s environmental score could reflect “greenwashing” rather than actual environmental improvements.”

The key findings

The paper finds that:

  • The Big Three focus their engagement efforts on large firms with high CO2 emissions and in which these investors hold a significant stake.
  • Consistent with this engagement influence being effective, the study shows a strong and robust association between Big Three ownership and a subsequent drop in carbon emissions
  • This pattern becomes stronger in the later years of the sample period, when the three institutions have publicly committed to tackling environmental issues.

The paper also shows how, beyond altruistic reasons, there could be several economic incentives for the Big Three to engage with firms on environmental issues. One reason could be a belief that reducing CO2 emissions increases the value of their portfolio (reflecting a growing awareness of the financial implications of climate risk); another is that pushing firms to reduce carbon emissions can help attract or retain clients sensitive towards environmental concerns.

ESG engagement as a complement to carbon pricing

According to the authors, “one of the main conclusions of our research is that the Big Three, contrary to what many believe, have both the incentives and the means to get CO2 emissions reduced. And our empirical evidence suggests that, through engagement with their portfolio companies, they have already been playing a positive role in this important dimension of corporate governance.”

Still, they caution that the magnitude of these carbon reductions may not be enough on their own to tackle the climate challenge we face. As such, the authors stress that the research points to how the big three could contribute to reducing world carbon emissions, alongside other approaches already underway or under study, such as carbon pricing.

“Climate change is a major global problem which requires coordinated global action” say the authors. “That´s where the unique size and reach of the Big Three may help. While the Big Three´s importance to the global economy is controversial, their almost supranational status means that, when they engage with companies on environmental issues, they can avoid the global coordination issues that hinder the quick implementation of other full-scale regulatory solutions. In doing so, our research suggests that they can offer a complementary way of addressing climate change, alongside other efforts.”

Access the full paper The Big Three and Corporate Carbon Emissions Around the World.” 


About the authors:

Jose Azar is a Visiting Professor of Economics at IESE Business School and an Assistant professor at the University of Navarra. 

Miguel Duro is Assistant Professor of Accounting and Control and Academic Director of the Center for International Finance (CIF) at IESE Business School. 

Igor Kadach is Assistant Professor of Accounting and Control at IESE Business School. 

Gaizka Ormazabal is Associate Professor of Accounting and Control and holder of the Grupo Santander Chair of Financial Institutions and Corporate Governance, at IESE Business School. He also serves as academic director at the IESE Center for Corporate Governance.