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What is Universal Ownership Theory?

[1] James Hawley & Andrew Williams, 2000, ‘The Emergence of Universal Owners’, Challenge, 32(4), p.43.

[2] Jan Fichtner & Eelke M. Heemskerk, 2020, ‘The New Universal Owners: Index Funds, Patient Capital, and the Distinction Between Feeble and Forceful Stewardship’, Economy and Society, 49(4), p.510.

[3] Adrienne Buller, 2021, ‘Goliath and Goliath: Asset Management and Ownership in the UK Economy’, Commonwealth.

[4] Benjamin Braun, forthcoming, ‘Asset Manager Capitalism as a Corporate Governance Regime’, in J.S. Hacker et al., American Political Economy: Politics, Markets, and Power. Cambridge University Press: New York, USA.

[5] Marshal Burke & Silomon H. Hsiang & Edward Miguel, 2015, Global non-linear effect of temperature on economic production, Nature, 527, pp.235-239.

[6] Network for Greening the Financial System, 2020, NFGS Climate Scenarios: for central banks and supervisors.

[7] Swiss Re Institute, 2021, The economics of climate change: no action not an option, p.9.

[8] Francesco Lamperti et al., 2019, The public costs of climate-induced financial instability, Vol.9, pp.829-833.

[9] See, for example, Rebecca Shaw et al., 2011, The Impact of Climate Change on California’s ecosystem services, Climate Change, 109, pp.465-484.

[10] On this, see the discussion of climate change in chapter four of Toby Ord, 2020, The Precipice: Existential Risk and the Future of Humanity. Hachette Books: New York, USA.

[11] Timothy Lenton et al., 2019, Climate Tipping Points – too risky to bet against, Nature, Vol 575, pp.592-595.

[12] Ord, The Precipice.

Universal owners are investors whose portfolios encompass a representative slice of the market. The concept of universal ownership theory, originally developed by James Hawley, recognised that large institutional investors with diversified portfolios owned a representative share of the entire economy and their interests align with the public at large. James Hawley and Andrew Williams originally described public pensions as universal owners, noting that whereas in the 1970s individuals held 75% of stocks in the United States, by 2000 institutional investors owned 60%.[1]


It is clear today, however, that the locus of this secular concentration of equity is not public pensions, but asset managers. Indeed, the 'Big Three' asset managers - BlackRock, Vanguard, and State Street - together own 21% of the average S&P 500 company.[2] They also hold significant stakes in European and Japanese markets, while BlackRock and Vanguard alone hold 10% of the average FTSE100 company[3]. What accounts for this remarkable concentration of equity? Three factors are paramount: (i) the sector benefitted from the damage the 2008 financial crisis inflicted on traditional banks; (ii) asset managers have reaped the benefits of the increasing transfer of capital from active to passive investing; (iii) asset managers operate as 'digital platforms' benefitting from economies of scale and network effects.[4]


Climate change is the greatest market failure in the history of the world. Its costs are not priced into market transactions because third parties overwhelmingly bear them – they are 'externalities'. The average individual will bear only 1/n of the costs of climate change, where 'n' is the population now and in the future who will feel its impact. If, for the same reason, companies only bear a minuscule share of the costs of their emissions, then they will have little direct financial incentive to do anything about it. There is a fatal misalignment between what is in the interests of the economy and the incentives of the companies that comprise it.


Universal owners do not confront the same collective action problem. Their exposure to a representative slice of the market gives them an interest in the net growth of the market, including the ecological conditions which make stable market activity possible in the first place. If a company in their portfolio engages in GHG-intensive activities, from the point of view of the universal owner, those costs are not simply borne by 'third parties'. Instead, they are felt by the rest of their portfolio. Indeed, in theory, universal owners should make a cost-benefit calculus of whether a given GHG-intensive project contributes to the net health of the market (and so to its portfolio): do the economic benefits derived by that company from the project, exceed all of the costs borne by the market as a whole? Where it does not, the universal owner has a strict financial interest in bringing it to a stop.


It is worth averting to recent estimates of the costs which climate change threatens. A model published in Nature analyzing the effect that temperature – independent of its indirect effects – has upon economic production found that, under a scenario of unmitigated climate change, this would lead to a 23% loss of global income.[5] A study by the Network for Greening the Financial System concluded that if global temperatures surpassed 3ºC, the physical risks alone would incur a 25% loss of global GDP.[6]  Swiss Re estimates that by mid-century if temperatures cross the threshold of the Paris Agreement, the world will suffer a 10% loss of GDP.[7] A recent study predicts that climate change could increase the frequency of banking crises by between 26% and 248%, dragging states into a spiraling sovereign debt crisis.[8


Yet few cost estimates take into account the severe non-monetary effects of climate change on the ecological services on which sustainable growth depends[9], the risk of destabilizing climate migration and geopolitical conflict, or many of the long-tail risks. Indeed, the 'error-bars' of climate models are extremely wide because of how uncertain we are about both the climate's sensitivity to GHG increases and the various positive feedback loops that rising temperatures may trigger.[10] Worryingly, the most recent generation of climate models – that will ultimately inform the IPCC's sixth assessment in 2021 – have revised long-standing estimates of the climate's sensitivity to GHG upwards. There are also fears that different feedback loops may interact, creating a fatal cascading effect across the world's biosphere.[11] It, therefore, cannot be ruled out that climate change will trigger catastrophic warming anywhere up to a temperature of 13ºC in the long run – at which point it would threaten civilizational collapse.[12]


In light of these considerations, UNPRI has released a new ‘aspirational standard’ of stewardship for
institutional investors, ‘Active Ownership 2.0’. It argues that a preoccupation with the short-term returns of
individual companies has led to a failure to redress systemic market problems. Stewardship should be ‘less
focused on the risks and returns of individual holdings, and more on addressing systemic or “beta” issues
such as climate change [...] it means prioritizing the long-term, absolute returns for universal owners’.
This transformation cannot be achieved by increased disclosure. Investors need to focus their efforts on
‘real-world outcomes’ instead of fixating on ‘inputs or processes’UNPRI also emphasizes the importance of collaboration given the dynamics of the ‘free-rider’ problem.

This is especially important in the case of engagement. If an individual investor pushes a company to
reduce the costs that it is externalizing onto the rest of the market, this benefits the market as a whole.
Yet this investor will be worse off comparatively, as the other investors will recoup the same share of the
benefits in proportion to their stake in the market, without the cost of engagement.
Only if investors engage together will there be a full alignment of costs and benefits for each investor.
Collaboration not only lowers the cost of engagement because those costs are shared among investors:
by bringing their holdings together, investors strengthen their bargaining position, lowering the cost of
success in the first place


In summary, the three key lessons of ‘Active Ownership 2.0’ are


- Focus on systemic problems
- Prioritize real-world outcome
- Collaborate with other investors

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