Asset managers have cut ties with investor-led climate change coalitions. Pension funds are having a hard think about their relationships.

Institutional investors across Europe are thinking through their next moves and, potentially, future relationships with asset managers as they adjust to high-profile manager withdrawals from coalitions formed to combat climate change.

Discussions are being held at the executive level, with sources telling Pensions & Investments that the pension funds are engaging with their managers to understand whether the moves will impact their contracts.

A number of European pension funds contacted by Pensions & Investments said while withdrawals from climate change-focused coalitions — such as the Net Zero Asset Managers initiative and Climate Action 100+ — are disappointing and signify a setback for the low-carbon transition, they may also carry consequences for asset managers that have chosen to eschew membership. High-profile withdrawals over the past year or so include by BlackRock, State Street Global Advisors and Northern Trust Asset Management.

“Climate change is still a financial systemic risk,” said a spokesman for the 1.44 trillion Swedish kroner ($131.4 billion) AP7, Stockholm. And while AP7 handles voting and engagement internally, “climate ambitions will likely become a more prominent selection criterion in procurements in the future.”

Sources at another multibillion-dollar Europe-based pension fund said the first check in the case of the departure of a manager that runs money for the fund is whether the manager is still meeting the terms and requirements of its contract.

“When an asset manager decides to leave this kind of initiative, it means that we have to monitor more precisely, more strictly,” the CEO said. The team will also make sure the manager is still complying with investment guidelines under which the original contract to run the pension fund’s assets was awarded. “If they are in the initiative (such as the NZAM or Climate Action 100+), there is a natural confidence that this will be the case.”

The pension fund — like many Europe-based funds — sees incorporating climate risk as part of its fiduciary duty. “So if we see people putting less effort into it, (it may) have consequences for us,” he added.

A manager that has pulled out of the initiatives does not “make our lives easier — we know if we appoint a manager that is a member of NZAM, it is a stamp … For us, it is proof that they are committed not only for the portfolio (they’re running for us,) but for the company as a whole. We are more confident that they will be able to apply (ESG principles) for the mandates that we put on them,” the pension fund's head of ESG head said.

The executives said they have engaged with asset managers and are confident that they are still working in line with the sustainability-related requirements of their contract.

One pension fund is taking action. The €59.9 billion ($61.8 billion) PME Pensioenfonds, The Hague, Netherlands, is “taking a stance regarding BlackRock’s retreat from responsible and sustainable investing” for reasons including that the pension fund “invests to achieve the best possible returns with the most sustainable portfolio. This goal has been reinforced by PME in recent years, with a close eye on the external managers who contribute to this objective,” according to an internal document seen by P&I.

BlackRock runs about €5 billion in money market and index funds for the pension fund.

“BlackRock, however, has moved in the opposite direction. By entrusting a part of our asset management to BlackRock, PME becomes associated with this movement, which is increasingly difficult to justify and explain,” the document said.

In January, PME wrote to BlackRock in the Netherlands and invited the firm to address its position and rationale behind its departure. “Relocating the mandates elsewhere would not affect returns,” the document added. “PME also anticipates a transition can be cost-neutral.”

As of March 4, there had been no change in the situation or status of PME’s dialogue with BlackRock, a PME spokesman confirmed.

And U.K. master trust The People's Pension, Crawley, England said in February that it was shifting a total £28 billion ($34.7 billion) in passive equity and active fixed-income assets to Amundi and Invesco, respectively, from State Street Global Advisors. SSGA will still run the remainder of the assets.

The move followed The People's Pension's reviewed and strengthened responsible investment policy, put into place last year. The new policy included minimum requirements and stronger expectations of its asset managers, with a warning that relationships would be reviewed if those requirements were not met. The master trust also reiterated its commitment to industrywide groups such as Climate Action 100+ — from which SSGA withdrew early last year.

Until this year, asset manager withdrawals from climate-related coalitions had made headlines because of the weight of the names of the individual managers that were leaving. However, the NZAM said in a Jan. 13 statement that it was suspending activities amid a review following “recent developments in the U.S. and different regulatory and client expectations in investors’ respective jurisdictions.”

The initiative, which “exists to help investors mitigate the material financial risks of climate change and to realize the enormous benefits of the economic transition to net zero,” will be reviewed to “ensure (it) remains fit for purpose in the new global context.” Signatories — the list of which was removed from the website — will be consulted throughout the process, it added.

The statement came hot on the heels of a Jan. 9 letter by $11.6 trillion BlackRock to its clients saying that it would be leaving the initiative. The manager had already shifted its membership of the Climate Action 100+ initiative to its international business last year.

The letter to BlackRock's clients — signed by Vice Chair Philipp Hildebrand and Helen Lees-Jones, global head of sustainable and transition solution — explained its decision to withdraw from the NZAM and reassured clients that its approach would not be affected: “Our participation in NZAM did not impact the way we managed client portfolios. Therefore, our departure does not change the way we develop products and solutions for clients or how we manage their portfolios. BlackRock’s active portfolio managers continue to assess material climate-related risks, alongside other investment risks, in delivering for clients," it said.

Then, on Jan. 21, the $1.6 trillion Northern Trust Asset Management confirmed that it would be dropping out of both the NZAM and Climate Action 100+ — of which the manager was a founding signatory.

Northern Trust shared a similar statement at the time of its withdrawal. "This decision reflects our confidence that we can independently and effectively manage material risks and engage with portfolio companies to safeguard and grow our clients’ capital,” the statement said. “We have made and continue to make investments that support our independent stewardship and sustainable investing capabilities.”

Despite reassurances, the moves by asset managers and the NZAM has sparked responses from European pension funds, with some choosing to reiterate their own commitment to climate change policies and moving toward a net-zero world — although adding that they’ll be keeping an eye on the any changes managers might make to their approaches to managing climate-related risk.

Among the £49 billion National Employment Savings Trust, London’s external managers are BlackRock and Northern Trust. BlackRock managed about £2.8 billion and Northern Trust about £1.9 billion as of March 31, according to the NEST 2023/24 annual report.

A NEST spokesperson declined to comment on specific managers, but Diandra Soobiah, director of responsible investment, said in a statement about the departures: “While we understand the pressures asset managers are facing, we remain committed to delivering on our climate change policy and will continue to closely monitor the situation.”

The retirement plan has “been clear about the importance of managing climate change risk and its impacts on our investments and the broader financial markets.”

She said that’s “why we regularly engage with all our fund managers to ensure their engagement with companies on climate-related risk and opportunities is continuing and they are tracking their progress towards a net-zero world.”

Charity investment manager CCLA Investment Management, which has £15.3 billion ($19 billion) in AUM, said in a Jan. 27 news release that the NZAM’s decision to suspend and review had been “taken reluctantly, against the backdrop of a hostile and changing political environment that was targeting some of the world’s largest asset managers.”

CCLA, a founding signatory of the NZAM, said it was “disappointed with the decision … but after meeting with the NZAM secretariat team, we understand that they had very little other choice.” A CCLA spokesperson declined to comment further.

The manager said it would be participating fully in the NZAM consultation on its future, proposing that the investment management sector “be resolute that climate risk is long-term financial risk. We cannot cave to pressure to be quiet, instead we should review options together,” the release said.

Due to anticipated changes in U.S. law, CCLA said that may “sadly” result in some asset managers no longer participating in “whatever comes next. But this should not stop those that can,” it said, highlighting that the U.K.’s Competition and Markets Authority has “explicitly signaled that collaboration and coordination on climate change is legal.”

AP7’s spokesman said while BlackRock’s withdrawal from the NZAM carried “a strong symbolic value … the problem is actually much bigger. In 2024, there has been a stream of asset managers and banks that have left various collaborative initiatives, probably to avoid being drawn into politically driven legal processes in the U.S. If these financial organizations give up their climate ambitions, it is a major setback for the transition that the world needs to make.”

The NZAM statement of Jan. 13 said: “As a voluntary initiative, NZAM has successfully supported investors globally as they have sought to navigate their own individual paths in the energy transition in line with their fiduciary duties and clients’ long-term financial objectives. NZAM looks forward to continuing to play this constructive role with investors around the world.”

On the other hand, though, many of the asset managers departing said their climate ambitions had not changed, just their membership in collaborative initiatives, he noted.

Just one month earlier, that concept of a collaboration was probed by the U.S. Judiciary Committee Chair Jim Jordan, R-Ohio and Thomas Massie, R-Ky., chair of the Subcommittee on the Administrative State, Regulatory Reform, and Antitrust, wrote to more than 60 U.S.-based asset managers — including BlackRock and Northern Trust AM — to demand information on their involvement in the NZAM initiative. A Dec. 20 news release from the committee described the climate coalition as “a woke ESG cartel.”

A June interim report by the committee “details direct evidence of a ‘climate cartel’ consisting of left-wing activists and major financial institutions that collude to impose radical environmental, social, and governance goals on American companies,” the release added. The committee wanted managers that were signatories to the NZAM to “answer for their involvement in prioritizing woke investments over their own fiduciary duties.”

The AP7 spokesman added that along with the departures from coalitions, “it is clear that the world is entering a new phase with the new leadership in the White House that will affect the world far beyond its borders. What this means will be something many in the industry will try to find out in the near future.”

PME’s internal document echoed the concerns, noting that in order to achieve its climate goals, the pension fund “relies on the efforts of organizations like Climate Action 100+ and Net Zero initiatives. The departure of major players like BlackRock from these organizations severely weakens them and could potentially lead to the termination of these initiatives,” it said.

The anonymous pension fund CEO agreed that the departures put “in danger the existence or relevance of these initiatives.”

And what it means for the wider ESG movement is also of concern for him. “The main concern is not … at the level of the relationship between the asset manager and us, but the more comprehensive, geopolitical level: How will the dynamic of ESG evolve in the future?” he added.