Universal Ownership in the Anthropocene

Abstract

While diversified asset owners’ returns have always largely derived from the overall performance of the market, it is only in recent years that the scale and scope of the systemic environmental and social risks to the portfolio have become apparent. These ‘universal owners’ – pension funds, endowments, sovereign wealth funds, and the like – have an incentive to protect the source of the vast majority of their returns: a well-functioning economy underpinned by robust environmental and social substrates. Not all market players share this incentive, however. Universal owners’ own asset managers’ incentives run counter to the goal of addressing climate change and other catastrophic risks, producing a structural misalignment in which universal owners effectively finance conduct that undermines their own long-term interests. The stakes of this misalignment extend to trillions of dollars in investment and to the planetary systems upon which long-term economic value depends.

This Article advances Universal Ownership Theory by incorporating several novel elements into the concept: a catastrophic risk lens that highlights the portfolio risk of fat-tail events; a theoretical framework that reflects advances in the behavioural sciences; and a clarification of the definition of the term in light of the pressures of the 21st Century. It further develops a typology of universal owners and their intermediaries; proposes the term ‘universal manager’ to describe the large diversified (and mainly passive) asset managers with which universal owners are sometimes conflated; and explores both the practical and theoretical implications of universal ownership in terms of fiduciary duty and the actions of other financial sector actors. This reorientation of Universal Ownership Theory clarifies the role of universal owners relative to their service providers and frees them from misconceptions that would otherwise impede them from protecting long-term portfolios and the environmental and social substrates that underpin them.

*Note that the second half of this paper has been separated out into its own piece, now an updated and expanded forthcoming book available here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3638217

Keywords: universal ownership, sustainable finance, corporate governance, climate risk

JEL Classification: G30, Q00