The Limits of Portfolio Primacy

61 Pages Posted: 31 Aug 2021 Last revised: 22 Mar 2022

See all articles by Roberto Tallarita

Roberto Tallarita

Harvard Law School; Harvard University - Harvard Law School

Date Written: August 9, 2021


According to a theory that is gaining increasing support among academic and practitioners, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and push companies to reduce their carbon footprint. Under this view, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization.

This Article provides a conceptual framework and empirical evidence to assess the limits of this theory. In particular, it identifies four crucial problems that undermine the theory’s practical impact on climate change: (i) underestimation of climate mitigation, (ii) portfolio biases, (iii) fiduciary conflicts, and (iv) insulation from index fund stewardship.

First, the stock market likely underestimates the social benefits of climate mitigation. In particular, stock prices might underprice climate risk, and private investors discount the distant future at a much higher rate than socially desirable.

Second, index funds are not real “universal owners”; rather, they invest in subsets of the economy that are relatively less vulnerable to climate change. Many of the Big Three index funds with the largest holdings in the top U.S. oil companies have incentives to oppose aggressive carbon mitigation measures, and even index funds with the broadest market bases internalize global climate externalities to a very limited degree.

Third, climate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company.

Fourth, even if index fund managers undertook the role of climate stewards, most firms across the world would be partially or totally insulated from index fund stewardship, because they are privately held, are owned by state governments, or have a controlling or influential shareholder.

The Article reveals the serious limits of portfolio primacy and shows that this approach offers no adequate answer to the crucial threat of climate change. Policymakers should not rely on portfolio primacy as an effective substitute for climate regulation.

Keywords: corporate governance, index funds, climate change, portfolio primacy, corporate social responsibility, ESG, stewardship, common ownership

JEL Classification: D21, G30, G34, K22, Q5

Suggested Citation

Tallarita, Roberto, The Limits of Portfolio Primacy (August 9, 2021). Forthcoming in Vanderbilt Law Review, Vol. 76, 2023, Available at SSRN: or

Roberto Tallarita (Contact Author)

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

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