Introduction

The paper analyses how institutional investors with diversified, economy-wide portfolios—“universal owners”—influence corporate behaviour to internalise negative externalities, particularly greenhouse gas emissions. It challenges the assumption that shareholders solely seek firm-level profit maximisation, showing that diversified investors may prioritise portfolio-wide stability and risk reduction.

Institutional investors’ externality internalisation

Portfolio-maximising objective of common owners

Research shows large institutional investors hold significant stakes across competitors, reducing incentives to prioritise firm-level gains. Between 2001 and 2013, seven shareholders controlled 60% of United Airlines and large shares in Delta, JetBlue, and Southwest, contributing to higher ticket prices. This suggests investors aim for portfolio-level outcomes even at the expense of individual firms.

Reduction of systemic climate risks

Climate change poses systemic risks estimated to cause economic losses of up to USD 23 trillion over 80 years under 4°C warming. These risks cannot be diversified away, incentivising investors to mitigate emissions across portfolio companies.

Shareholder activism for climate change mitigation

Emissions reduction targets: Investors demand binding emissions targets. Royal Dutch Shell pledged a 20% reduction in net carbon footprint by 2035 and 50% by 2050 following pressure from Climate Action 100+, representing USD 34 trillion in assets. BP, BHP, and Xcel Energy linked executive pay to emissions goals.

Suspension of anti-regulation lobbying: Firms face pressure to end lobbying against climate policies. Shell withdrew from the American Fuel and Petrochemical Manufacturers over misalignment with Paris Agreement objectives.

Climate risk disclosure: BlackRock contacted 120 carbon-intensive companies requesting TCFD-aligned disclosure, framing transparency as essential to managing systemic risks.

Legitimacy of firm-specific business purpose

Although managers are expected to serve firm-level interests, diversified investors rationally pursue portfolio-wide returns. Some activism is justified as firm-aligned, though evidence indicates broader motives. Climate proposals won majority support at Kinder Morgan (59.7%) and Anadarko Petroleum (53%).

Impact on emissions reductions

Studies show a negative association between “Big Three” ownership (BlackRock, Vanguard, State Street) and carbon emissions, suggesting either preferential investment in low-emission firms or active pressure on emitters.

Internalisation of climate externalities: cost-benefit analysis

Investors face difficulty modelling portfolio-wide effects and may prioritise cost-effective reductions. Their interventions aim at portfolio returns rather than full social welfare alignment.

Ability and incentives of common owners

Mechanisms for influencing managers

Tools include shareholder proposals, direct engagement, voting strategies, and aligning executive pay with emissions performance.

Liability for violation of fiduciary duty

There is debate over whether portfolio-oriented activism breaches fiduciary duty. Courts and regulators continue to evaluate whether such actions undermine obligations to individual firm beneficiaries.

Incentive to intervene: amending model of rational reticence

Traditional governance models assumed diversified investors were passive. Evidence of coordinated climate activism indicates a shift, with intervention occurring when systemic risks threaten portfolio stability.

Implications of diversified shareholder objectives

Welfare effects

Climate externality internalisation may overlap with societal interests, but outcomes can diverge where labour or consumer welfare is affected.

Market concentration and investor as regulator

High ownership concentration enables investors to act as de facto regulators, influencing competition and environmental standards, raising concerns about accountability and oversight.

Shareholder primacy and efficiency framing

The findings challenge the assumption that shareholder interests always equal profit maximisation. Investors may direct firms toward goals that stabilise portfolio value, even where this reduces individual firm profits.

Conclusion

Institutional investors’ climate activism reflects rational attempts to internalise portfolio-wide externalities. This challenges assumptions of shareholder homogeneity, reshapes corporate governance theory, and raises questions for antitrust and regulatory frameworks.