Saturday, January 8, 2022

Tallarita on The Limits of Portfolio Primacy (Revised)

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, 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 offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship.... [C]limate 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....

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