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Asset Manager Capitalism and “Sustainable Investing” Pose Enormous Risks to The Environment

The industry is rife with claims of greenwash and poor regulation, but even with these problems fixed, largely passive funds tracking “lower carbon” indexes will do little to drive the transition to a sustainable economy

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Adrienne Buller
A sign for Wall Street hangs outside of the New York Stock Exchange

Despite the selection of several BlackRock alumni for influential political offices, most recently in the new Biden administration, surprisingly few people are likely to know who BlackRock are, or what they do. More surprising is the apparent eagerness of regulators and governments to accept BlackRock as another branch of government, whether handing them the reins of the US Federal Reserve’s Covid-19 asset purchase programme or contracting them to devise sustainable finance regulation for the EU.

As the world’s largest asset management firm with nearly US$9 trillion in assets under their purview and stakes in virtually every industry of the global economy, BlackRock are an immensely powerful global institution. But they are not wholly unique in this position; a number of behemoth firms have surpassed multi-trillion dollar asset values over the past two decades, propelled by a number of factors including a passive investing boom and buoyant asset prices following a decade of quantitative easing. Rather, BlackRock are simply the most prominent instantiation of a much wider-reaching trend: the advance of asset manager capitalism. As the academic Benjamin Braun contends, asset manager capitalism is the outcome of a decades-long concentration of ownership within a handful of elite asset management firms – a process that has fundamentally reconfigured the logics that motivate corporate and financial behaviour.

As Braun argues, the ascendance of a handful of large firms, that dominate the industry’s market share and constitute the most powerful shareholders of the global economy’s major firms across every industry, has made the interests of asset management firms the core consideration of corporate governance. Critically, this influence increasingly extends to government, as well. Some of these impacts are direct and overt, as in the examples cited at the start of this piece. But more subtle and, in my mind, more impactful, is the permeation of the logics of asset management throughout much of our wider political response to societal objectives and challenges; most saliently the climate crisis.

Over the course of the pandemic, the so-called ‘Environmental, Social, Governance’ (ESG) investment industry, where portfolios are constructed with attention to particular criteria, like a company’s carbon footprint, has enjoyed record cash inflows from eager investors supposedly waking up to the reality of ‘systemic risks’, like a pandemic or global warming, for their investments. Meanwhile, political leaders and institutions from the World Bank to the UK Chancellor and European Commission are consistently repeating the mantras of ‘sustainable finance’ and ‘green investing’, as they advocate major shifts in private investment to ostensibly ‘green’ assets. BlackRock and many of its contemporaries have been applauded for committing to address ‘climate risk’ in their vast portfolios, while shareholder engagement – whereby a firm uses its position in a corporation to push for changes in business strategy, such as carbon targets – has marched up the agenda for many large asset owners, such as the Church of England’s pension board.

The trouble is that neither strategy is delivering. Despite best efforts from some, whatever advances have been won through shareholder engagement are modest, while crucially, the world’s dominant players – particularly the US passive investment titans – have routinely failed to use shareholder power to drive climate and environmental progress. This is not necessarily the result of wilful neglect that can be rectified with a change in management; rather, it is built into the incentives of asset manager capitalism. Not only are the world’s dominant investment firms the largest shareholders in countless companies, giving them immense voting power and sway over engagement processes, but they are also ‘universal owners’ – meaning they are invested throughout the global economy. As a result, the actions of individual portfolio companies matter much less than the stable growth of their asset base as a whole, upon the size of which their fees are based. Thus, while this universality may make them uniquely attentive to the systemic risks of climate change, it contravenes the motivation to take specific action to address it.

And while the explosive growth of these asset management firms’ ESG offerings might seem encouraging, not only is the industry rife with claims of greenwash and poor regulation, but even with these problems fixed, largely passive funds tracking “lower carbon” indexes will do little to drive the transition to a sustainable economy. Relative to the volume of trading, very little productive capital is raised by firms on the stock market, which largely sees shares and cash change hands between investors; thus, a ‘green’ investment product is better understood as a means for investors to bet on the likelihood of a low-carbon future, rather than construct it. This speaks to the rot at the core of ‘sustainable investing’: namely, this approach is dedicated to minimising the risks to investors posed by the climate crisis. Comparatively scant attention is paid to the inverse of this relationship. That is, the tremendous risk posed to the climate and environment by finance and its relentless pursuit of higher returns divorced from ecological reality. Not to mention its tendency to exacerbate the economic inequalities that underlie soaring emissions and environmental degradation.

Vast disparities in affluence within and between countries mean the comparatively affluent consume and emit on a scale that dwarfs the environmental impact of the majority of the world’s population. Importantly, this small cohort also overlaps extensively with those set to benefit most from the green finance boom. As argued in a recent Nature publication, long-term climate and environmental sustainability hinges on addressing these extremes of affluence. The growing pervasiveness of the ‘sustainable investing’ mantra and permeation of the logics of asset manager capitalism into our politics is thus, to my mind, a grave concern. It risks creating the veneer of meaningful shifts in economic behaviour while further enriching the savvy asset owning – directly undermining the erosion of extremes of inequality needed to combat the ecological crisis. As governments spin rhetoric of green recoveries from the Covid-19 downturn, leveraging ‘sustainable’ private finance seems set for pride of place among their strategies. Against this received wisdom, we must demand a decisive break with our economic status quo, and design a future that is not just decarbonised, but fundamentally more equal.

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