- Interview by
- Daniel Finn
At the start of this year, the investment fund BlackRock reached a new peak, with ten trillion dollars in assets. The company’s CEO Larry Fink has become one of the most influential figures in global capitalism, and Fink’s annual letter to BlackRock shareholders is a news event in itself.
The rise of passive-investment firms like BlackRock since the financial crisis of 2008 has been one of the biggest stories in global capitalism, leading to an unprecedented concentration of economic power. It also has huge implications for the way we respond to the climate crisis.
Adrienne Buller is a senior research fellow at Common Wealth and the author of The Value of a Whale: On the Illusions of Green Capitalism.
People might have heard a lot about firms like BlackRock in terms of their size and the assets at their disposal. But in the most elementary terms, what is an index fund, and how does it differ from traditional investment firms?
The investment industry today is dominated by firms like BlackRock, whose primary business model is index or passive investing. A passive fund or an index-tracking fund does exactly what the name suggests.
When we think of investment funds and hedge funds, we have the idea of a Wolf of Wall Street–style room, full of traders and fund managers, all yelling and deciding what to buy and sell. But with a passive fund or an index-tracking fund, they allocate the portfolio based on a predetermined set of securities: whether that’s determined in-house or by a third-party provider, you get a list of things that you should buy and how much of it you should buy.
Usually, it’ll be a representative sample or subsample of the market. You might buy the S&P 500, which is the index of the five hundred largest US-based corporations. That covers everyone from Exxon to Amazon, Microsoft, and all the big names. Or it might be something more niche like emerging markets, or mining, which would get you all the mining companies in specific countries in the world that are designated under that category.
It’s a big break with traditional active investing, where investors try to beat the market — they try to outperform the average growth in share and other security prices over time — whereas index funds eschew that altogether. They’re just interested in tracking the market. If the S&P 500 grows by 5 percent in a year, then they want your fund to grow by 5 percent as well.
That may sound like less sexy or enticing, but what’s been interesting is that over time, index funds have consistently outperformed active funds. Sometimes you’ll get an active fund that does very well, but for the most part, they fail in aggregate to beat what a passive fund does, which is give you slow, steady returns over time.
That’s made passive funds incredibly popular. They’re also a lot cheaper than a traditional actively managed fund, because you buy a list of securities and you track it, as opposed to paying a team of people to do all the research and make those decisions.
What is the positive or optimistic case that’s been made about the rise of index funds and passive investing? Do you find those arguments convincing?
One of the arguments that gets made is that passive funds have had the effect of opening up the investment space to a lot more people. Traditionally, investing has been the domain of the very wealthy. In part, that is because you needed to have a certain threshold of assets that you are going to invest, and you had to pay quite a lot in fees to the managers of that fund, which made it untenable for most people. Passive investing has significantly cut those fees, which makes it more accessible.
At face value, that argument is true. I think that’s valuable in some ways. It’s also cut costs for many pension funds, which now invest a lot of their assets passively. That means they’re spending less money lining the pockets of managers and ensuring that the pension assets grow as much as possible.
But on the other hand, I think that the rise of passive investing has had some significant negative impacts as well, or at least ones that are concerning. It has fundamentally changed the landscape of not only investing but also ownership and control in the global economy. It has driven a huge concentration of ownership and power among a handful of elite asset-management firms.
BlackRock is the biggest asset-management firm in the world. About two-thirds of its assets are invested passively, the last time I checked. But it’s closely followed by a group called Vanguard, which is almost exclusively a passive-investment firm, and a few others that are now primarily investing passively. After the 2008 financial crisis, for a whole range of reasons, passive investing really took off. That propelled this small cohort of three or four firms to unprecedented positions of power and ownership.
Today, the so-called big three — BlackRock, Vanguard, and State Street in the United States — together own over 20 percent of the average S&P 500 company. In the UK, BlackRock and Vanguard together own 10 percent of the average FTSE 350 companies — the 350 biggest firms on the London stock exchange. That might not sound like a lot at face value, but that percentage usually ends up being quite decisive in terms of voting rights at corporate annual general meetings.
Corporations will have meetings where they have lots of resolutions that you’re entitled to vote on if you’re a shareholder. Those questions might be “Do we appoint this director to oversee ExxonMobil?” or “Do we set a net-zero target?” or “Do we set human rights and labor standards targets?” and so on. BlackRock, Vanguard, and a few others now often have this immense quasi-veto power over corporations. Evidence from a lot of groups suggests they’re not really using that power to steward these companies toward better behavior, even though the Right has now started to accuse the BlackRock CEO, Larry Fink, of being too “woke” and caring too much about climate change.
One of the reasons I have concerns about the growth of passive funds is their role in driving this enormous concentration of ownership and control. Another is that it’s fundamentally changing the way that capital is allocated in the global economy — changing the sites of power in terms of who gets to decide where money goes, how those decisions are made, and who is accountable.
Following on from that point, how would you say that the major funds like BlackRock have been using the power that arises from their position as big investors?
Unlike Vanguard, which tries to stay in its lane and say, “We are a passive investor and that’s all we do, we don’t engage politically,” BlackRock is hugely interested in the public domain and in politics and policymaking, in large part because of the company’s CEO, Fink. It’s at a scale now where its perspective and its demands are regularly receiving an audience and can’t really be ignored.
For example, BlackRock is very vocal about the climate crisis. That comes in part from a genuine position in as much as it’s invested across the entire global economy: it’s a universal investor, which is the jargon for that. It has every kind of asset class in every kind of industry and every kind of geography. Because of that, it is very much exposed to the impacts of the climate crisis in terms of how that might affect its assets, so its engagement on that question is partly legitimate and partly about making sure that the climate crisis is addressed in a way that doesn’t harm its business interests.
At Common Wealth, where I work, we’ve published a report defining what we call asset-manager capitalism. This is a term originated by a German academic named Benjamin Braun, with whom we’ve worked. Asset-manager capitalism is defined by an ownership structure that is a combination of huge concentration with universal exposure. These companies are invested across the whole economy, and they have strong positions and influence with all of these firms.
Finally, they operate on a fee-based model, according to which their revenues are biggest when they grow the aggregate pool of assets they manage. They might charge you a 5-percent fee on the size of the assets they manage for you. The end result is that all these firms really care about is growing the aggregate scale of the assets under their management.
For BlackRock, that ends up really coming across in the way that it engages on the climate crisis. For example, Fink has been criticized in the past for forming what has been called a bit of a shadow government. There’s a revolving door between BlackRock and policymakers in powerful positions in the United States, the European Union, and even the UK.
The former British chancellor George Osborne worked for them for a while. Brian Deese, who is an economic advisor to Joe Biden, was head of sustainability at BlackRock prior to that, having also previously worked in Barack Obama’s administration. Another Biden administration official, Mike Pyle, used to be BlackRock’s chief investment strategist. There are quite a few others that now have prominent positions in the US government.
The fingerprints of what BlackRock is interested in are very much present in infrastructure and climate-related proposals. Instead of saying that we’re just going to have the state invest directly, you’ve got clever little tools to create new opportunities for private investors that are backstopped and guaranteed by the state. That’s very interesting to BlackRock, which would love the climate crisis to be resolved in a way that means it gets to invest in, profit from, and have controlling ownership of the new infrastructure systems that we need in decarbonized economies. It’s quite strategic about wanting to grow their assets and be in control of the future.
BlackRock’s influence is so profound that it has been invited to directly consult on the EU sustainable finance regulations. It was also given control of the asset-purchase program, which was the Federal Reserve’s response to COVID-19. It bought up all sorts of bonds, like corporate debt. BlackRock was given the job of doing that and bought up a lot of its own funds in the process. It is increasingly becoming integrated with the infrastructure of the US state, while also being present in the EU and the UK.
What implications does the rise of index funds have for the fossil fuel industry and the ecological crisis in particular?
One of the points that campaigners have been raising for a long time — and which we’ve found some evidence for in research that we did at Common Wealth — is that index funds might be creating what we call the “holders of last resort” effect when it comes to the fossil fuel industry.
We’ve seen a lot of active funds looking down the line at a world in which ideally, we’ll have some form of regulation of the fossil fuel industry, or at least we’ll have so many incentives for renewable energy that fossil fuels will gradually become obsolete. Obviously, that’s an optimistic scenario, but the investment industry is looking at the future and thinking fossil fuels are going to be a risky bet in the long run, so many of these funds are slowly, gradually moving out of the fossil fuel industry.
However, we found that in the UK at least, passive funds have been lagging behind in that respect. Over time, ownership of the fossil fuel industry is increasingly shifting out of the active sector and into the passive sector. If you have passive funds that are required to keep buying up shares in these companies, it keeps their share price higher, and it allows these companies to have easier access to capital in other ways: they can borrow and so on.
That’s something that is quite concerning to a lot of people. If you have increasing passive ownership of the fossil fuel industry, you also end up in a situation where some investors like Vanguard, who don’t really act at all on the climate crisis, will have a lot of voting power and will not use that to attempt to drive change at those companies. It’s been a big question for the divestment community. A lot of people have pushed for big investors to divest, but they say, “We can’t, because we’re just following the index; we have no choice, we have to stay invested in fossil fuels.”
Recently, a challenge to that consensus has started to emerge. For a long time, no matter what happened, passive investors would not deviate from what was in the index they were given. They refused to introduce “tracking error,” as it’s called, even in the wake of the high-school shooting in Parkland, Florida, in 2018. There was a quote from a BlackRock executive who said that Parkland was interesting for them, because on the one hand, you feel bad and you don’t want to keep buying shares in gun manufacturers, but on the other hand, you don’t want to introduce tracking error. That’s genuinely the way that they were thinking about it, and it’s the same with fossil fuels and the climate crisis.
But in response to the conflict in Ukraine, BlackRock stopped buying any securities from Russian companies: no bonds and no shares, and that includes its index-tracking funds. It went to the three companies that dominate index providing — MSCI, S&P, and FTSE Russell — and said, “We’re your biggest client, and you need to stop putting Russian securities in the index.” That’s a great way for them to avoid introducing tracking error, because they’re so powerful that they can just lobby the index providers to change the indices themselves.
When it comes to the ecological crisis and the way that we resolve it, there are other interesting implications of the way that passive funds have changed how capital is allocated. This is documented very well in the book Trillions by Robin Wigglesworth, which I would highly recommend to anyone who finds this interesting. Passive funds have a self-fulfilling prophecy effect: when they allocate money to a fund, more goes into the bigger companies than into the smaller ones, in proportion to how big they are.
When you’re buying the S&P 500, you’re putting proportionately more into Tesla, for example, than you are into Hasbro or Alaska Airlines. That creates a system in which you continue to subtly favor big incumbent firms over time. When it comes to sectors like renewable energy, they tend to be much smaller firms — often not even big enough to be included in indices.
If you are going to try and resolve the climate crisis in a way that involves a capitalist approach, that’s a big problem, because the market isn’t efficiently allocating capital to these dynamic new upstarts. It’s favoring incumbent industries, of which fossil fuels are a big one.
Passive investing also has huge implications for governments in the Global South and in what are called “emerging markets.” Passive funds are increasingly big players in buying up the sovereign debt of many countries around the world, who unfortunately have to borrow from private investors on the global market.
That means that the question of whether or not a country gets included in an index that investors are interested in potentially has life-and-death implications, because it hugely affects how much it costs for them to borrow and on what terms. That has significant governance implications for countries that don’t have monetary sovereignty.
There’s some very interesting work by an academic named Jan Fichtner looking at how the big three index providers have become a force in how poor companies access finance that is now rivaling the scale of the International Monetary Fund and the World Bank. From the perspective of the climate crisis, that’s a huge problem, particularly because in the event of crises such as the COVID-19 pandemic, there’s now evidence to show that passive funds are the first to pull all of their investments out of those risky government bonds and into safer havens.
That has very damaging effects for those countries because it immediately increases the cost of borrowing for them in a moment of crisis. As we look forward down the line to a much larger climate and ecological crisis, it’s incredibly concerning. It’s concerning from a justice perspective and from a sovereignty perspective, but it’s also concerning in terms of the ability of countries on the front lines of this crisis to adapt, to mitigate, and to obtain financing on fair terms to do what they need to do to survive and ensure that people are safe and able to adapt to a rapidly changing world.
Your new book is called The Value of a Whale: On the Illusions of Green Capitalism. What are the key arguments that you set out to challenge in the book?
The fundamental argument in The Value of a Whale is that we need to be contesting and thinking about the way that capitalism is adapting and “greening” itself, at least in name and image, in response to the climate crisis. The climate crisis is an unprecedented threat to the capitalist model, but it’s also increasingly perceived by capitalist interests as a new terrain in which they can profit.
To me, that is quite a big concern, because most “green capitalist” solutions, as I call them, are based around two approaches. One is doing everything possible to minimize disruption to the existing economic system and arrangements of ownership, wealth, and power. The second is to ensure that there are new opportunities for profit-making and accumulation in a rapidly changing world future.
Carbon pricing, for example, is the totemic example of green capitalism. A carbon price sets out to do as little as it can to disrupt existing patterns of power, inequality, and control. It relies fundamentally on a belief in the ability of the market to adapt and be an invisible hand that is wise and can steer us towards a greener future. It’s all based on ideology and faith in market actors, incentives, and the price signal as the ultimate arbiter of what we should do.
That’s exactly what I set out to challenge in The Value of a Whale. Market-based logics, however you might feel about them in other contexts, are just nonstarters in the context of ecological and climate crisis. One point I consider at the end of the book is the question of whether we should accept green capitalist solutions, failing other chances to resolve these crises, whether that means sustainable finance, carbon pricing, carbon offset markets, or putting a value on a whale, which is a big new frontier in this space.
The answer I arrive at is “no,” because these proposals are both practically ineffective and a huge distraction from what needs to be done. They create a veneer of progress where there really isn’t any. We also have to ask whether this world with its arrangements of wealth and power is one that we want to carry forward, or whether we should be advocating for something radically different in the transition to a decarbonized and sustainable future, with a different prioritization of value and a different way of living.
If green capitalism doesn’t have the answers, then what are the prospects for the kind of political action that would be needed? How would you say the pandemic has affected the picture after two full years?
This one might not be the most optimistic answer! If anything, the pandemic has really cemented the conditions for green capitalism to thrive. All of the “Build Back Better” and green recovery pledges — as watered down and as whittled down as they may have been — were ultimately built around the green capitalist perspective of using the state as a backstop for private investment and accumulation. This is a phenomenon that the economist Daniela Gabor calls the Wall Street Consensus — using the public purse to backstop private profits while taking all the risk on the public front.
That was the bread and butter of most green recovery packages, whether it was in the United States, the EU, or the UK. In many ways, the pandemic was an initial test for the strength of that agenda, and I think the reaction to it has showed it to be quite a cohesive framework that governments are very eager to follow. That’s obviously concerning from my perspective.
The pandemic was also a very good time for investors and people with financial assets and for passive markets and sustainable finance. ESG, which stands for environmental, social, and governance, is a kind of green branding for investors and companies, and it had a record year in 2020. Again, that further cemented a coalition that is embedded in the growth of financial assets and has that as a priority over time.
On the other hand, the pandemic provided a huge moment of rupture and a reminder of the unsustainability of our existing system. It also confronted us with the question of who and what we value in the economy.
“Clapping for carers” was obviously a garbage way to avoid talking about paying them more. But I think it made a lot of people confront the question of who is valuable in the economy as a worker: Who is doing the real work, what do we actually value in our lives, and what do we need to survive and thrive? What do we care about, whether that’s access to nature, green spaces, and being in the fresh air during the pandemic or being able to spend time with our family and friends?
That all might sound a bit twee, but I genuinely think those are the sort of questions that we need to be asking. What do we consider the foundation of a good life? What do we actually value? Being able to focus on those questions and center our politics and our response to the climate crisis around demanding a future that is sustainable while discarding the idea of happiness derived from mass consumerism, for example, can be a very powerful way to orient ourselves in the way that we think about how to respond to ecological crisis.
Whether that has political cut-through is another question. But hopefully we can tap into the salience of the importance of childcare, social care, health care, access to nature and green spaces, the ability to spend time with family and friends, and not wanting terribly insecure labor conditions. Obviously, the resurgence of trade unions in response to inflation has been interesting in that respect, and that’s a secondary pandemic effect that’s quite encouraging. All of those things can inform a climate politics that speaks to people — and that might have a chance of winning.