In 2008, when the financial crash coincided with real economic hardship, the stock market and the economy appeared to be related. But the Covid-19 pandemic has driven a spectacularly large wedge between financial markets and the material world. The S&P500 marked 33 record highs over the course of 2020 alone, and with it the wealth of billionaire founders of companies in the index, such as Jeff Bezos and Elon Musk, reached dizzying new levels.
There are many who will have looked at booming stock markets during the pandemic – or heard them cited by politicians such as Donald Trump as proof of wider economic health – and wondered how such gains are possible amid unprecedented economic hardship, soaring unemployment and the shutdown of huge swathes of our economy for months on end.
The answer is that stock markets are not the whole economy, or the real economy. They are not a rational, useful indicator of economic activity, now or in the future. Their purpose is ostensibly to raise investment money for companies, but compared to the volume of trading, very little productive capital is actually raised on stock markets. The vast majority of activity involves exchanges between investors. The journalist Doug Henwood has argued that even new stock issuances have “more to do with the arrangement and rearrangement of ownership patterns than…with raising fresh capital”.
This rearrangement of ownership does not happen in a vacuum, however: over the past several decades, it has substantially reshaped the behaviour of major economies, and with them, the contours of global crises from Covid-19 to the climate emergency.
Last year BlackRock, the world’s largest asset management firm, quietly passed a new milestone: more than US$8.5trn in assets under its control. Its closest competitor, Vanguard, now boasts nearly US$7trn in assets under management. Together with State Street, a third American asset management titan, these three firms now constitute nearly 20 per cent of the roughly $100trn in global assets under management. In the US, 90 per cent of the S&P500 companies have one of these three managers as their top shareholder. This concentration of economic power is a fairly recent phenomenon, and it’s no longer unique to the US.
According to new research we’ve undertaken at Common Wealth, BlackRock and Vanguard have doubled their average combined stake in the FTSE100 over the past two years alone. Two-thirds of FTSE100 companies are at least 10 per cent controlled by these two asset managers.
Why does this matter? Owning shares in a company gives you not only income rights (rights to dividends), but also a say in how the company is run and the investment decisions it makes through voting at corporate annual meetings, as well as through direct engagement with a company’s executives.
The result is that under our current system, a handful of firms now wield significant control in the economy, and this influence extends far beyond the companies in which they hold shares. The European Commission, for example, prompted a conflict of interest inquiry when it decided to contract BlackRock to advise on its sustainable finance legislation, while the Federal Reserve put BlackRock in charge of its $750bn Covid-19 response programme, prompting some to brand BlackRock “a fourth branch of government”. Quietly, and with little resistance, asset management has emerged as a major site of economic power, and the industry generously lends its capacities to policymakers while increasingly featuring in our responses to global challenges, perhaps none more critical than the climate crisis.
After years of explosive growth, in 2020 the so-called ESG sector (in which environmental, social and governance-related criteria are used to shape the contents of an investment portfolio) enjoyed record inflows of cash. The combined assets of BlackRock’s two flagship clean energy equity funds multiplied 14-fold from $760m at the start of 2020 to $10.8bn this month. Meanwhile, governing bodies around the world are championing the central role of private investment in delivering a decarbonised economy. Rishi Sunak foresees a green post-Brexit future for the City of London, while the World Bank has a “sovereign ESG data portal” and the EU’s flagship Green Deal is based around a mission of “channeling private investment to the transition to climate-neutral economy”.
ESG or “sustainable investing” sells itself as a win-win for investors and the planet, enabling owners of assets to invest in line with their values and support the transition to a decarbonised economy. BlackRock has positioned itself as the leader of this vital new frontier. But the investment industry is plagued by claims of “greenwash” and shareholder “engagement” strategies have failed to generate meaningful action from corporations. The $54trn Climate Action 100+ investor coalition – of which BlackRock is a member – published a progress report this week showing 99 per cent of the companies with which it engages have failed to set a target to drastically reduce their emissions by 2025.
Beneath fears surrounding ineffectual engagement and poor oversight of green products is a more fundamental concern: the “sustainable investing” boom is delivering no such boom in actual decarbonisation. First, because very little productive investment is raised on the stock markets, and equity investments dominate the ESG world. Second, concentration within a few vast, universal owners structurally undercuts the incentives for and efficacy of shareholder activism. While sustainable investing is sold as a means for investors to put their savings toward building a greener economy, the reality is that it is much better understood as a way for investors to bet on the likelihood of a greener economy, rather than help construct it.
This might be fine if sustainable investing were just an investment fad confined to the world of investors. But it is actively counterproductive to the task of securing a habitable planet, in two critical ways. First, the triumph of sustainable investing risks creating the impression that there is tangible action being taken on the climate crisis, where there is none. Second, as the past few decades have demonstrated, the markets have been remarkably efficient at concentrating ownership, control and wealth. The consequences of this concentration are potentially devastating.
The immense inequalities in wealth and economic power, both within and between countries, that define the contemporary economy are closely related to unsustainable patterns of carbon emissions and resource and land use. To rest our hopes on the expansion of a system that exacerbates these inequalities and concentrates control rights in the hands of a few immensely powerful firms could therefore directly undermine the structural changes to the economy required to secure a sustainable future.
Moreover, doing so will entrench the image of climate action as the preserve of the elite, undermining progress on winning mass public support across social class, which is perhaps the most critical battle we face. To cast climate action as unaffordable – unless it also creates returns for investors – is thus a political failure that risks undermining the public consent needed for the actual work of decarbonisation, while worsening the inequalities underlying the environmental crisis.
We urgently need to shift capital out of polluting sectors and toward a sustainable future, and we also need to ensure that people are able to secure dignity and well-being over the course of their life as pensions – the dominant source of assets for asset management firms – currently aim to do. But to achieve this we will need far more imagination than a handful of companies can provide; we will need to come to terms with the fact that present inequalities in wealth and power are themselves unsustainable.