Abstract
The outsize influence of asset managers raises important questions about the relationship between fund managers and the companies in which they are invested, with recent theorists of asset manager capitalism suggesting an emergent disinterest in the performance of individual firms among large asset managers. Investors’ growing focus on environmental, social, and governance (ESG) data in financial decisions offers one window into this relationship. Drawing on interviews with the ESG team and a group of portfolio managers at a large European bank, I argue that ESG analysis is seen as valuable not because of some unique social, environmental, or even financial benefits, but because it helps asset managers more effectively govern the companies in which they are invested by objectifying and depoliticizing their interventions in the governance of invested companies. This contributes to emerging theories of asset manager capitalism by calling attention to the strategies asset managers develop to exercise control over invested companies.
Introduction
In early 2022, BlackRock Chairman and CEO Larry Fink published an open letter describing his firm's renewed commitment to accounting for invested companies’ decarbonization efforts. Environmental, social, and governance—or ESG—issues, he contended, were increasingly important determinants of capital allocation. As if responding to the charges of “wokeness” that are now bafflingly levied at asset managers and other financial institutions that have adopted even the most basic forms of ESG analysis (Financial Times, 2022), Fink insisted that BlackRock is focused on sustainability “not because we are environmentalists, but because we are capitalists and fiduciaries to our clients” (Fink, 2022). The embrace of ESG by asset managers like BlackRock has led pundits in both the popular press and academia to speculate about the changing nature of sustainable finance. A short analysis published by S&P, for instance, suggested that Fink's (2022) letter represented a “subtle but significant escalation of BlackRock using its influence to push for action on climate” (Naik, 2022), reflecting an admittedly more reserved optimism among political economists and other scholars regarding the structural power of large asset managers to take a longer-term, and thus more responsible, approach to economic decision making, even if their voting records suggest a hesitancy to act too aggressively on sustainability (Dafe et al., 2022; Fichtner and Heemskerk, 2020).
Asset managers like BlackRock now control a sizeable chunk of global financial capital. In addition to owning large stakes in many of the world's biggest companies, they also increasingly control people's access to basic needs like housing and healthcare. This level of concentration of asset ownership is unprecedented, leading social theorists to supplement existing typologies of capitalism with the addition of what is increasingly referred to as “asset manager capitalism” (Braun, 2016a, 2021; Brice et al., 2022). A defining characteristic of asset manager capitalism is the emergence of so-called “new permanent universal owners” whose assets under management (AUM) are highly diversified and who care less about the financial performance of individual invested companies than the relative performance of large, passively managed index funds compared to the funds of other asset managers (Fichtner and Heemskerk, 2020). This literature suggests that large asset managers are less concerned with the performance of individual invested firms for at least three reasons: first, because their holdings are so diversified, poor financial performance of a particular company or even several companies within a particular sector has a less noticeable impact on overall fund performance; second, because they are so big, it is easier for large asset managers to internalize poor performance; and third, and perhaps most important, because their fees are based on AUM rather than returns on investment, they do not need to perform well in absolute terms, but only relative to their peers who typically exhibit very similar investment profiles (i.e., huge holdings that are highly diversified).
Building on a nascent literature that examines these dynamics through the empirical lens of ESG integration (Braun, 2022; Brice et al., 2022; Ouma, 2020), this article contributes to the growing body of scholarship on asset manager capitalism by complicating the idea that asset managers are less interested in the financial performance of individual firms. I show that, in the case of a large European bank that has a well-established asset management division, the primary value of ESG analysis according to both the ESG team and a diverse sample of portfolio managers is not that it leads to some desirable social or environmental outcome, but that it enhances the financial value of the portfolios they manage. It will come as no surprise that a bank cares about the financial performance of the funds it manages on behalf of both institutional and individual clients. However, the observation that ESG analysis is seen as a way of allowing fund managers to probe and at times interfere in the governance of invested corporations suggests that the question of governance within an era of asset manager capitalism is more complex than analyses of the world's largest asset managers (i.e., BlackRock, State Street, and Vanguard, or the “Big Three”) can answer, calling attention to the power struggles between relatively smaller asset managers and invested companies. With that in mind, this article addresses several interrelated questions: What is the role of smaller asset managers in asset manager capitalism? Does the increasing “assetization of society and nature” (Langley, 2020) correspond to an expansion of asset manager capitalism and its attendant logic of disinterest in the actual (versus relative) performance of the underlying asset? Do smaller asset managers follow this new logic, or do they continue to play by the rules of earlier corporate governance regimes?
To answer these questions, I examine the value of ESG from the perspective of people working for an asset manager whose managed assets are a fraction of those managed by the Big Three, but are nevertheless measured in the hundreds of billions of dollars. This responds to Benjamin Braun's call for a “microfounded political economy of the investment chain” that puts “the market practices and devices that constitute finance back into view,” with a specific focus on “micro-level devices, practices and narratives” among ESG professionals and the way these relate to “macro-issues of power and inequality that are at the heart of political economy” (2016b: 6–7). The sustainability efforts of asset managers offer an interesting window into the power relations within the investor chain and how those relationships get obscured and depoliticized, not only between analysts and portfolio managers within a firm but also between portfolio managers and the companies in which they have invested. In interviews, once our conversations about their employer's ESG strategy moved beyond vague claims about the potential of ESG to help expose unforeseen risks and opportunities for investors, my informants often explicitly described the value of ESG as a way of objectifying their active management of invested companies. On one hand, this should not come as a surprise since even Larry Fink understands ESG as a way of enhancing the way asset managers wield their influence over-invested companies. On the other hand, the fact that asset managers are so interested in ESG precisely as a technology of corporate governance should give us pause as we contemplate the ostensibly passive management strategies of asset managers and their supposed disinterest in the performance of individual firms. If Stefan Leins (2020: 74) is right in asserting that the rapid rise of ESG has instantiated a “new form of governmentality of markets,” then it is crucial to understand the dynamics between investors and invested companies that this emergent “ethical order” obscures behind the veil of “the market” (Archer, 2022; Archer and Elliott, 2021). I argue that ESG allows asset managers in particular, who are both structurally disincentivized to actively engage with corporate governance issues and facing increasing political pressure to take a passive role in the management of invested companies, to exert control over invested companies at the same time depoliticizing and objectifying their influence. In doing so, they take an idea that has the potential to be quite radical—that companies should indeed be held accountable for their social and environmental impacts—and turn it into yet another ecocidal scheme to extract profit from already over-exploited socioecologies (Goldstein, 2018; Whyte, 2020).
Methods
The article draws on a set of 26 semi-structured interviews and several shorter, less formal conversations that took place in 2018 and 2019 with employees of the asset management division of Norebank (a pseudonym), a large European bank that is actively working to integrate environmental, social, and governance (ESG) indicators in its investment strategy. Approximately half of these interviews were with members of the bank's sustainability team, while the other half was with a group of portfolio managers. Interviews with the sustainability team varied, from several one-on-one interviews (and in a few cases, multiple meetings and interviews with the same key informants) to online group interviews with up to four ESG analysts who are based in the bank's different offices. I made several visits to some of these offices, including the headquarters of its asset management division and a more casual office space (think WeWork) where several members of the sustainability team preferred to work, which gave me a chance to do very limited participant observation as I sat at an empty desk between scheduled interviews or joined different members of the sustainability team for lunch in the building's cafeteria. My primary contact on the sustainability team set up interviews with a group of portfolio managers (from European “large cap” portfolios to fixed income portfolios), who I typically met in groups of two or three (although some of these interviews were also one-on-one). Most of the interviews were recorded and transcribed, although some of the portfolio managers declined to be recorded. A few months after finishing my interviews, I was invited to give a summary of my findings to the sustainability team in the form of a webinar, which provided an opportunity for further feedback and discussions. I situate these interviews in a longer research project analyzing elite visions of sustainability from 2015 to the present, which has included several additional interviews with and observations of people working in sustainable finance (Archer, 2022). As Brett Christophers (2019: 758) observes, the perspectives of investors themselves “are seldom heard but are frequently assumed or imputed” in critical scholarship on finance and sustainability. Understanding these perspectives, he argues, is “fundamental” for both policymakers and environmental activists seeking to influence the flow of capital to unsustainable companies.
In drawing on interviews with people who work in a single financial institution, this article is distinct from recent studies such as those by Christophers (2019) and Brice et al. (2022), which draw instead on interviews conducted across several different asset managers. In a different vein, its reliance on interviews rather than more typical ethnographic data yields admittedly “thinner” descriptions than Leins’ (2020) analysis of the way bankers engage with ESG or Souleles’ (2021) work on how traders think about the social and temporal aspects of markets in the context of algorithmic trading, to give two recent examples of relevant work in anthropology. However, nearly all of my informants at Norebank had work experience at other financial institutions, and several have since moved on to other positions at other banks, suggesting that even if the interviews were limited to a single bank, the perspectives of my informants were informed by their experience both within and outside Norebank. At the same time, confining my interviews to Norebank rather than interviewing people working in ESG at several different banks helps control for differences in organizational cultures, structures, and strategic priorities. Moreover, focusing on a single bank allowed me to probe the relationship between “conventional” financial analysts and portfolio managers, on one hand, and the ESG team, on the other, which would have been much more difficult with a cross-sectional approach that tried to account for a wider swath of the financial industry. Finally, while I often considered trying to build on these interviews to develop a larger ethnographic project within Norebank (given my own disciplinary background at the intersection of anthropology and geography), doing so would have almost certainly involved being embedded in the bank's ESG team, which would likely have made the portfolio managers I interviewed less inclined to offer critical feedback on the ESG team and its work.
The value of ESG
Many financial institutions are investing quite heavily in ESG integration. This is particularly evident in their hiring practices, where there has been an explosion in advertised positions for people specializing in ESG analysis. In June 2021, for example, PwC announced plans to “invest $12 billion over five years to create 100,000 new jobs aimed at helping its clients grapple with climate and diversity reporting and also in artificial intelligence, as part of its new global strategy” (DiNapoli, 2021). 1 According to a frequent interlocutor who is a senior ESG analyst in the United States, although there is a lack of reliable data about the amount banks are spending internally on ESG (new hires, training, data subscriptions, etc.), the sharp rise in ESG-related job advertisements is evidence that the sector is “taking it seriously.”
The stated rationale is that ESG integration generates financial returns by bringing new data about risks and opportunities into the investment process. Proponents of sustainable finance claim that by mainstreaming ESG integration, sustainability will become a fundamental aspect of investing and that finance will become inherently more sustainable, reflecting a kind of passive embrace of the inevitability of sustainability that sits at the heart of green capitalism (Goldstein, 2018). This corresponds to popular definitions of sustainable finance across the industry, government, and academics, which consistently emphasize the integration of ESG data as the key element of sustainable investing (Busch et al., 2016; European Commission, n.d.; SSF, n.d.), without elaborating the concrete mechanisms through which ESG integration is supposed to lead to more sustainable outcomes other than vague appeals to the efficient distributional power of the market. Central to this vision is the availability (or the eventual availability) and proliferation of reliable nonfinancial data leading to rigorously and transparently constructed ESG indicators. For some of my informants, this imminent shift represents a rather radical opportunity to change the way finance works. In 2015, I was sitting in a conference room of one of Geneva's numerous private banks, talking to its head of sustainability. He outlined an interesting genealogy of sustainable finance: In the early days of banking, he told me, people only cared about returns, but they quickly realized they had to systematically consider risks, too. Hence the basic equation of investing, where the expected value of an investment is a function of both risk and return. Nowadays, he told me, people are adding a third dimension to investing—sustainability—which he anticipated would be just as fundamental as risk and return within a few years. This, he claimed, will bring finance back down to earth, forcing it to invest in companies that offer products and services that people need in their lives rather than the industry's current focus on complex, detached financial instruments.
The investors I have met over the years have tended to be less optimistic (or, in their words, less naïve), reflecting a tendency among asset managers to express skepticism around the promise of ESG (Zeidan, 2022). In 2018, I interviewed one of Norebank's portfolio managers who had recently been tasked with thinking about how to integrate ESG considerations into his investment decisions. I told him what the Swiss banker had told me a few years earlier, and he laughed, telling me I should have asked him, “What's the difference between risk management and ESG?” For this informant, there was no difference. If ESG was in fact a new way of managing investment risks, he asked rhetorically, would not portfolio managers, whose compensation depends on the financial performance of their portfolios, have embraced it wholeheartedly? The fact that they are still so skeptical, he told me, is evidence that the hype around ESG's value-generating potential is just that: hype.
Although ESG integration is often framed rather vaguely as a way of managing risks more efficiently, when I asked for concrete examples of the benefits of ESG analysis, my interlocutors often described the “value” of ESG indicators as a way of making their preferences as investors seem less subjective from the perspective of invested companies. To give one example, it is much easier to ask a company to hire (or reject) a particular CEO or adopt a particular sustainability strategy if one is armed with “objective” ESG data to point to in support of a particular request, not to mention much more likely that the company will comply with their advice. When I asked for specific instances of ESG data being used within Norebank, the ESG team was especially proud of a tool they had developed that collated and analyzed various ESG datasets, providing a straightforward metric for all the companies in the bank's investing universe that portfolio managers consult before meeting with companies or before choosing how to cast proxy votes. Appealing to ostensibly objective ESG data gives portfolio managers a way to influence corporate decision-making that appears “evidence-based” and “data-driven” rather than biased, subjective, or overtly political. ESG data, as Leins (2020) observes, is particularly valuable to fund managers when it is used to shore up their extant investment narratives.
As I discussed briefly in the introduction, emergent theories of asset manager capitalism suggest that asset managers have little interest in the performance of individual invested companies, since they only need to ensure that their funds perform as well as other funds, all of which are diversified in fairly similar ways, in order to attract new asset owners. And yet, the Norebank portfolio managers I interviewed for this project were all very interested in the performance of the individual companies that made up their funds. These portfolio managers were interested in ESG integration to the extent that it gave them a way to push companies to adopt strategies that would enhance their market value and therefore raise the value of the portfolios they managed. It follows that if the portfolio managers are interested in ESG as a tool to help them influence the strategic management of invested companies, then the asset managers who employ those portfolio managers must also be interested in the financial performance of individual companies, suggesting that the political economy of asset manager capitalism is more complicated than it might appear at first blush. At the very least, it requires political economists to reckon with the entanglements of asset manager capitalism's structural dynamics and the way these dynamics manifest from the perspective of the analysts and managers involved in the day-to-day operations of asset management. It also requires an analysis of asset manager capitalism outside the “Big Three.” Asset managers like BlackRock manage assets on an unprecedented scale, with their AUM measured in trillions of dollars. However, most asset managers, such as Norebank, are significantly smaller, and even though they employ similar strategies (e.g., ETFs) and have similar kinds of clients (e.g., pension funds), they enjoy less global influence than their massive counterparts, and they face different pressures at home. In its marketing materials, for example, Norebank regularly refers to its European values (democracy, transparency, sustainability, etc.), and unlike asset managers like Vanguard and State Street, Norebank is a household name in the countries where it operates, a popular choice for both business and personal banking. Recent work has already started to move in this direction, with Braun (2022) noting that BlackRock tends to vote in favor of social and environmental shareholder proposals in “ESG-friendly Europe,” but tends to vote against such proposals in North America. Examining asset management at sites where the logic of asset manager capitalism intersects with other political economic logics and cultural values, as well as asset management at a smaller scale than BlackRock and other behemoths, enhances our understanding of the emergent political economy of asset manager capitalism, especially to the extent that asset managers are embracing ESG as a way to exert power over other actors in the investment chain, specifically invested companies.
Data and dialogue
Two of the Norebank portfolio managers I interviewed, who I call Sara and Peter, were responsible for a portfolio of high-yield bonds (that is, relatively low-quality bonds issued by companies that have a higher chance of not being able to pay them back). According to Sara, these companies are often “immature in terms of ESG” integration and sustainability considerations more generally: We have many smaller companies that have either no clue and don’t pay much attention to ESG related issues, and that could be the E, the S, and the G, and then we have some that are keen on engaging in dialogue with us, because they don’t get the feedback from the equity investors. They only have us, so to speak, as a source of reference for what's going on in the world, how investors are assessing the cases, what the trends are. So, they have a much narrower source of information. … That is where we add the most value, in terms of impact. [Laughing] I think impact is quite a strong word, but in terms of engaging in dialogue with companies and, um, nudging them in the right direction…. Yeah, and that's the thing, if you want to see a company that is thinking about the future and is, you know, trying to foresee what is happening. I guess if they don’t have an ESG focus, then most companies, at least in most sectors, will have a challenge in the years ahead. Matthew: How do these interactions with companies play out? You meet with them and…. Peter: There are conferences around the year […], and at these conferences we have small group meetings. We’ll sit together with other investors. At these meetings, of course, we discuss financial performance, specific issues that have arisen in the last year or so, and we also discuss ESG-related matters. But it's probably fair to say in the high yield space, there aren’t that many investors who have focused on ESG yet, so normally a source for information could be calls with the management, reports they have issued. Yeah…. Sara: And we try to use [these meetings] to get an idea of how they are assessing the future of the business model. So, if you take for example the packaging industry, both paper and plastic, if they are investing in transformation towards using more recycled material, and producing more recyclable material, then if they’re investing in the future, the likelihood of them being able to refinance and us getting our money back is higher, so we find that more attractive as an investment case. But we also assess if they invest too heavily in that and become too leveraged in that service, then we have to assess if we think they’re going in the right direction. So, for us, we use it as an active part of our risk assessment and our evaluation of the sector and the particular issue. And we try to give them feedback on what other people are doing. So, with some of these smaller companies, saying, “You have to focus on transforming your business because that's what your peers are doing,” that's a kind of pushback. It's not impact, but it's pushback. It's trying to share information about the sector. Matthew: Is there an implicit threat in that? That you won’t invest in the future? Sara: Yes (quickly, both laugh). Well, it's not a threat. But what you could say, of course, if we give a clear indication that we are not investing in this company because our assessment is they are not investing in the future, then you could say that. There can be a bit of a conflict between the equity case and the credit case. … In the automotive industry, for example, if you invest heavily in electrification and automated driving, then you might end up having too leveraged a company now, and if you don’t succeed, then there's a high risk that you won’t be the winner at the end, and you take on the risk of having high leverage now. On the other hand, if it actually turns out that you are the winner, then the equity owners would get the upside, so we need them to invest in transformation of the business, but not go overboard and just throw money at each and every trend.
I have reproduced a fairly long snippet of this conversation in order to give a better sense of the tentative nature of ESG integration and the relatively informal interactions in which ESG concerns are elaborated and negotiated both internally within Norebank but also between portfolio managers and invested companies. The kinds of ESG-mediated interactions Sara and Peter describe—small, casual meetings with both other investors and the managers of invested companies—are at odds with the objective, impersonal “data-driven imaginary” that characterizes the ideal-typical sustainability initiative (Archer, 2021). But they are also at odds with emergent theories of asset manager capitalism, which paint a picture of asset managers who are disinterested in the performance of individual firms. Indeed, these portfolio managers are clearly interested in the financial performance of the individual firms that make up their portfolio, evidenced by their concerns over which invested company will be “the winner at the end,” which invested companies will be the losers, and, crucially, what kind of strategic advice they can give to those companies (and what kind of data that advice is based on) to ensure they have picked winners rather than over-leveraged losers.
Another informant, Roberto, managed a team of three people who were responsible for a portfolio that consisted of “some fixed income,” as well as a couple of short horizon funds, a total return fund, and several bigger mandates from institutions. When I asked him about working with the bank's ESG team in the context of managing this kind of fund, he replied: They’ve spotted lots of good topics and small details. You might know that this area [of ESG as opposed to a different area] is discussed more, and they can bring you the details, rather than you having to use time gathering this data, because obviously one challenge still, for the ESG team as well, is that not every company produces these kinds of numbers or data. In the fixed income side, especially as we are not shareholders, we cannot attend shareholder meetings. [There are meetings we can attend, though.] Corporates issue bonds regularly, and whenever there is a new issue, that is more or less the best time when you can try to, or when you can make a change, because if the bond issuer is there, they need you, they need your money, and you can talk to management, and you can give your interests, where you say what you like and what level you’d like to lend money.
Even in the very different context of managing a portfolio that includes fixed income, one of the values of ESG is the way it facilitates conversations with the management of invested companies, offering a way to communicate “your interests” and to “say what you like and what level you’d like to lend money.” Like Peter and Sara, Roberto sees ESG in part as an entry point for nudging or influencing companies to move in a direction he considers to be more strategically valuable. At the same time, and again like his colleagues, Roberto insisted that ESG was only a small piece of a very complex puzzle. He told me that “ESG issues are long term. They have a long-term impact, so it won’t necessarily show in the numbers in the next month, the next quarter, even the next year. It might take several years for the difference to come out in the valuation.” Investors therefore have to balance the long-term concerns raised by ESG analysis with the more immediate pressure of making money for investors. To illustrate this point, he gave an example of two hypothetical kinds of companies, one that has done “the right thing” by adopting a new technology and one that is presumably doing the wrong thing from an ethical perspective (or at least less right) by sticking with an older, cheaper technology: If you compare companies that are doing the right thing, but [some other company] is still using old technology because it's cheap and can still make money and still has good cash flow. At some point, that will change, but it will take time, and in the meantime, there are a lot of other issues that affect valuation, like I said, the central banks, the politics, the technicals, the momentum, and all these things. So, you need to still balance a little bit because we are still evaluated on an annual basis as well, so you cannot put too much in very long-term projects that might become profitable, for example, after five years. You still need to make money every year, or at least your fund has to perform hopefully relatively well every year, so one cannot become too idealistic in that sense, as we are not really an impact type of investment. […]
Yet again, there is an apparent concern with the financial performance of the firms represented in this portfolio manager's investment portfolio. For Norebank employees, performance evaluations are tied explicitly to the performance of the portfolios they manage, which is in turn tied directly to the performance of the companies that are represented in those portfolios. Roberto's response hints at the tension portfolio managers must navigate within asset manager capitalism, namely the tension between the imperative to “make money every year” and the imperative to “at least” perform relatively well.
The G in ESG
In other contexts within Norebank, ESG analysis was used to organize shareholder votes, a key aspect of corporate governance. During “voting season,” in particular, the availability of ESG data allowed portfolio managers to “shore up” potentially controversial votes. One thing my informants seem to want to avoid is being labeled as “activist” investors or shareholders. One way they did this is by grounding their votes in “objective” analyses, to couch their preferences in the quantitative data and technical models. In general, portfolio managers want to avoid the perception that they are motivated by personal ethical or political views. A good example of this is debates over executive pay. In Europe, executives tend to earn substantially lower salaries than their U.S. counterparts, and many Europeans are ethically opposed to senior managers making tens (or hundreds) of millions of dollars (or euros) per year. Norebank's portfolio managers were no different, and they compared European executive salaries to American executive salaries several times in interviews, perhaps because I am originally from the United States. As I have argued elsewhere, framing executive pay as a governance issue through the lens of ESG analysis allowed my informants to relocate the (im)morality of executive pay from their own subjectivity to a moral subjectivity of the market itself—the former, a subjectivity rooted in individual opinions and cultural specificities; the latter, a subjectivity rooted in the economics of efficiency and optimality (Archer, 2021).
In a 2013 speech at a workshop at Georgia State University (the United States), the then-Commissioner of the U.S. Securities and Exchange Commission Luis Aguilar emphasized the role of institutional investors in corporate governance, focusing specifically on their role in determining executive pay vis-à-vis the “say-on-pay” provisions of the Dodd-Frank Act, which allowed investors to vote on executive pay resolutions that, while not binding, proved to be relatively influential in a governance context. According to Aguilar, “Given the percentage of company stock held by institutions, and the low participation rates of individual shareholders in corporate elections, the vote of institutional investors can often determine the outcomes of ‘say-on-pay’ votes. As a result, public companies now regularly arrange meetings with institutional investors to lobby these large block holders” (Aguilar, 2013).
At the same time, these investors tend to be relatively passive, seemingly unconcerned with the governance or even performance of individual companies, rarely submitting resolutions of their own. For institutional investors—and this is even more pronounced for asset managers that advise institutional investors like pension funds and mutual funds—relative performance matters more than actual performance. This has the perverse effect of disincentivizing portfolio managers from taking an active interest in the performance of individual companies, since competing asset managers are typically invested in the same companies; if the value of every asset manager’s portfolio increase at the same rate, none of them enjoy the competitive advantage of relatively good performance, even if this kind of performance would obviously be in the interest of ultimate beneficiaries (pensioners, for example), what Gilson and Gordon (2013) call the “agency costs of agency capitalism.”
Given the difficulty of controlling invested corporations anyway, it makes sense that large investors have developed this hands-off approach. One of the key characteristics of modern corporations, according to Lynn Stout, is their “capacity to make it easier for equity investors to commit their financial contributions irretrievably to the firm” (Stout, 2005). Unlike unincorporated businesses, “[a] corporation's assets belong to the corporation, and not to its equity investors. As a result, those assets cannot be unilaterally withdrawn from the firm by either its shareholders, or the creditors of its shareholders.” Most investors have very few avenues to influence the way a company manages its assets. One of the portfolio managers I interviewed at Norebank provided a useful example of this. His portfolio included shares of a multinational petrochemicals company that was a market leader in deep-sea oil and gas drilling. Offshore drilling rigs, he explained, can “easily cost more than a billion [US] dollars.” Investors like Norebank see these investments as increasingly risky due to several factors, including rising insurance premiums, reduced access to capital, and a general shift in social attitudes toward offshore drilling following several notable disasters (even after more than a decade, the Deepwater Horizon oil spill is still fresh in many people's memory).
He offered a hypothetical example of the dynamic between investors and corporate managers that, in his own words, was unrealistic but still instructive: In a situation where a company was choosing between investing in clean energy research and investing in a new offshore rig, how can an investor like Norebank influence their decision? The problem is not only that the corporation makes it difficult for equity investors like Norebank to unilaterally withdraw their assets, but also that it is difficult for those investors to control how the corporation manages its own assets. For this informant, ESG data can help mediate this potentially fraught relationship. Appealing to “objective” data about the social and environmental risks of offshore platform development rather than relying on “subjective” opinions about whether it is right or wrong to invest in new hydrocarbon extraction infrastructures transforms an ethical decision into a financial decision.
Within the context of what Braun (2016a, 2021) refers to as “asset manager capitalism,” the strategies asset managers develop to more effectively control the companies in which they have invested becomes a central problem, particularly in the context of institutions that have the power to influence corporate governance on an unprecedented scale, but tend to avoid meddling, or at least meddling too noticeably (Fichtner et al., 2017; McCahery et al., 2016). According to Braun's typology of historical corporate governance regimes, asset manager capitalism exhibits the following features: asset managers are the main shareholders; “stock ownership is concentrated in the hands of a few giant asset managers; the latter hold large minority stakes despite being fully diversified; and their interest in the economic performance of individual portfolio firms is weak” (2021: 7). This represents a significant departure from earlier modes of corporate governance such as the shareholder primacy, managerialism, and finance capitalism. For Braun, asset management capitalism can be summarized as “diversified and disinterested.”
Under this regime of asset manager capitalism, shareholders own corporations but are unable to control them since their ownership is relatively dispersed, whereas managers wield significant, if hidden, power within corporations despite owning a typically negligible fraction of those corporations. This generates the well-known “principal-agent” problem, where managers and shareholders exhibit different preferences and face different incentives. The problem is usually resolved by giving management a larger ownership stake, which is supposed to align the incentives of relatively powerful senior managers, who now get most of their pay in the form of stock options, with relatively powerless shareholders. Suddenly everyone is more concerned with share prices than other performance indicators.
Asset manager capitalism adds another complication: Asset managers are the agents or intermediaries of other intermediaries (typically institutional investors like pension funds), and their incentives are also imperfectly aligned (Gilson and Gordon, 2013). As an asset manager, Norebank manages investments for both wealthy individuals (and families) and other financial institutions, which should mean that Norebank is interested in the performance of its funds only to the extent that these funds are able to convince asset owners to enlist Norebank's help managing their assets. The reality is of course a bit more complex than that, especially in the case of a bank like Norebank, which is technically an asset manager, but is several orders of magnitude smaller than any of the “Big Three” asset managers (BlackRock, Vanguard, and State Street), and also provides other services (such as personal banking, business loans, etc.).
Moreover, while at an institutional level, Norebank's asset management division might be less concerned with the performance of individual funds than the absolute value of AUM, portfolio managers’ bonuses (a significant part of their annual pay) are determined by the performance of their portfolios, meaning individual employees are exceedingly concerned with fund performance, and not just relative to other asset managers. Portfolio managers who work at an asset manager like Norebank, then, are caught between a rock and a hard place, required to balance an institutional concern with the total amount of AUM with their own personal incentives to improve the performance of individual portfolios; though clearly related, the two performance indicators are not perfectly aligned. An individual fund might generate excellent returns, but if similarly structured funds at other banks perform even better, those banks will ultimately attract more capital from institutional investors and other clients. On the other hand, an individual fund at Norebank might generate low or even negative returns in one period, but if similarly structured funds at other banks perform worse, Norebank might outcompete other banks in terms of attracting assets.
Here, it is helpful to recall Roberto's claim: “You still need to make money every year, or at least your fund has to perform hopefully relatively well every year, so one cannot become too idealistic in that sense, as we are not really an impact type of investment.” This demonstrates the tension asset managers must navigate as the regime of asset manager capitalism continues to emerge. For Roberto, performing relatively well is a kind of bare minimum requirement, but he still prefers that his fund makes money every year. ESG offers a convenient pretext for portfolio managers like Roberto to be involved in the governance of invested companies without coming across as a meddling activist.
Governing, objectively
Norebank's portfolio managers rarely mentioned the social or environmental impacts of integrating ESG analysis into their investment decision-making process. They even corrected themselves when they used the word “impact,” opting for other words like “nudging” and “pushback.” They were also skeptical of claims that ESG data helped them better understand and manage the so-called nonfinancial risks of their portfolios. Sometimes, this skepticism was explicit, as with the portfolio manager who sardonically asked why someone whose salary was pegged to the performance of their portfolio would need to be convinced to use something that increased the value of that portfolio. Usually, however, this skepticism was more implicit, apparent through the absence of any really explicit claims that ESG analysis was really valuable. In every interview I conducted with portfolio managers, I asked if there was an example where the ESG team's analysis had led them change their mind about an investment decision (either investing in a company they might not have invested in, or choosing not to invest in a company they were planning to invest in); in each case, the answer was “no.”
What emerged instead was a preoccupation with the way ESG data could help portfolio managers push companies in more desirable directions or push back against corporate management decisions with which they disagreed. ESG data obscured these preferences behind a veil of objectivity. Through quantification and rationalization, ESG analysis transforms the profound ethical and political implications of investing—and of finance more broadly—into merely technical issues. Backed by quantitative analysis performed by an ESG team who had strong financial backgrounds and therefore “spoke the same language” as “conventional” investors, Norebank's portfolio managers were able to depoliticize their attempts to govern invested corporations by rendering these preferences technical. Tania Murray Li theorizes moves like this as instances of “rendering technical,” a process that “confirms the expertise and constitutes the boundary between those who are positioned as trustees, with the capacity to diagnose deficiencies in others, and those who are subject to expert direction,” while at the same time depoliticizing the extent to which these practices contribute to the effective exercise of expert power (Li, 2007: 7). In this sense, ESG integration follows a well-documented trend in sustainable development more broadly, situating powerful actors at the center of sustainable development discourse through their claims of technical expertise. Asset managers and the analysts they employ become the arbiters of what counts as truly sustainable, having established themselves as the most compelling experts when it comes to measuring and evaluating sustainability. According to one informant who works as an environmental economist at a large international organization, it is no coincidence that, over the past few years, ESG analysts from places like JP Morgan and Bank of America have displaced climate finance experts from government agencies and NGOs at sustainable development conferences, becoming a key fixture on panels about global sustainability, circular economy, and energy transitions, despite having little formal training in these areas. Having successfully positioned themselves as important sources of expertise on diverse sustainability topics, from environmental management to social responsibility, financial institutions are wielding this expertise against corporate managers, using ESG indicators to “nudge” companies to operate in a way investors believe will generate the highest returns.
On one hand, it is easy to dismiss ESG integration and the people who do it as greenwashing, something that is relatively marginal to the bigger picture of finance. Critics of sustainable finance typically focus on the way the neoliberal logic underlying initiatives like natural capital valuation (Sullivan, 2018) and ESG investing (Parfitt, 2020) reinforces existing power dynamics while precluding more radical approaches to sustainability. Even among my informants working in “conventional” investing, ESG is often described as marketing and reputation management, and ESG certainly contributes to the greenwashing of extractive asset management practices (Braun, 2022). On the other hand, despite my interlocutors’ about the value-added of ESG, their association of ESG integration with a kind of tacit empowerment of portfolio managers vis-à-vis the companies in which they have invested suggests that asset managers might be more concerned with the financial performance of invested companies and their own ability to influence the governance of those companies than theories of asset manager capitalism based on an ideal-typical analysis of asset management might otherwise posit. It may be the case for huge asset managers like Vanguard and BlackRock, those concerns become less pronounced, although as Appel et al. (2016) observe, passive investors are not necessarily passive owners. In any case, smaller asset managers like Norebank are not just—or even primarily—asset managers in the sense of those whose actions form the empirical basis for the theory of asset manager capitalism; they provide business and consumer loans, they offer investment banking, and they even manage small venture capital funds to invest in local start-ups. Asset manager capitalism may be characterized by a higher degree of disinterest in the financial performance of individual invested companies. But, as an analysis of Norebank's ESG integration efforts suggests, asset managers are also developing new ways of monitoring and controlling the companies in which they are invested.
The green spirit of asset manager capitalism
Although the seeds of asset manager capitalism were planted in the early 20th century with the passage of legislation in the United States that established tax benefits for mutual funds, it was only a century later that AUM started to become concentrated in the hands of a few large asset managers, and that asset manager capitalism finally emerged as both a distinct corporate governance regime and a growth regime (Braun, 2021). As asset manager capitalism emerged, the political ecology of finance changed, as well. In particular, concerns about the social and environmental impacts of the private sector, including the financial industry, became increasingly pronounced. Although religious organizations had excluded certain investments from their portfolios for more than a century, it was only during the civil rights movements of the 1960s and 1970s that investors started to face pressure to explicitly consider the social impacts of their investments. (It is worth noting that Rachel Carson's Silent Spring was also published around this time.) By the early 2000s, sustainable finance as we know it today—with its explicit focus on ESG integration—started to take shape, with the first mention of ESG in a 2004 United Nations report serving as a foundation for the Principles for Responsible Investing (PRI) in 2006 (Eccles et al., 2020). Now, most of the world's biggest asset managers are signatories of the PRI and participants in the Climate Action 100 + initiative, while firms like BlackRock have become increasingly prominent actors in global sustainability discussions, with BlackRock CEO Larry Fink's recent annual letters in particular drawing lots of media attention for their foregrounding of sustainability issues.
While a superficial commitment to ESG integration has undoubtedly helped banks greenwash their operations and reduce their own reputational risks (Braun, 2022), my analysis of ESG integration efforts at Norebank points to a much more fundamental reason that financial institutions are so enthusiastic about sustainability: ESG helps conceal the strategic preferences of investors behind a seemingly objective, depoliticized veil of technical analysis, while also providing a pretext for demanding the nonfinancial disclosures. This is important for asset managers like Norebank who, under an emergent regime of asset manager capitalism, are meant to be disinterested in the individual performance of invested companies but also need to keep an eye on what these companies are doing in order to ensure the relatively strong performance of their various funds. The depoliticization of sustainability vis-à-vis “objective” ESG analysis is also exceedingly useful in a political moment where “woke” banks are increasingly targeted by conservative politicians.
Sustainable finance is an increasingly central aspect of “green capitalism,” which Scott Prudham (2009: 1595) defines as “a set of responses to environmental change and environmentalism that relies on harnessing capital investment, individual choice, and entrepreneurial innovation to the green cause.” Green capitalists, according to Stefano Ponte (2019: 102), believe that “the capitalist mode of production can be leveraged to solve the pressing environmental issues that arise from its very logic. We are told that new business models, innovation and technological progress can save the environment and still facilitate capital accumulation and ever-lasting growth in production.” Although green capitalism reinforces existing power relations and fails to address the fundamental contradictions of capitalism that generate socioecological crises in the first place, it also includes a tacitly critical undertone of post-capitalist speculation that needs to be taken seriously (Goldstein, 2013). Drawing on an ethnography of “clean tech” entrepreneurs and investors in New York City, Jesse Goldstein (2018) distills a “new green sprit of capitalism” that combines an underlying commitment to maintaining (and indeed profiting from) the status quo with an uneasy feeling that things desperately need to change, a tension embodied in the phrase “non-disruptive disruptions.” Like Norebank's ESG analysts, Goldstein's clean tech entrepreneurs genuinely want to improve the world, but they are constrained on nearly every front, and they end up promoting “solutions” that not only fail to address the underlying causes of the problems they hope to solve, but potentially even exacerbate them. Put differently, they exhibit a genuine “will to improve” (Li, 2007) that nevertheless reinforces existing socioecological inequalities. The kinds of “technical adjustments” (Günel, 2019) green capitalists develop in response to various socioecological crises—from self-driving electric cars to carbon sequestration technologies to novel ESG integration techniques—do little to address the root causes of these problems and even actively preclude more radical, but necessary, responses.
Green capitalists embrace the ideology of capitalist development, while at the same time harboring an often disconcerted recognition that there are serious problems in need of solutions. One of Goldstein's key insights is that one of the most important dimensions of the green spirit of capitalism is the requirement that “one's aspirational ideals of a large-scale ecosocial transformation … be insulated from the profit-maximizing market imperatives and necessity of perpetual growth that are endemic to capitalism,” leading to a kind of denialism that accepts the scientific basis of climate change while refusing to accept “the social and political implications of any adequate response” (Goldstein, 2018: 32). In this context, the vision of ESG's radical potential to change the way investing works, espoused nearly a decade ago by one of my informants working in a Swiss private bank, gets stripped down to a wholly uncreative—and woefully inadequate (see Buller, 2022) —exercise in fiddling at the margins of asset managers’ bloated portfolios, all while waiting for the market to inevitably transform the ever-increasing avalanche of ESG data into better sustainability performance. Rather than a “revolution” (Gassmann et al., 2021) or a “radical change” (Wenzel, 2022), as recent reports from PwC and GreenBiz suggested, ESG represents a disciplining of both the creative and cautionary impulses of portfolio managers and investment analysts, forcing them to trust in the inevitability of market-driven sustainability while adopting tools that reinforce a political-economic system in which asset managers wield immense influence over-invested companies and, by extension, nearly all of our lives.
Conclusion
The role of ESG analysis in the political economy of asset manager capitalism offers a glimpse into the power relations between asset managers and the companies in which they are invested. ESG analysis is a way for asset managers to govern invested companies more effectively by helping them depoliticize their efforts to advise and “nudge” those companies in directions they think are more profitable, offering a way for financial institutions like Norebank to exercise power within the investment chain in a political economic context where they are meant to be passive and increasingly disinterested in the performance of individual invested companies. In the case of Norebank, ESG integration lets portfolio managers hide their preferences regarding the governance of invested companies behind a veneer of quantitative, objective analysis. For larger asset managers like BlackRock, ESG seems to serve a similar function, although more research from inside those firms, as difficult as it may be to conduct, is needed to say for sure. However, in his 2022 letter, Fink adopted a discourse of ESG concerns to make an explicit threat to companies. “Access to capital is not a right,” he wrote. “It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you” (Fink, 2022). With this, we return to more familiar terrain, a classic example of self-disciplined governmentality, the “conduct of conduct” in a way that automates governance, rendering questions of ownership and control technical and analytical rather than political and subjective, naturalizing “the market” while obscuring the ambitions of individual asset managers and the people who run them. In accounting for the way asset managers try to exert power over-invested companies in the context of asset manager capitalism, where this power is hidden by technical analyses and objective data, the growing focus on ESG integration among asset managers becomes an important case study in sustainability as a technology of governance.
Footnotes
Acknowledgments
I thank Benjamin Braun and Brett Christophers for inviting me to contribute to this special issue, and for providing generous feedback on an earlier version of my arguments. Natascha van der Zwan, Philipp Golka, and Carmen Giovanazzi provided helpful comments at a January 2022 workshop hosted at the Max Planck Institute for the Study of Societies, as did three anonymous reviewers on an earlier draft of this article. I am of course very grateful to my informants at Norebank, whose honest and critical reflections about their own work made this project as enjoyable as it was enlightening.
Declaration of conflicting interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.