Over the past two years a striking change has taken place in the boardrooms of greenhouse-gas producers: a growing number of large companies have announced commitments to achieve “net zero” emissions by 2050. These include the oil majors BP, Shell, and Total, the mining giant Rio Tinto, and the electricity supplier Southern Company. While such commitments are often described as “voluntary”—not mandated by government regulation—they were often adopted begrudgingly by executives and boards acquiescing to demands made by a coordinated group of their largest shareholders.

This group, Climate Action 100+, is an association of many of the world’s largest institutional investors. With over 450 members, it manages a staggering $40 trillion in assets—roughly 46 percent of global GDP. Founded in 2017, the coalition initially was made up mostly of pension funds and European asset managers, but its ranks have grown rapidly, and last winter both J.P. Morgan and BlackRock (the world’s largest asset manager) became signatories to the association’s pledge to pressure portfolio companies to reduce emissions and disclose financial risks related to climate change.

A growing number of large companies have announced commitments to achieve “net zero” emissions by 2050. What are we to make of this seeming sea change in corporate social responsibility?

Some critics think corporate “net zero” goals smack of greenwashing. That is a legitimate concern, but many of the latest commitments contain details that suggest they are more than just PR moves. Shareholders have pressed for tying executive compensation directly to the achievement of emissions goals. And some companies have begun to write down billions of dollars of fossil assets they previously claimed would be profitably sold. Emissions targets are not the only change investors are fighting for, either; they have been paying increasing attention to corporations’ efforts to thwart carbon regulation. This summer, for example, Chevron’s management lost a battle against a shareholder proposal demanding the company reveal how much money it spends lobbying and change its expenditures to align with the goals of the Paris Agreement. Similar lobbying-related successes have been reached at dozens of other companies. Some, like those against ConEd and ConocoPhillips, were withdrawn prior to voting after management agreed to shareholder demands rather than wage a public battle.

Shareholder proposals in the United States are merely precatory: even if they pass with majority support, a company is not legally required to do what investors want. Still, it is risky for companies to disregard proposals that gain significant shareholder support—even those that fail to reach a majority—because shareholders also hold the power to appoint and remove corporate directors and vote against compensation packages of executives that haven’t done their bidding. In a striking report released in July, BlackRock revealed that it had voted against 53 different companies for climate-related issues in 2020 and that it had put another 191 companies “on watch,” meaning they should be prepared to be voted against in 2021 if they fail to make changes BlackRock has asked of them (behind closed doors). The move now has years of precedent. In 2016, and again in 2020, BlackRock publicized that its votes against the re-election of Exxon board members were motivated by climate concerns. Many investors have supported resolutions for the appointment of board chairs independent from the CEO in cases where chief executives have stubbornly avoided responding to climate demands. Directors ignore their largest shareholder’s displeasure at their peril.

To observers of corporate governance, this level of climate activism is unprecedented. Critics say it amounts to greenwashing.

What are we to make of this seeming sea change in corporate social responsibility? Critics are correct in pointing out that these measures fall far short of what is needed to avoid catastrophic levels of warming. But to observers of corporate governance, this level of climate activism is unprecedented, almost shocking—and without an analytical vocabulary to make sense of it. The term “activist shareholder” is traditionally used to describe investors, like hedge funds, that buy a sizable stake in one company and press for profit-maximizing changes or a leadership battle at that one company. Instead, what has arisen only very recently are a handful of very large, very diversified, institutional investors pressing for portfolio-wide policy changes. BlackRock, for example, has announced it will expect companies to report their climate risks under the framework created by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). (The FSB is an international organization that makes regulatory recommendations to the G20 nations.) Financial regulators around the world have begun requiring that companies disclose their climate risks in accordance with the TCFD. But in the United States, it is not the Securities and Exchange Commission (SEC) that is mandating a new disclosure standard—it’s BlackRock.

To understand this recent rise in institutional investor activism, one has to look at the shifting composition of the major players in capital markets over the past decade.

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If you’ve been told only one piece of investment advice, it’s probably that you should put your money in an index fund. These securities offer a form of “passive” investing: to put it simply, you pay a small fee to a money manager such as Vanguard to buy you a basket of diversified stocks that roughly mirrors the whole economy. If the market (as a whole) goes up you make money; if it dips you lose money. By contrast, “active” investing entails paying a money manager to pick stocks for you—to research which are undervalued and are likely to go up—and you pay more for their expertise.

A welter of empirical research over several decades has shown that active managers are bad at their jobs. Individual stock pickers are unlikely to “beat the market” over a typical investor’s return horizon. Warren Buffett famously bet a group of hedge fund managers that their stock-picking couldn’t beat a passive fund over a ten-year window; he handily won the million-dollar wager. Over time, as this messaging has become more popular—and in particular after the global financial crisis of 2008—people have been pulling their money out of actively managed mutual funds and placing them into passive investments: index funds and exchange-traded funds (ETFs). Because passive funds compete on the fees they charge clients, they benefit from economies of scale. This trend has been one major contributor to rapid concentration of fund providers and what Benjamin Braun has dubbed our new age of “Asset Manager Capitalism”: just three firms, BlackRock, Vanguard, and State Street, control 80 percent of the ETF market. BlackRock, which only 16 years ago managed $366 billion in assets, now manages $7.3 trillion. If it were a country BlackRock would have the third-largest GDP after the United States and China. On the average BlackRock alone controls about 7 percent of every S&P 500 company.

If you own a significant slice of the global economy, you should be very concerned about climate change: damages will likely mount to tens of trillions of dollars by the end of the century.

What does all this have to do with climate change? If you own a significant slice of the global economy, you should be very concerned about climate change: damages will likely mount to tens of trillions of dollars by the end of the century. Even if governments fully implement their commitments under the Paris Agreement, the world is nevertheless on track to warm between 3 and 4° C by 2100. At this level of warming weather events become more frequent and more extreme, disrupting supply chains and destroying infrastructure; workers become less productive; sea levels rise to engulf whole cities; agriculture is severely disrupted; much more energy is required for cooling; and electricity transmission becomes less efficient—to name just a handful of expected effects. Yet within BlackRock’s portfolio are many of the fossil fuel–generating companies that are contributing to this crisis. Each year, just one hundred publicly traded companies are responsible for two-thirds of all industrial emissions.

The economist Joseph Stiglitz has labeled the investor practice of collecting short-term profits from companies whose activities will sooner or later be economically devastating as a type of institutional “schizophrenia.” Recent institutional investor activism on the climate suggests that money managers are finally waking up to this internal conflict within their portfolios. Shareholders have increasingly been battling management on an array of issues: stopping anti-carbon regulation lobbying, reducing capital expenditures on the exploration and development of fossil reserves, and releasing analysis on just how well their business would fare in a world that successfully limits warming to 2° C. And asset managers admit they are applying pressure on individual firms for the benefit of their broader portfolio of investments. A 2019 joint letter signed by many investors, including the California Public Employees’ Retirement System and the banking group BNP Paribas, stated that their climate activism against fossil companies was in service to the “value in our portfolios across all sectors and asset classes.” The multinational bank UBS claims it engages with portfolio firms in order to address “large negative externalities.”

But neither corporate governance theory nor real-life corporate regulation has kept pace with this shift in investor perspectives regarding the goal of portfolio maximization. Legal scholarship assumes that the one thing all shareholders have in common is that they desire the maximization of the share price of each individual firm in which they invest. The very norm of so-called “shareholder primacy” rests upon this assumption. Under the theory advanced by Chicago school theorists, shareholders are the “residual claimants” to a firm’s assets: they get whatever is left over once a bankrupt firm has paid out its liabilities to all other stakeholders, including suppliers, bond holders, and employee pensions. Therefore, the argument goes, shareholders are the best stewards of corporate objectives. This is why shareholders and no other stakeholders are given various special rights: voting on proxy proposals, approving compensation and mergers, and suing firm leadership on behalf of the corporation itself. Similarly, corporate experts have spent the last three decades arguing that firm managers’ performance should be evaluated and rewarded using share price as the primary metric. Paying executives with shares of their own companies, the thinking goes, will align the interests of managers with those of their shareholders, reducing internal “agency costs.”

BlackRock, which only 16 years ago managed $366 billion in assets, now manages $7.3 trillion. If it were a country BlackRock would have the third-largest GDP after the United States and China.

The locus classicus for this view is Milton Friedman’s infamous essay, “The Social Responsibility of Business Is to Increase its Profits” (1970). Friedman condemns an executive spending money to reduce pollution beyond the levels required by regulation, calling it “spending someone else’s money for a general social interest.” But what happens to Friedman’s reasoning if these “someones” are explicitly asking the managers to spend their money on pollution reduction? The law, it turns out, doesn’t have a great answer to this question, as the long-reigning concept of “shareholder primacy” has conflated two ideas into one: maximizing the share price and doing what shareholders want. The new wave of investor behavior over climate change is a striking case in point: when one company’s profits are another company’s loss but they have the same shareholders, it is wrong to assume these two goals coincide.

This unwinding of the two concepts that make up shareholder primacy has been made even clearer by the Trump administration’s ongoing efforts to weaken shareholder power in response to climate activism. Pursuant to an executive order on “Promoting Energy Infrastructure,” the Department of Labor, which has jurisdiction over retirement funds, has issued guidance meant to discourage investment manager engagement with companies on environmental issues. The SEC has proposed rules that would make it harder for investors to reissue environmental proposals that failed to receive majority support in prior years. Most significantly, the SEC has gone out of its way to permit companies to block shareholder proposals entirely, allowing companies to exclude 45 percent of all climate-related proposals from the proxy voting process last year. This meant that shareholder proposals at Exxon, Duke Energy, and Chevron requesting the disclosure of emissions reduction targets never even went to a vote.

These changes are not without a constituency. Last summer the Business Roundtable of top U.S. CEOs, including those of oil majors, airlines, car manufacturers, and energy companies, released a much-covered statement against shareholder primacy. Since 1997, the letter said, the Roundtable had issued corporate governance guidelines indicating that “corporations exist principally to serve their shareholders.” In an about-face meant to “supersede” previous statements, the group announced that a corporation’s mission is instead to balance the needs of all stakeholders—employees, communities, and shareholders alike—as their “long-term interests are inseparable.” Many business commentators interpreted this statement as part of the general shift of public sentiment toward corporate responsibility, one in line with BlackRock’s demands for climate risk. But another interpretation is that the Roundtable, an organization historically devoted to the interests of executives, is seeking to disempower and ignore shareholders at a time when the largest investors have been pushing an aggressive climate agenda.

Neither corporate governance theory nor real-life corporate regulation has kept pace with this shift in investor perspectives regarding the goal of portfolio maximization.

The Roundtable is not alone. The National Association of Manufacturers has been transparent in its attempts to disempower shareholders of the companies that make up their organization. The trade group funded the creation of the Main Street Investors Coalition, which claims to represent the interests of individual retirees, whose savings, in the hands of large asset managers, are being used for “non-wealth maximizing activism.” The coalition argues that votes against fossil companies are motivated by fund managers’ personal political beliefs, rather than bottom-line reasons. Now, in this new schema, the accusation of “spending someone else’s money for a general social interest” is being made against institutional investors rather than corporate managers. The group has been lobbying for many of the anti-shareholder reforms being contemplated at the SEC, even sending fraudulent letters of support from “ordinary Americans” using signatures without permission.

In the 1990s corporate governance activists Robert Monks and Nell Minow coined the term “universal owner” to describe large investors that are diversified across the entire economy. They they have a long-term interest in the health of the economy as a whole, as opposed to the relative performance of any one firm. The former head of the $1.5 trillion Japanese Government Pension Investment Fund explicitly embraced the term to describe the fund’s climate strategy:

Given our size and long timeframe [our returns are] pretty much dictated by what happens in the overall capital markets, in fact, by what happens to the global economy. . . . [Our fund] is so big it essentially owns the whole investable universe. So, our focus should be on making the whole market better, rather than trying to beat the market.

A sufficiently large portfolio is able to diversify away firm-specific risks, but it remains exposed to systemic ones—risks that broadly affect the entire economy and thus cannot be diminished through diversification, like the Federal Reserve changing interest rates. In the traditional conception of what asset managers do, market risk is taken as a given: they sell you an index fund that mirrors a slice of the market and passively wait for it to go up (or down). But we’re entering an entirely new paradigm where one of the most significant sources of economy-wide, non-diversifiable, market risk—climate change—is something individual fund managers can influence. Should they be required to?

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This slow realization of the motivations and powers of this new age has left some commentators hopeful. The United Nations, in fact, encourages funds to think like universal owners, and a new non-profit is considering litigation strategies to force institutional investors to prioritize portfolio growth over individual-firm profits. Describing how several of the world’s largest asset managers, including BlackRock and Fidelity, were urging pharmaceuticals companies to collaborate rather than compete on finding a vaccine for the coronavirus, popular financial blogger Matt Levine recently mused, “Will the index funds save us?” But there is—of course—a darker side to this newly amassed power. The three largest U.S. asset managers hold an average stake of more than 20 percent of S&P 500 companies. What happens when all competing firms within an industry share the same large shareholders?

The long-reigning concept of “shareholder primacy” has conflated two ideas into one: maximizing the share price and doing what shareholders want. This new wave of investor behavior shows how they may come apart.

In 2014 a trio of economists found that the key players in the U.S. airline industry compete less with one another as a result of being all partially owned by the same institutional investors. In a two-year period, the same 7 shareholders who controlled 50 percent of American Airlines’s stock also had large ownership shares in American’s competitors. This “common ownership” was found to result in higher ticket prices. Since then, similar anti-competitive effects have been found in the banking, pharmaceutical, seed, and even cereal industries.

Institutional investors, of course, deny that they help the firms within their portfolios collude. They insist that they lack the power to influence specific supply and pricing decisions made within firms. When it comes to issues of “corporate social responsibility,” however, these same investors are much more willing to trumpet their expectations and influence. At a Federal Trade Commission hearing on common ownership’s anti-competitive effects in 2018, BlackRock co-founder Barbara Novick discussed the investor’s “engagements” with firms on topics ranging from women’s representation on boards, to the opioid epidemic, and climate change, but emphasized that discussions were “never about product pricing.” But these interventions can, and do, influence supply and pricing in much the same way as collusive anti-competitive behavior would. The same market power that enables the jacking of airline tickets is key toward making emission reductions happen. Pressuring only one or two oil producers to slash supply is unlikely to have much of an effect on total emissions; their competitors will step in to fill the supply gap. But Climate Action 100+ is targeting, simultaneously, all publicly owned producers and major consumers of fossil products, including auto manufactures and construction companies. And the group is very coordinated in its efforts: individual investor signatories of Climate Action 100+ are tasked with specific companies to pressure, so they share the costs of economy-wide engagement across their membership.

We should question the desirability of a democratically unaccountable financial behemoth making centralized resource allocation decisions.

While we may celebrate the ability of institutional investors to combat climate change, or hope that they might address other social ills, we should question the desirability of a democratically unaccountable financial behemoth making centralized resource allocation decisions. This power to control and coordinate product supply across industries implies the market power to harm: to transfer wealth away from workers and consumers with anti-competitive behavior. The rapid growth of asset managers has been likened to the power wielded by trusts in the Gilded Age. Justice Douglas, in a 1948 dissent from the Supreme Court’s decision to allow a steel industry merger, argued that the case was at heart about how much power steel executives should be permitted to wield, rather than the immediate economic impacts of the merger. The power to control the economy, he argued, “can be benign or it can be dangerous,” but it will “develop into a government in itself” and “should be in the hands of elected representatives of the people, not in the hands of an industrial oligarchy.”

Consolidation in the asset management industry shows no signs of slowing, leading some to caution that eventually just twelve funds will control nearly all of corporate America. As corporate governance scholars and activists fight against the Trump administration’s attempts to weaken institutional investor oversight of corporate managers, we should think harder about the question of who oversees the overseers.


Editors’ Note: This essay is adapted from the author’s recent law review article, “Externalities and the Common Owner.”