The recent explosion of private finance has nursed the hope, dream or illusion that it can be mobilized for the public good, e.g., to achieve the
Private finance boom
Private capital has exploded with financial deregulation from the late 20th century. Global finance increased 53% from 2000 to 2010, reaching some
In its 2018 annual report, Principles for
According to the
From active to passive investing
From 2006 to 2018, almost
Mutual index funds have been available since the late 1970s, while the first exchange traded funds (ETFs) were launched in the early 1990s. The growth of passive or index funds has greatly accelerated in the decade since the global financial crisis (GFC).
Attracted by the much lower fees charged, passive funds had
Consequently, corporate ownership is increasingly concentrated and largely held by the 'big three' passive asset managers: BlackRock, Vanguard and
Describing passive investors as the true "titans of
In traditional investment funds, managers decide how and where to invest, e.g., which shares to buy. Instead of depending on fund managers, passive funds track selected constructed indices. This is increasingly done algorithmically, instead of reflecting or responding to price and other movements.
Index providers set standards
When investors invest via index funds, their decisions are effectively shaped by the indices the passive funds track. The three most influential index providers are the
The main emerging markets indices have tremendous influence, particularly the
Deciding what to include in indices is not just an objective or technical matter, but inherently political and subjectively discretionary, typically benefiting some over others. Setting criteria for inclusion thus endows index providers with the authority and power to greatly influence regulation and policies.
Indices influence capital flows
In the past, index providers only supplied information to financial markets. But with passive funds, index providers have considerably more authority in markets. With trillions of dollars invested worldwide, capital has been reallocated by index providers' decisions, as innocuous as they may seem.
These often influence international capital flows much more than economic fundamentals. Massive portfolio investments typically flow into the financial markets of countries chosen for inclusion.
When
Adding
Thus, the big three's indices greatly influence global investment flows. Meanwhile, investors may unwittingly acquire controversial or problematic investments, either by investing in index funds, or by choosing options heavily invested in such funds.
Divesting for progress?
Clearly, the three biggest passive fund managers and three major index providers greatly influence portfolio investment choices, while the world remains largely oblivious of their biases, influence and impacts, wishfully hoping for the best possible outcomes.
BlackRock, the world's largest investor, with
But, as most BlackRock funds passively track indices, these continue to invest in coal until such stocks are removed from the indices. Moreover, its CEO has made clear that it will continue to invest in controversial assets, including coal.
Following BlackRock, Vanguard and
UN 'blue-washing'?
ESG-rating firms disagree about which companies qualify, producing different sets of ostensibly ESG compliant stocks. Meanwhile, the
In
Neither Vanguard nor FTSE Russell explained how and why the 'error' had happened, or the criteria involved. Most ESG indices include 'industry leaders' in almost all, including the most controversial sectors, only excluding the very worst offenders, which are quite subjectively, if not arbitrarily determined.
The Economist has noted, "Tobacco and alcohol companies feature near the top of many ESG rankings. And many funds marketed on their green credentials invest in Big Oil... the scoring systems sometimes measure the wrong things and rely on patchy, out-of-date figures. Only half the 1,700-odd companies in the
Unless there are more meaningful and effective means to ensure that private finance equitably and appropriately serves public needs, indiscriminate UN endorsement of ostensible efforts to mobilise private finance for sustainable development runs the serious risk of legitimising a massive fraudulent exercise in financial 'blue-washing', referring to the colour of the UN flag.
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