The Passive Revolution
The Passive Revolution
How corporations are owned and governed, and in whose interests, is a structuring force of our economies. In our previous report, “Under New Management”, Common Wealth traced the rise of a new corporate governance regime in the UK economy: asset manager capitalism. This marks a new era of ownership and control with only partially understood implications for how corporations are governed and by extension, how society will respond to major challenges like the climate crisis.
Asset manager capitalism did not arise spontaneously. It is the product of a series of important shifts in the structure and distribution of ownership in the economy over the past several decades. The first shift, detailed in our previous report, began with the enactment of neoliberal policy programmes that deregulated finance and privatised large swathes of the UK economy under the premise of generating a “shareholder democracy”. More recently, a second major shift has been defined by the rise of a cohort of asset management titans and a corresponding concentration of corporate ownership and control. This shift has in large part been propelled by the growing dominance of “passive” (index-tracking) investment strategies. The deepening of this trend in the UK context is the focus of this report.
- The explosion of passively-managed investments over the past two decades – and in particular in the wake of the 2008 Financial Crisis – marks a major shift in two defining forces in the global economy: corporate governance and control over investment allocation. A small cohort of increasingly vast asset management giants – chief among them BlackRock, Vanguard, State Street and Fidelity – has ridden a wave of enthusiasm for passive investing to positions of dominance within the UK shareholder structure.
- These firms occupy the top positions in the largest firms of the UK economy, a phenomenon that will only increase with the continued growth of the passive segment. Indeed, of the funds that held stakes in UK-listed companies as of the end of 2021, US funds represented over two thirds of total net assets (approx. £8.4 trillion), and an impressive 77% of all passive fund assets (£3.55 trillion).
- Within this context, the role of index providers – companies providing indices for index-tracking investment funds – remains comparatively under-scrutinised and, critically, under-regulated. These companies have significant and growing influence over how capital is allocated in the global economy. Just three firms – MSCI, S&P Dow Jones, and FTSE Russell – dominate the index business, taking in over three quarters of all industry revenues.
- If these index providers and the funds that track their products occupy a (quantitively) unignorable position in the allocation of both capital and decision-making power within the UK economy, our analysis shows that this is especially the case for those industries most pivotal to the question of what kind of economy we want to live in, particularly in the transition to a decarbonised future.