Can BlackRock save the planet? The institutional investors’ role in stakeholder capitalism

Within a context of increasing concentration of ownership, where the Big Three –BlackRock, State Street and Vanguard– now hold over 20% of the shares in S&P500 companies, the spotlight now falls more than ever on institutional investors, which are being increasingly called upon to play a major role in favoring the shift towards stakeholder capitalism by pursuing environmental and societal objectives. These expectations are reinforced by leading institutional investors’ commitments –such as those included in Larry Fink’s last annual letter– to do well by doing good. In spite of this however, while the incorporation of ESG issues into investment policies is surely intended –perhaps above all– to attract an increasing share of clients that place central attention on those aspects, institutional investors’ commitment to pursue sustainability objectives face several limitations. First, promoting more virtuous conduct by investee companies entails significant costs, thereby impairing institutional investors’ returns. Secondly, even though portfolio value maximization objectives may, to some extent, favor the incorporation of ESG factors into investment and stewardship policies, the dissemination of passive funds (i.e. portfolios that track a particular benchmark equity index) is a factor that can impinge upon the effective capacity of institutional investors to encourage the adoption by investee companies of policies that pursue sustainability objectives. Against this backdrop, this article shows that it is illusory to assume that institutional investors can be charged with the task of pursuing objectives of general interest, such as fighting climate change (thus essentially acting in place of the state), where such a task is not aligned with their clients’ and their own interest in improving risk-adjusted returns.