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ESG and the Investment World's 12 Emperors

In 2018, Harvard Law professor John Coates published a paper titled “The Problem of the Twelve.” Coates focused on the rise of index funds as investment vehicles and the muscle that index providers and fund managers get from the flow of cash into index funds. He emphasized that index providers “have greater practical importance” than many people believe.

Charlie Munger, vice-chair of Berkshire Hathaway, put it more bluntly to an audience at the Daily Journal Corp. annual meeting: “We have a new bunch of emperors, and they’re the people who vote the shares in the index funds. I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”

According to a report in the Financial Times, the three largest index fund providers — BlackRock, Vanguard, and State Street Corp — control a combined 18.7% of the companies on the S&P 500. The same three firms also own 22.8% of the S&P 400 (mid-caps) and 28.2% of the S&P 600 (small caps).

According to The Corporate Citizenship Project, a think-tank focused on a data-driven look at corporate governance issues, most retail investors do not realize how powerless they are when it comes time to “vote their shares” in proxy contests.

“Retail investors often get mail from companies asking them to cast their ballot for board slates, mergers & acquisitions, and other important decisions. What they often do not realize is that they have relatively insignificant influence compared to the large asset managers who control trillions of dollars as well as the clandestine proxy advisors like ISS,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project.

In “The Problem of the Twelve,” Coates wrote:

“The effect of indexation will be to turn the concept of ‘passive’ investing on its head and produce the greatest concentration of economic control in our lifetimes…More fundamentally, the rise of indexing presents a sharp, general, political challenge to corporate law. The prospect of twelve people even potentially controlling most of the economy poses a legitimacy and accountability issue of the first order.”

While environmental, social, and governance, or ESG, investments represent just a small fraction of total assets under management, they have become a significant piece of business for index providers and proxy advisors.

Here is FT Alphaville’s list of the 11 men and one woman who are the investment industry’s — and the financial world’s — putative emperors. Of the companies on the list, four are investment management firms, three are index providers, two are proxy advisory firms, and three are sovereign wealth funds.

BlackRock CEO Larry Fink leads the world’s largest investment group with more than $10 trillion in assets under management. About two-thirds of BlackRock’s funds are passive, and Fink’s pronouncements on ESG investing have roiled the industry.

Vanguard CEO Tim Buckley is the head of the world’s second-biggest investment firm with some $8 trillion in assets under management.

Abigail Johnson leads Fidelity Investments, a privately held firm founded by her grandfather in 1946. Fidelity now claims more than $4.2 trillion in assets under management.

State Street Corp.’s CEO, Ron O’Hanley, came from Fidelity to lead State Street Global Advisors.

Henry Fernandez is CEO of MSCI, the financial world’s largest index provider. MSCI provides more than 160,000 indexes and nearly $14 trillion in assets are benchmarked against these indexes.

Dan Draper is CEO of S&P Dow Jones Indices. S&P Global estimates that $13.5 trillion in assets is indexed or benchmarked to the S&P 500 index.

Arne Stahl is CEO of the London Stock Exchange’s FTSE Russell index empire. The day that the FTSE indexes rebalance typically generates the highest U.S. trading volume of the year.

Gary Retelny is CEO of Institutional Shareholder Services, one of the “least-appreciated” power brokers in the investment industry, per FT. The firm’s proxy voting recommendations influence thousands of investors with trillions of dollars in equity assets.

Kevin Cameron is a co-founder and CEO Glass-Lewis, another proxy voting advisory firm that influences thousands of investors.

Masataka Miyazono is head of Japan’s $1.5 trillion government pension investment fund. When the fund switched some investments away from BlackRock, Larry Fink reportedly caught ESG fever.

Nicolai Tangen heads Norway’s $1.2 trillion sovereign wealth fund, known for being both a notably active investor and one that has a history of excluding companies conflicting with Norwegian state ownership.

Peng Chun is the head of China Investment Corporation, China’s sovereign wealth fund, which is currently valued at $1.2 trillion in assets under management.

Bryan Junus of The Corporate Citizenship Project adds, “Savvy investors have heard of Blackrock, Vanguard, and State Street. Some have heard of the large state investment funds. But very few have heard of the clandestine proxy advisors like ISS, who often are the driving force behind many corporate decisions, especially concerning ESG.

“Unlike asset managers, ISS has little to no regulation governing its proxy recommendations or ESG activities. If there are 12 Emperors of the Investment World, then ISS is the secret advisor to almost all of them. We must bring more transparency to protect the rights of individual investors and American businesses.”