Banks in Europe are increasingly having their hands tied behind their backs, leaving little room for competition and diversity because regulatory costs are an effective barrier to entry and risks can only be taken to a very limited extent. However, outside the borders of the banking landscape there is a shadow paradise where a few large asset managers are running the global show. Of course, they are also subject to regulation, but they have nevertheless ended up owning the global economy. Mega asset managers own around 22% of all large, listed companies included in the S&P 500 index.

The reason why it has gotten to this is the same as for the consolidation that has occurred in any other sector: technology and globalisation make scale more and more important, and as a result these asset management giants have been able to push many other parties out of the market or acquire them. Especially the emergence of so-called passive strategies, which invest in the index average, has made economies of scale attractive. No one knows the exact amount, but it is estimated that half the global assets are invested without checking what those investments actually consist of.

These developments have changed the face of capitalism. It moved away from shareholder capitalism, where at least a visible participant in markets was the most powerful one, to asset manager capitalism: capitalism with universal owners where their powers are shrouded in mists. Shareholder capitalism at least implied that the shareholders still cared about the long-term performance of companies, but now that is hardly ever the case. Being universal owners, they do not even have to select a specific company. They own it all so they do care about anything specifically. And while previously shareholders acted relatively independently from each other, the biggest asset managers, such as State Street, Vanguard and Blackrock, also hold hefty stakes in each other. Together, these mega managers control everything, all in the interest of short-term returns. Nowadays, it is the asset managers who are in charge, not the asset owners. And of course, everything in the interests of their clients. But most of times, their clients don’t even know what they exactly do or don’t do.

Asset management capitalism is the most cynical type of capitalism: those investors that have a finger in every pie could not care less about how these assets fare in the long term. The short-term is everything. Why would an asset manager want to improve sustainability? That would only be worthwhile if non-sustainability were to become a short-term risk or if money can be made by becoming sustainable. And even then, you would first try to pass on the sustainability risks to society. And you make money by investing in new, supposedly sustainable, asset classes. You have the money and power to do so. Just watch and see during the biodiversity summit. Nature as an attractive asset class, brought to you by the mega investors. The risks are for all of us.

This is a translation of Hans Stegeman's column in Het Financieele Dagblad, published 6 December 2022.