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Protesters outside of BlackRock’s offices in New York called on the firm to stop investing in new fossil fuel projects, May 25, 2022.
The current conflict over environmental, social, and governance (ESG) principles raises a crucial question: How should the managers of financial funds invest the enormous sums entrusted to them? Giant asset management firms like BlackRock contend that responsible stewardship of customers’ savings includes promoting a “sustainable” environment for long-term returns by joining in the growing movement of investors from fossil fuels into renewable energy. But Republican politicians denounce “woke capital” for tilting away from the oil, gas, and coal industries, and they demand the divestment of public pension funds from ESG-oriented firms in response.
Yet a more fundamental question has been left out of the debate: Where has all of that money come from in the first place, and how have investment companies come to control it? The answer reveals how the main contributors have been sidelined in the struggle over their savings, and why neither Wall Street executives nor their conservative critics speak for them.
Most of the cash invested by financial firms derives from American workers’ retirement savings, administered by pension funds, mutual funds, and money managers, now totaling more than $20 trillion in “assets under management.” Workers and capitalists have battled for decades over who has the right to dictate where this money gets invested.
Federal legislation constrained workers’ influence over how their savings were invested, even as it sought to safeguard their rights to retirement income.
Pension funds originally arose after World War II, when labor unions gained the legal right to bargain for employer-sponsored retirement plans, subsidized by the federal government through generous tax exemptions and deductions. But federal labor law limited employees’ collective control over the funds themselves, which employers began investing in the stock market in the 1950s, providing a vital source of capital for corporations as well as income for retirees.
As retirement funds came to own as much as a quarter of all the stock in American companies, organized workers mounted an international movement for “responsible investment,” seeking to marshal pensions’ power in support of working-class communities and good jobs. This story is well told in recent books by the economic historian Sanford Jacoby, the legal scholar David Webber, and the sociologist Michael McCarthy. American unions enlisted pension funds along with other sympathetic shareholders to pressure companies on employees’ behalf, testing out a strategy that became central to the organization of service workers such as nurses and janitors. In a 1978 manifesto for a struggling labor movement, Jeremy Rifkin and Randy Barber championed the rise of “a new lexicon, which has broadened the definition of investment to include social and moral considerations in economic decision-making.”
But once again, new federal legislation constrained workers’ influence over how their savings were invested, even as it sought to safeguard their rights to retirement income. The landmark Employee Retirement Income Security Act (ERISA) of 1974 set “fiduciary duty” standards for pension fund trustees, requiring them to focus narrowly on maximizing financial returns at the preferred level of risk for their investment portfolios. The costs to workers’ wages, jobs, and rights, which skyrocketed as retirement funds fueled the financial reconstruction of the economy over the following decades, were explicitly secondary under the interpretation of the law. Fund managers’ investments ironically helped to dismantle the postwar pact between organized labor and big business, along with the pension system it had fostered.
Tax reforms in the late 1970s and 1980s prompted an exodus of private employers from traditional defined-benefit pensions, which offered a guaranteed payout in retirement, to new defined-contribution 401(k) and other tax-deferred savings accounts, the benefits of which depended on earnings from investing. Though these vehicles offered account-holders the illusion of more individual choice about which funds to invest in, they provided less collective voice in the funds’ investment decisions themselves, much as the simultaneous decline of unions deprived workers of collective bargaining power on the job.
Ownership of the means of both employment and retirement increasingly concentrated in the hands of “institutional investors”: financial firms representing pension funds, mutual funds, private equity funds, and hedge funds that together took charge of workers’ savings, with which they acquired more corporate stock than all individual investors combined by the mid-1990s. The new structure of savings created a perverse conflict of interests between retirement plans and workers’ rights, as institutional investors pressed large employers to slash payrolls and paychecks in pursuit of higher shareholder returns.
Yet the rise of asset management transformed the financial roles of both the workers who were the funds’ beneficiaries and the professional money managers who became their effective trustees. Over the course of workers’ careers, returns on retirement funds’ highly diverse investments depended far more on the long-term growth and prosperity of the entire economy than on the fluctuating fortunes of particular businesses or industries. With that in mind, mainstream investment analysts increasingly argued that fund managers’ fiduciary duties obliged them to consider the consequences of their decisions for natural resources and social institutions sustaining the financial system as a whole. The financial crisis of 2008 showed how supposedly sound investments by many individual funds could spell collective disaster for all of them. So did the quickening pace of climate change.
Such concerns have broadened support for “responsible,” “sustainable,” or “impact” investment in recent years, making ESG a booming market itself. The biggest players in financial markets are increasingly focused on maximizing returns on investment for the whole system and over the long run while managing systemic risks. But they hardly question their lion’s share of the earnings from workers’ savings, or capital’s power over labor’s purse.
As a result, retirement funds starkly fail to provide American workers with either a comfortable income in later life or control of investment while still employed, the twin purposes their savings should serve.
Just 15 percent of American workers, mostly public employees, still count on a secure income from a traditional pension. Most of those with 401(k)s or similar plans save far too little to supplement meager Social Security benefits and support them in retirement, as employers have cut their contributions and fund managers command hefty fees. Roughly half of private-sector workers lack retirement savings of any kind.
The most immediate reform should be extending tax-subsidized savings plans to all American workers. The new federal SECURE 2.0 Act takes several steps in that direction, requiring businesses with more than ten employees to offer retirement plans and making the tax credit for employee contributions refundable, so low-wage workers who owe no income tax can get the subsidy to save.
Several states, led by Illinois and followed by New York and California, have gone further in the past few years, allowing private-sector workers to join the retirement plans for public employees, which charge much lower fees than private funds. The economist Teresa Ghilarducci and investment banker Tony James have recently shown how the ideal of universal retirement could be achieved at low cost by creating government-guaranteed portable savings accounts for all Americans, funded by modest but mandatory contributions from both employers and employees, with refundable tax credits fully subsidizing the savings of low-wage workers and tax deductions offsetting the contributions of those earning more.
But more than individual rights to income, retirement funds should confer collective rights to investment. As the controversy over ESG shows, fund managers’ decisions are inherently driven by political priorities as much as by financial markets. If asset management funds are to become more universal, they must be made not just socially responsible but accountable to the working people whose wealth they manage. That would mean restructuring fund management so that all plan participants, including those still employed and those drawing retirement benefits, are collectively represented in investment decisions.
More basically, accountability for workers’ savings would entail reorganizing the funds’ membership to unite rather than divide workers, including the employees of the industries in which funds invest and the care workers on whom retired beneficiaries depend. Much as financial firms consolidate the capital of competing businesses and different industries in seeking the highest returns, local or regional labor-led funds could draw members together in support of their work as well as their wealth.
Ultimately, real accountability would require redistributing the funds’ grossly inequitable ownership of company stock. Half of American households own no stock whatsoever, and another 30 percent hold less than $10,000 in shares, including in their retirement accounts. A straightforward solution would be a tax on corporate profits to be paid in stock rather than cash, distributed to labor-led savings funds directing productive rather than predatory investment in their communities—an elegant idea first proposed by the Swedish economist Rudolf Meidner 50 years ago. It is time to retire the exploitative structure of savings and investment that emerged instead.
