Africa: Can Private Finance Really Serve Humanity?
The recent explosion of private finance has nursed the hope, dream or illusion that it can be mobilized for the public good, e.g., to achieve the Sustainable Development Goals, associated with Agenda 2030. However, such hopes ignore how changes in financial investing have deeply transformed corporations, national economies and prospects for the world economy and social progress.
Private finance boom
Private capital has exploded with financial deregulation from the late 20th century. Global finance increased 53% from 2000 to 2010, reaching some US$600 trillion (ten times annual world output), and was projected to reach US$900 trillion by the end of this year.
In its 2018 annual report, Principles for Responsible Investment (PRI) - an investor initiative in partnership with UN offices - estimated that investors with over US$80 trillion in combined assets had committed to integrate 'environmental, social and governance' (ESG) criteria into their investment decisions.
According to the IMF, between US$3 trillion and US$31 trillion in assets are managed by ESG funds, depending on the definition used. It also notes problems in evaluating ESG criteria, such as reducing emissions or raising labour standards, and hence fears 'greenwashing' financial investments with false claims of ESG compliance.
From active to passive investing
From 2006 to 2018, almost US$3,200 billion left actively managed equity funds globally, while over US$3,100 billion has gone into equity index funds, constituting "an unprecedented money mass-migration from active to passive funds". The shift has given index providers considerable private authority and influence in global capital markets.
Mutual index funds have been available since the late 1970s, while the first exchange traded funds (ETFs) were launched in the early 1990s. The growth of passive or index funds has greatly accelerated in the decade since the global financial crisis (GFC).
Attracted by the much lower fees charged, passive funds had US$11.4 trillion globally by November 2019, five times more than in 2007. Jan Fichtner, Eelke Heemskerk and Johannes Petry discuss some implications of this money mass-migration to index funds for corporate governance, market competition and investment flows.
Wall Street's new titans
Consequently, corporate ownership is increasingly concentrated and largely held by the 'big three' passive asset managers: BlackRock, Vanguard and State Street, already the largest owners of US corporations. In 2019, actively managed US funds were overtaken by passive funds. Some estimate that index funds will have over half the US capital market by 2024... Read more on All Africa
Source: All Africa