Millions of Americans are happy to hand over the power of their portfolio to a professional.
And while asset managers should, in theory, be more successful than the average American investing for themselves, Tesla CEO Elon Musk worries they’re not always making decisions in the best interest of individual investors — especially when it comes to promoting an Environmental, Social, and Governance policy.
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“We don’t basically do some sort of like bizarre, like communism rebranded thing, which is like a lot of what ESG is and to be inflicted upon corporate America without the knowledge of the actual shareholders, which is what's going on,” he said during a 2023 discussion with GOP presidential candidate Vivek Ramaswamy on X Spaces.
Musk may have a long history of supporting environmental causes, and sure, his car company, Tesla, is one of the most common ESG investments, but that doesn’t mean he’s on board with investment world titans pulling the strings.
“The public is being lied to … And I'm naming names here: BlackRock, Fidelity … I know you guys and you need to tell your customers that you're not making the optimal decisions for shareholder value because that's what's going on,” he said.
Musk, to be fair, isn’t the only party with concerns along these lines. Texas Republicans, in particular, have been in the news for “blocking” certain financial corporations from participating in a huge municipal bond deal because of their ESG policies for everything relating to “boycotting” of the fossil-fuel industry to “discriminating” against the firearms industry. The state has also passed a few bills to stop both insurance companies and global financial companies from imposing ESG regulations. Here’s why Musk theorizes it may get litigious.
Musk sees massive ‘class-action lawsuit’ coming
Major asset managers are increasingly considering ESG factors when evaluating their investment strategies.
BlackRock, for instance, has emphasized incorporating climate change impacts into investment decisions and offers a variety of ESG-focused funds. Vanguard has set specific corporate goals for reducing carbon emissions and offers both index and actively managed ESG funds. Fidelity, similarly, integrates ESG considerations into their investment processes and offers a range of ESG-focused products.
According to projections by PwC, global asset managers are expected to increase their ESG-related assets under management to $33.9 trillion by 2026.
And when these asset managers hold board positions in the companies they invest in, they can also end up influencing company decisions.
Musk sees potential issues arising from this increasing emphasis on ESG principles.
“The big firms that you hear, BlackRock, you know, Vanguard, all them, they’re like, they’re setting themselves up for the biggest class-action lawsuit in the history of class-action lawsuits by an order of magnitude, because they're breaking the deal with their customers and they're not maximizing shareholder value,” he told Ramaswamy.
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An industry that’s ‘ripe for corruption’
Musk’s concern lies in the fiduciary duties that asset managers have to their customers. However, Ramaswamy points out that many of these so-called customers are really just intermediaries.
“The problem is, the people who are giving them the money aren't even giving them their own money,” he told Musk. “Those are either pension funds or they are intermediaries like investment advisers across the country.”
Ramaswamy highlighted a complexity in the relationship between asset managers and capital owners. He noted that while asset managers can claim transparency with clients — who may continue to invest — these clients aren’t the actual owners of the capital.
This distinction, he argued, could complicate a potential class-action lawsuit if Musk’s hypothesis proves true.
“The wave of lawsuits is first going to probably come to the BlackRocks and Vanguards and State Streets of the world. They're going to kick it upstream and say, ‘No, no, no, we disclosed it and our clients still sent the money,’ but their clients were themselves money managers for other people,” Ramaswamy explained.
The problem, according to Ramaswamy, stems from the inherent structure of the financial sector.
“That's what happens when you have an industry that's so intermediated that there's so many layers to the waterfall that's actually ripe for corruption,” he remarked.
Musk concurred, noting, “The average investor is being misled.”
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