What exactly is asset management? What is an “asset manager society”?

Asset managers are companies that carry out investment on behalf of others. Principally, they carry out that investment on behalf of institutional investors, like pension schemes and insurance companies. But they also carry out investment on behalf of so-called retail investors, which are the likes of you and me. Asset management is a broad industry of which things like private equity, hedge funds, and index funds are component parts.

“Asset manager society” is a term I use to signal a transformation that has occurred over the past thirty years. The origins of the modern asset management industry are in the 1960s and ’70s, principally in the United States. When asset managers began to invest on behalf of pension funds, they invested exclusively in financial assets: stocks and bonds, including bonds issued by governments and municipalities.

At one level, who owns shares in Microsoft or government debt does matter to society at large, but it matters in quite a distant way. To you and me, it makes no difference at all to our daily lives whether that investment is carried out by our pension fund trustee directly or indirectly via an asset manager. What asset managers did was far removed from everyday life for a long period of time.

But in the 1980s, asset managers began to diversify their holdings into what are typically referred to as “real assets.” Instead of just investing in financial assets, they began to buy physical things, rather than just share certificates or digital numbers on the screen. In particular, they began to buy commercial property: offices, hotels, shopping centers. In the 1990s, they began to diversify into new types of real assets. Asset management companies began to buy housing, particularly apartment blocks, and they began to buy infrastructure — including essential infrastructure in energy, transportation, and water supply.

These asset managers began to play a very significant role shaping the conditions and the costs of people’s everyday lives, because they were now buying, owning, controlling, and earning money from the physical things on which we all rely — whether that’s housing, the electricity grids that supply our power, the municipal systems of pipes that supply water to homes, or the parking systems where we park our cars. An asset manager society is a society in which asset managers, which are often faceless financial institutions that most people don’t know about, play an increasingly important role in controlling the infrastructure within which our daily lives are embedded.

How does asset management impact housing, both as a market force and for those who need it?

Asset managers regard housing as an asset: something that will deliver a recurring income, which is the rent that the tenant will pay, and that will also deliver a capital gain when it comes to selling that asset at a later point. Given that those are their underlying motivations, what are they looking for when they invest in housing? What they’re looking for is the capacity to increase the rents that they are able to extract from that property.

That’s the case for two reasons. One is that more rent means more income to be pocketed, but much more important than that is that higher rent makes the asset more valuable to prospective buyers at a later point in time. The key thing to remember about asset managers is that they are largely not in the business of buying and holding assets into perpetuity. They are in the business of buying and selling assets. When they buy assets, their primary consideration becomes how best to manage that asset in such a way that it becomes more valuable to the market. Increasing rents is obviously the primary way for them to do that in terms of housing.

Over the last decade or so, the most common strategy that asset managers have pursued in buying rental housing is buying in areas where there are very tight rental markets, where there are essentially not enough rental properties to meet demand. There’s an obvious reason for that: in such rental markets, there tends to be upward pressure on rents. Just as important, if not more important, they look to buy in places where they think there is only a limited prospect of substantially more rental housing being built, because that would represent a clear and present threat to their business model.

The reason I emphasize this is that what they do runs almost diametrically counter to what they say their interests are in housing markets. When they talk to politicians, when the media asks them, “What are you going to do about the housing crisis, about the fact there are shortages of supply and the fact that renters can’t afford their rents?”, what these asset managers typically say is, “We’re part of the solution; we want to add to new supply.” It’s really not true — that is absolutely not what they’re interested in. And if you listen to other conversations that they have, when they talk to investors on earnings calls, they say the complete opposite: “We’re investing in places where there are supply shortages, because that gives us the pricing power that we like in those markets.” They say two completely different things to two different constituencies. And what they say to investors is much more truthful.

There’s also an inherent short-termism in this behavior, because the asset manager knows that he or she has to sell these assets pretty soon after buying them. That inherent short-termism is really inappropriate and destructive when it comes to assets like housing, water supply networks, and electricity transmission grids. Asset managers are inappropriate custodians of these types of assets. They’re about as inappropriate as you can imagine.

You write that energy — especially renewable energy — is the largest sector for asset managers investing in infrastructure, and that asset managers also have stakes in other climate infrastructure, such as transportation. What does this mean for our energy future and our climate more broadly?

What most people have looked at when they think about climate and asset managers is the dirty side of the equation. They look at the fact that asset managers remain substantially invested in fossil fuel companies and many of the other corporations that continue to be responsible for large amounts of emissions.

One of the main reasons for that is that the biggest fund managers, like BlackRock, Vanguard, Fidelity, and State Street, are predominantly passive managers: their biggest funds track particular market indices. If you have a fund that’s tracking the S&P and that index includes Exxon Mobil and Chevron or, in the European context, BP, Shell, and Total, then you are required by the nature of your fund to remain invested in those assets. The big asset managers, by virtue of the nature of their model, remain major owners of fossil fuel companies and other huge emitters. A lot of the attention that both scholars and activists have focused on the climate finance question is focused on asset managers as owners of dirty assets.

In my work, I tend to focus on the other side of the question, which is asset managers as owners of clean assets — the assets that are being constructed to try to get humanity out of the crisis. The biggest area of interest is clean energy assets. If you look at the ownership of the infrastructure of clean energy generation, and, in particular, if you look at it relative to the infrastructure of dirty energy generation, you find that clean energy infrastructure is far more concentrated in private hands than in publicly owned infrastructure. Something like 50 percent of fossil fuel assets are owned by the state, either directly or indirectly through state-owned companies. The number is nowhere near that with clean energy infrastructure, which is something like 90 percent private.

As we move through the energy transition, we appear to be moving toward a more privatized system of infrastructure ownership, simply by virtue of the fact that clean energy infrastructure historically has been generally invested in by private companies. To be more specific, increasingly, the biggest investors in clean energy infrastructure are asset managers.

For example, Brookfield Asset Management, which is a Canadian company, and one of the main companies I talk about in the book, is one of the world’s largest owners of renewable energy infrastructures. BlackRock is increasingly becoming a major owner of these infrastructures. When the executives at companies like BlackRock talk to policy makers about climate questions, they talk to them not just about the dirty side of the equation, but about the clean energy side of the equation.

Asset managers were some of the biggest lobbyists and interested parties behind the Inflation Reduction Act last year, which was about providing incentives for further private investment in US clean energy infrastructure. The ten-year extension of subsidies that have been put in place by the Inflation Reduction Act is one that asset managers actively lobbied for, and they have subsequently spoken about how enthused they are by those incentives. To the extent that the climate crisis is an infrastructure crisis, it’s about asset managers, because asset managers are increasingly becoming the biggest investors and owners of infrastructures of all types, including climate infrastructure.

You describe how ownership by asset managers is usually invisible, even as it directly affects very concrete aspects of our daily lives. You call this a “very physical if also strangely intangible” type of ownership. Can you talk about the effects of this invisibility?

Asset managers increasingly own very important forms of infrastructure that really affect our lives — yet most people are not aware that asset managers own those infrastructures. They probably wouldn’t recognize the names of most of these companies.

If Brookfield Asset Management is the ultimate owner of the apartment block in which you live, you almost certainly wouldn’t know that. Typically, there’ll be a local holding company, an intermediary, that is actually registered as the apartment owner. The name Brookfield wouldn’t be visible. Even if it was registered as the owner, it wouldn’t be Brookfield that you interacted with as a tenant in terms of who carries out the maintenance and deals with you if you’re late with rental payments.

A lot of the day-to-day drudge work of managing these various types of housing and infrastructure assets is not carried out by the asset manager, or even by a company that the asset manager owns: that work gets contracted out. Macquarie Infrastructure and Real Assets, which is, alongside Brookfield, the world’s biggest asset manager in terms of infrastructure ownership, estimates that around one hundred million people rely every day on infrastructures that it owns around the world. Yet I’d wager that at most a couple of thousand people out of those one hundred million know that they’re using infrastructures that Macquarie is the ultimate owner of.

What are the consequences of that invisibility? The main one is that they become very distant from potential critique. For people struggling with bad living conditions and rapidly increasing rents, or burst water pipes and increased water rates, it’s very difficult to take issue with the asset management companies, who are the ultimate owners of these assets, if people don’t know that they are indeed the owners. It becomes a very depoliticizing structural configuration. A lot of activists have been dealing with these questions to try to render visible what was previously invisible.

Despite the general invisibility of asset managers, some have recently come under fire for their holdings in industries like fossil fuels. When asset managers are challenged over the impacts of their investments, how do they justify their choices?

One of the arguments that asset managers often make about what they do is that, at the end of the day, it’s in your interest as an ordinary citizen for our funds to perform well. If our funds perform well, then your retirement savings will increase, so if you’re going to criticize us, it’s you who will be hurt.

That’s a discourse that lots of people get persuaded by. But it’s also a misleading discourse, for a couple of reasons. It’s certainly the case that a lot of the money that is invested in housing and infrastructure by asset managers is, indeed, retirement savings. But it would be disingenuous to argue that those retirement savings are principally the savings of ordinary workers. Retirement savings represent a form of wealth that, like all forms of wealth, is unequally distributed among the population. In the United States, something like 50 percent of all retirement savings are held by the top earnings quintiles among workers, while the lowest earnings quintile essentially has no retirement savings.

To argue that if an asset management fund performs well, then ordinary workers benefit by virtue of growth in their retirement savings is simply not true. Most of the retirement savings that are invested are the retirement savings of wealthy people, not ordinary workers. They’re the pension pots of consultants, doctors, bankers, and executives, including of course the executives of asset management companies themselves.

The second thing is that, yes, pension schemes are very significant contributors to these real estate and infrastructure funds. But increasingly, they’re not the only ones. A growing amount of the money that is invested in these funds is coming from sources around which it would be much harder for asset managers to tell a comforting public relations story.

A few years ago, for example, Blackstone established a huge new infrastructure fund, and around 50 percent of the capital that is committed to that fund is provided not by pension schemes and underlying workers’ retirement savings, but by the sovereign wealth fund of Saudi Arabia, which is an entity that has received a huge amount of scrutiny and criticism from human rights organizations like Amnesty International. A minority of the money in that fund represents retirement savings, and a minority of those retirement savings represents the money of ordinary workers. When asset managers’ funds perform well, there are end investors who in turn also do well. But to suggest that they are predominantly ordinary workers is very far from the truth.