‘Wall Street is a way of organising nature’ : is passive investment an obstruction to the transition to green finance?

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‘Wall Street is a way of organising nature’

Is passive investment an obstruction to the

transition to green finance?

Mark Statham

11367423

MSc Political Economy

Supervisor: Dr. J Blom

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The remarkable rise of passive investment presents a challenge for political economists’ consideration of the role of finance in the transition to a carbon neutral global economy. This thesis explores whether the technical logic of index investing is an obstruction to the ‘greening’ of the financial system. Financial innovations, in the form of ‘Exchange-Traded-Funds’ (ETFs), have embedded the logic of modern portfolio theory into technical products that track underlying indices – offering low-cost alternatives to active fund management. These innovations have concentrated asset ownership within a small group of firms, who, by nature of the index tracking process, forego their ability to ‘exit’ from their holdings. As these passive managers continue to invest in fossil fuel companies, in spite of the growing numbers of investors choosing to divest their funds, the soundness of this investment strategy is being called into question. The inability of passive managers to divest, a potent tool in the green finance cause, has led some to argue that they risk becoming the ‘holders of last resort’ for environmentally unsustainable investments.

Drawing from the conceptual toolkit of the ‘social studies of finance’ literature, I argue that ETFs ought to be viewed as ‘socio-technical agencements’, a mixture of human and technical agency that enables the translation of passive investment from theory into financial market practice. Viewed as such, a better understanding the political dynamics underlying the confrontation of this form of agency with the demands of the green finance agenda, is revealed. Through a detailed case study concerning the re-emergence of Peabody Energy, the world’s largest private coal company, in popular US ‘small-cap’ ETFs, I argue that the ‘socio-technical agencement’ of passive investment is not as passive as it first appears. In fact, it maintains an element of technologically enabled flexibility, raising questions about ETF managers claims to passivity. By ‘opening the black box’ of ETF investment, my analysis seeks to politicise these claims, showing how they are increasingly untenable in a warming world.

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Introduction

‘Limiting global warming to 1.5°C would require rapid, far-reaching and unprecedented changes in all aspects of society’ (UNIPCC, October 2018)

The words of the most recent United Nations Intergovernmental Panel on Climate Change (IPCC) reflect the severity of the global economy’s current climate predicament. If the goal set by the Paris Agreement (PA), of limiting human-induced atmospheric warming to ‘well below’ 2℃ is to be achieved, profound changes in human social organisation are needed. Of these changes, it is widely recognised that a transition in the world economy’s predominant energy source, from fossil fuels towards low, and zero carbon alternatives, is an imperative in order to mitigate the worst environmental, social and political impacts of warming. A transformation on such a scale would require unprecedented investment in renewable energy production, and disinvestment from fossil fuel companies (FFCs). Or in the words of the IPCC working group III: ‘The pursuit of mitigation efforts requires a major reallocation of the investment portfolio, implying a financial system aligned to mitigation challenges.’ (IPCC 2018: 154).

However, in the time since the PA, there has been little change in the patterns of investment. It is estimated that investments worth US$2.3 trillion dollars a year in renewable energy is needed in order to keep within 2°C track by 2040 (IEA, 2016). This figure is neatly mirrored by an annual ‘investment gap’ at US$2.5 trillion recently estimated by the UN (Zadek and Kharras, 2018), illustrating the lack of capital flowing to renewables technology at the pace and volume required to align with internationally recognised mitigation efforts. Seeking explanations for this gap, the International Energy Agency (IEA, 2019: 5) has reported that even as the costs of renewables diminishes, ‘investment activity in low-carbon supply and demand is stalling’. These are alarming findings for those interested in limiting warming to ‘well below’ 2°C, as scientists report that current ‘socio-economic trajectories’ – particularly rates of fossil fuel extraction and its concomitant consumption - are incompatible with meeting the targets agreed in Paris (Steffen et al., 2018).

These diagnoses invite questions as to why there has not been a more marked change in energy investment since the PA, and whether the financial system can be ‘effectively aligned with mitigation

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both public and private actors, under the umbrella term ‘green finance’. Its advocates argue that power of private finance as an engine of economic growth can be used as a tool to steer the world economy onto an environmentally sustainable path. Its most successful interventions stress that rather than an ‘externality’, climate change represents a material financial threat to actors across the economy, exemplified in the notion of ‘stranded assets’ (Caldecott, 2016). Reflecting the predominant ‘risk management’ frame within which the financial sector operates - the threat of climate change is treated as a risk to be tamed through proper configuration within financial markets. Some present green finance as an investment opportunity. Given that ‘financial markets currently under-price carbon risk’, proponents argue that opportunities are emerging for climate-savvy investors to profit from this under-pricing, or at least, to ‘hedge’ against losses that may amount from climate related economic downturns (Andersson, Bolton and Samana, 2016: 2). By embedding environmental threats within the logic of risk and return, the investment ‘floodgates can be opened’ in order to realise a low carbon energy transition (Persiemeinek and Mazzucato, 2018).

The presentation of green finance as a financial opportunity elides difficult questions concerning investment in and financial valuations of companies that materially contribute to climate change. Investment in fossil fuel companies (FFCs) is not only a financial risk to investors, but in an age of heightened environmental awareness, can be traced back to those investors, contested, and ultimately politicised. The concerns of institutional investors, asset managers and the larger investing landscape are no longer separable from political questions of environmental culpability and responsibility.

‘The future warming trajectory of the planet will be shaped to a significant extent by the quantum of fossil fuels burned; this quantum will be determined to a significant extent by the decisions and actions of FFCs, and those decisions and actions will depend to a significant extent on the financing environment within which such companies operate.’ (Christophers, 2019: 2)

A slew of recent interventions from institutional investors, including shareholder action calling for emissions targets from major fossil fuel companies (Raval and Mooney, 2019) and investor commitments calling for greater action from governments to meet PA targets (Climate Action 100+), illustrate this emerging political terrain. In the ‘age of asset management’ where funds amassing vast sums of assets is invested is an important site of political contestation. This politicisation is revealing tensions and contradictions within the investment chain. As increasing numbers of institutional

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investors seeking to decarbonise their portfolios pursue ‘active’, stock-picking strategies of divestment, pulling funds from FFCs, ‘passive’ index tracking funds have seen their holdings in FFCs rise considerably. Due to the passive nature of their index tracking mandate, these firms are widely seen as being unable to divest, leaving them in danger of becoming ‘holders of last resort’ for FFCs (Jahnke, 2019).

The Problem

On the 9th December 2018, a group of 415 institutional investors signed a ‘Global Investor Statement’ to be handed to world leaders at the upcoming COP24 summit in Poland, calling for more action to be taken to meet the climate targets set in the previous summit (The Guardian, 2018). On the very same day, a UK based non-profit InfluenceMap (2018) issued a report revealing the extent of a number of large institutional investors holdings in thermal coal companies. Within the report, they revealed that three American asset management firms, BlackRock, Vanguard and State Street, had the most carbon intensive portfolios - largely due to the increase in their holdings in thermal coal between 2016 and 2018. BlackRock, the largest asset management firm in the world, with $6.4 trillion in assets, was revealed as having the largest absolute holdings of coal assets. Moreover, it had the highest Thermal Coal Intensity (TCI), measured as the number of coal assets compared to the total assets under management. The fact that the companies representing the largest share of assets under management in the investing universe, had increased the coal intensity of their positions by 20% since the PA, despite specific IPCC warnings of the need to move away from coal (IPCC, 2018), caused quite a stir. The Financial Times (Mooney, Hook and McCormick, 2018) questioned their green credentials, given that BlackRock (2016), the largest of the three, had warned that environmental sustainability was something that ‘investors can no longer afford to ignore’. Climate campaigners, frustrated by the seemingly empty rhetoric of the firm, doubled down on campaigns calling the company, ‘the biggest climate change contributor you’ve never heard of’1_.

The responses from these companies involved an alternative approach to green finance - one at odds with divestment advocates. BlackRock argued that due to the ‘passive’ nature of its investment

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position, it could not divest from coal companies. Instead it pushed to engage with the management of these companies ‘to understand how they are managing and responding to climate change’ (Mooney, 2018). This illustrates the conundrum facing the world’s largest asset managers as FFC divestment moves further up the political agenda. Central to their business model and preeminent position within the investment chain are index funds, and their latest evolutionary iteration Exchange-Traded Funds (ETFs). These products, which aim to ‘track’ rather than beat the performance of an underlying market index, exemplify a ‘passive’ as opposed to ‘active’ investment strategy. Active strategies, which invests through stock picking a portfolio designed to beat the market overall, can be readily aligned with divestment concerns, as seen from the ability of important mutual and pension funds with regards to climate change (Raval and Mooney, 2019). Passive investment vehicles, by contrast, because they aim to track the performance of an index, cannot choose the companies in which they are invested. As the BlackRock example attests to, passive investors claim that because they lack control over the index which they aim to track, they are unable to divest from carbon-intensive industries and are limited to engagement with FFCs on environmental issues. Index tracking as an investment strategy precludes divestment, argue passive managers, who view themselves as ‘essentially permanent capital [that] cannot turn the S&P 500 into the S&P 499’ (Taraporevala, 2018). What are we to make of such claims in light of the emerging politicisation of ‘green finance’?

Index investment has increased immensely in the past decades, particularly in the wake of the 2008 financial crisis. Passive funds oversee $3 billion of flows per day, and Moody’s forecasts that index investors will surpass the size of active investment by 2024 (CITE). Explanations of this remarkable rise in popularity refer to the evolution of passive investment, from index funds to today’s hybrid products - Exhange Traded Funds (ETFs) (Braun, 2016). ETFs act like a nindex fund, but rather than having fixed redemption periods, are tradable as stocks and redeemable throughout the trading day, offering investors a cheap source of diversification that is highly liquid. In comparison to the high fees involved in active fund investment, the ETF is low fee, high liquidity investment opportunity (Ben-David et al., 2017). This has led to ETFs seeing their assets increase 6 times in the past decade (ICI, 2018). This has brought a shift in the investment industry that has induced a wealth of attention from across the social sciences. Haberly and Wojczik (2017: 22) illustrate how through the popularity of passive funds, ownership in public companies has become concentrated among a very small group of asset management firms, that have come to comprise a ‘de facto permanent governing board for a growing share of major global companies’. The growing concentration of ownership gives such firms

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a degree of ‘hidden power’ with the global financial system that is hitherto unheard of (Fichtner, Heemskerk and Garcia-Bernado, 2017). The implications of these developments are still being worked out, with some suggesting that the status of powerful institutional investors and asset managers may engender a longer-term focus, and with it the potential to advocate for environmental causes within the corporate environment (Deeg and Hardie, 2016). However, the environmental record so far suggests that this ‘hidden power’ manifests instead by providing financial backing for the continued intransigence and inaction of large FFCs (Jahnke, 2019).

Research Question

This thesis investigates the implications of these developments on the ability of the investment sector to align with currently proposed mitigation strategies. As the gap between active and passive investment in fossil fuels is revealed, there is a need to understand the ways in which passive investment, in particular its predominant product - ETFs - impacts private energy governance. My broad research question is as follows:

Is passive investing, through ETFs, an obstruction to the transition to green finance? Through the strategy of ‘buy and hold’, passive investment provides long term capital for companies within their portfolio, which has the potential to become a crutch for fossil fuel companies increasingly seeing their assets divested from. This impacts the ability for the finance to fuel the ‘creative destruction’ essential to a market transition in the global economy’s predominant energy supply. The decisions of actors within the passive investment architecture therefore constitute active ‘sites of politics’, within the emerging political economy of the Anthropocene, with increasingly contested consequences. Understanding how those actors are responding to climate change is therefore of critical importance to our understanding of the viability and character of a global green transition. The response of passive owners, that they cannot divest from FFCs, is commonly accepted as an uncomfortable reality. What impact does this have on the potential for finance to engender a green energy transformation? On the one hand, passive owners acting as ‘holders of last resort’ for powerful FFCs can be seen as a potential stumbling block for such a transition, deflating the claims of green finance advocates. On the other hand, if passive investors can voice environmental concerns with

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those FFCs for which they claim to provide ‘patient capital’, perhaps they can effect a smooth transition within those companies. In order to differentiate between these competing claims, it is necessary to explore the different interests, practices and justifications involved in the rise of passive investment.

Theoretical and Empirical approach

Answering the above questions requires delving into the technical arrangements that undergird passive investment and relating them to the wider debate as to the green transition. Situating my analysis within broader literatures concerning the political economy of a green energy transition, I argue that passive investment should be seen as an important site of politics. Though the presentation of ETF investment as passive is successful, scrutiny of its operation reveals that the process of achieving this passivity is highly technical, managed, monitored and judged. In short, the passivity of theory is translated into practice through an active, agential process. To make this point, I draw on the conceptual apparatus of the ‘social studies of finance’ (SSF) field, which has flourished in recent years as a provocative perspective with which to view the operations of high finance. The SSF literature engages with financial markets at their micro and material level. In so doing, it recognises that action in financial markets is distributed across human and non-human elements. Agency, in terms of the capacity for intentional action, involves the assemblage or arrangement of human beings, material and technical devices, and is achieved through the combination of these disparate elements (Calliskan and Callon, 2010: 9). Brought together as a ‘socio-technical agencement’, agency in financial markets is irreducible to either its human, or material inputs, but represents the hybrid fusion of the two (Ruggins, 2018).

I argue that this approach to agency allows us to better assess the relationship between passive investment and green finance. To do so, I engage in a detailed case study of recent ETF investment in an ailing US coal company, Peabody Energy. By interrogating the processes, decisions and protocols through which Peabody was (re)included within a predominant US small-cap indexes, and invested in through ETFs tracking them, I illustrate how the technical set up of a growing section of the investment industry is acting as an institutional block against the greening of finance

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Green finance has so far failed to engage seriously enough with questions of market agency and reflexivity. Because markets are reflexive, the structures of the status quo - the infrastructure of market action, embeds power. With my empirical example I wish to illustrate that the wish to steer markets onto a green path is more complicated than merely prescribing that all financial flows be in line with the PA. Because the power of the status quo - i.e fossil fuel energy is embedded in technical products of investing - the ‘fixtures and fittings’ of capital markets.

Relevance

This rise in passive investment has important implications for our thinking about environmental governance and the green transition, both in terms of the broad academic literature and society at large.

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The nature of ETFs and their construction through indexes and index providers centres a form of human and non-human agency, or ‘socio-technical agencement’ that explains the phantom like nature of responsibility from leading asset management firms in response to revelations concerning the coal-intensity of their investments. Theoretically, my analysis applies the conceptual toolkit of SSF to an underexplored dynamic – the extent to which ‘socio-technical agencements’ are challenged by the demands of green finance.

These companies are, due to the logic embedded in the market devices to which they owe a good deal of their success, tied to continued investment in non-renewable fossil fuels. This reality has had increased scrutiny amongst scholars and investment practitioners (see Jahnke, 2019; Serarfeim, 2017; UKSIF, 2018), however, this attention has been primarily concerned with the ‘concentration of ownership’ afforded to companies with highly liquid ETFs. My attention instead focuses on questions of justification, and the dispersed nature of agency brought through the performativity of passive investment. By challenging the status of ETFs as socio-technical agencements’, particularly the performance of passivity it entails, I show how the technical products of high finance may be politicised in the age of the Anthropocene.

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(ii) Societal

In terms of wider society, the stakes of coming to an informed understanding of the environmental implications of contemporary passive investment could not be higher. Continued investment and extraction of fossil fuels, particularly those with extreme polluting properties (coal), contributes to the failure to stay within the adequate boundary of the Paris agreements, and the catastrophic environmental prospects implied. The seemingly ‘passive’ activities of these products are contributing to the inaction of FFCs continuing to emit carbon. Given the urgency with which action is required to limit the catastrophic effects that will follow from a failure to limit these emissions, these actions are far from neutral, but constitute an increasingly active political decision. By contributing to a specific style of climate governance, in which large asset managers choose engagement over divestment, passive investment continues to profit off the damaging extractive practices that are leading to a global environmental breakdown. As the salience of the environment moves further up the political agenda, this is a point of concern for financial regulators, governments and concerned citizens.

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Literature review

In this section, I offer a literature review in order to situate my research question within broader academic discussions of climate change, finance and ‘asset manager capitalism’. Understanding the role of passive investment plays in global climate change governance requires engaging with IPE debates concerning private authority, financialisation, energy governance and the challenge of decarbonisation. My structure is as follows, I begin by exploring the literature concerned with the global energy transition needed to stay within the PA targets. Trends towards the ‘upstreaming’ of power towards investors within the governance of global energy suggest that finance may play an important role in shaping the character and speed of such a transition. Existing studies in the nascent ‘green finance’ literature examining the role of investment in the green transition illustrate two primary obstacles for realising a green finance transition: (i) the mobilisation of adequate funds to ensure the development of viable alternative energy sources; and (ii) adequate recognition of the risks associated with continued investment in FFCs, with the aim to engender a shift in the financial status of fossil fuels from assets to liabilities. These obstacles represent key political-economic hurdles to the realising a green financial transition, as they directly challenge the entrenched power of the fossil fuel energy order. Recent developments within the industry suggest that this is likely to become more fraught, as the rise of ‘passive investment’ vehicles is seeing the growing concentration of corporate ownership, which, by virtue of its index tracking investment strategy, is common seen as being unable to divest from FFCs. This growing contradiction is critical to our understanding of the potential for a global energy transition.

Political Economy in the age of the Anthropocene

An emerging scientific consensus concerning the impact of humans on the Earth’s natural systems argues that we are witnessing a transformation in the relationship between humans and the planet so profound as to constitute a new geological epoch: the Anthropocene2_{. Although geologists continue}

to debate the available evidence about the advent of the epoch, there is widespread acceptance of the premise of the concept - that humanity ought to be recognised as a geological agent, irrevocably shaping the Earth’s history. Recognition of this premise has prompted a wide-ranging debate across

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the social sciences, from Anthropology (Latour, date; Harraway, 2016), International Relations (Harrington, 2016), Political Theory (Mann and Wainwright, 2017), and Political Economy (Lane, 2019). Scholars grappling with the social origins of the epoch often criticise the term ‘Anthropocene’ as unnecessarily reductive, apportioning responsibility for global warming at the level of the human species. Instead, attempts to better situate the changes wrought in the anthropocene within human social relations have been made (Harraway et al., 2016), with some suggesting the alternative framing of the ‘capitalocene’ (Moore 2017a, 2017b; Malm, 2016). The idea of the ‘capitalocene’ attributes geological agenc not to humanity as a species but to the economic system, tying the desire for economic growth and its concomitant resource use to the capitalist imperative to accumulate. In this vein, Malm (2016) has traced the historical origins of fossil fuel power to the industrial revolution in England, and the decisions to pursue coal power as an alternative to steam. Mitchell (2011: 247) argues that the story of the emergence of contemporary political and economic status quo, prioritising a commitment to ‘growth without limits’, is inseparable from the discovery of fossil fuels that were ‘so cheap and plentiful’ that the question of their exhaustion and environmental impact was ignored. Lane (2019) recently examined the origins of the fossil-fuel growth complex to changes in the post-war US economy, linking the ‘Great Acceleration’ to capitalist processes. If, as these authors argue, climate change is fundamentally set in motion, enabled and maintained in the political economic status quo, then mitigation strategies, far from technical exercises, are fundamentally political – in that they seek to dismantle, alter and challenge the prevailing order.

Recognising the political dynamics of the Anthropocene, therefore casts new light on the proposed mitigation strategies. The most immediately pressing implication of human geological agency, in terms of its potentially destructive impacts, is climate change. Proposed targets for its mitigation have been reached through the international political process, culminating in the PA of 2016. Its authors admit to the need for profound changes in human social organisation in order to limit warming to 2 degrees. Jim Skea, co-chair of IPCC working group III, notes that although this is ‘still possible within the laws of chemistry and physics’, the required changes in economic, political and social life are without historical precedent. The science of climate change may no longer the subject of academic dispute, but the means through which to realise mitigation strategies is the essential political question of the present. As Mann and Wainwright put it: ‘Our technical understanding of the physical processes of climate change has run far ahead of our explanations of the social and political processes driving these physical processes, and yet it is the social and political processes that must change.’

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A (Green) Great Transformation?

Identifying the mechanisms that enable or constrain a transition in social and political processes is the central question of climate change mitigation. If the rapid, sustained and global transition away from the fossil fuel energy order is the imperative, International Political Economy (IPE) is well placed as a discipline to investigate the dynamics of such a transition. Decarbonising of the global economy becomes more complex, transnationally interlinked and fraught with political tension each year, and approaches that attempt to see the problem as merely a matter of appropriate incentives, geopolitical will, or technical innovation, fail to recognise the deep interlinking of capitalist ideas, interests and institutions with the prevailing fossil fuel order. By interrogating mitigation as a question of political-economic ‘Great Transformation’, IPE scholars can offer compelling analysis of this emerging political front. As Mann and Wainwright, ‘the future of [climate change] mitigation is fundamentally a question of political economy’ (2017: 52).

Geels (2014) presents an analysis of the low-carbon transition that adapts the common ‘multi-level perspective’ to include consideration of ‘instrumental, discursive, material and institutional forms of power’. He finds that the predominant optimism of policymakers, who see a low-carbon transition as the inevitable result of niche technological innovation, is misplaced. The power of incumbent actors within the energy regime will offer intense resistance to such a campaign. He argues that more attention should be paid by scholars to ‘the destabilisation and decline of existing fossil fuel regimes.’ (36) However, his analysis is not extended to the role of finance, and the ways in which it might aid or restrict this process of ‘destabilisation and decline’. In a familiar argument, DiMuzio (2012: 12) casts doubt on the ability for finance to aid a transition away from the prevailing global economic order. Highlighting the ‘entrenched power’ of the oil and gas industries, he sees the financial sector as its enabler. This he argues, is seen in the continued intransigence of investors towards action on fossil fuel investment, who instead seek to ‘capitalize on an unsustainable future premised on non-renewable fossil-fuels’.

Whilst such analysis highlight questions of power and its institutional manifestation in climate inaction, they operate with a highly aggregate, one-dimensional view of finance as a monolith. This is

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increasingly at odds with the emerging environmental investment movement, and ideas of ‘green finance’ more generally. In a recent contribution from the critical IPE tradition, Newell (2018) brings fresh thinking on the possibilities for a ‘Great Transformation’ in the energy order of the global economy that sees important points of tension emerging within the financial secotr. Criticising the ‘overwhelming technological focus’ of the predominant literature concerned with ‘socio-technical transition’ to green energy, who’s attention to the role of ‘niche’ emergent technologies (i.e. solar or wind power) and the policy approaches taken to them ‘neglect[s] questions of politics and power beyond specific management strategies and governance processes’ (Ibid: 2). Like Geels, he argues for the grounding of approaches to energy transition in analyses of power, but his perspective is Neo Gramscian. Doing so brings attention to the ‘incumbent regime of existing actors and interests that benefit from ongoing reliance on a fossil fuel economy’, as well as the ‘vulnerabilities, weak spots, and active agents of change’ that might foment an energy transformation (Ibid: 4). He sees the prevailing fossil fuel energy system as ‘an expression of hegemony’ which aligns predominant material and ideational logics, or ‘structures and superstructures’. The need for transition away from this predominant system is introducing new contradictions, contestation and competition between different fractions of capital, as actors within the incumbent energy regime ‘will not give up their position easily’ whilst others seek a smooth transition away from unsustainable energy sources.

Newell argues that the position of finance as the ‘dominant growth model’ tying capital and state interests together, affords it a ‘decisive role in the form that responses to climate change will take’ (Ibid:7). Developing awareness of the damaging financial impacts, as well as the potential accumulation opportunities, of climate change are driving actors within the financial system to depart from their traditional support for the predominant energy order. These developments suggest the need for critical scholars to engage with the ‘potentially disruptive power of finance capital in conjunction with movements from below resisting extractivism and the building of new fossil fuel infrastructures’ (Ibid:8). Divestment, disclosure and the devaluation of fossil fuel assets are examples of the mechanisms through which such an alliance could construct an emerging green energy alternative. However, Newell is wary that finance may be a ‘fickle ally’ in the climate mitigation fight, arguing that its green strategies should be put under intense scrutiny to reveal their contradictions, as well as the opportunities they may promote. It is worth delving into such contradictions further – which reveal a growing divide within investment between active and passive strategies, particularly with respects to the regard and attention paid to the energy transition and climate risk.

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Financialization and the ‘upstreaming’ of global energy governance

Understanding the role played by finance capital in an energy transition requires unearthing the institutional power of finance within the system of global energy governance. A rich tradition in IPE investigates the role of finance in the private governance of the global economy (for a summary, see Frieden, 2016). Following Keohane’s (2009) call for greater understanding of the role of corporate actors in shaping global political economic outcomes, a number of scholars highlight how finance acts to delegate public authority to private actors in global energy governance (Buthe and Mattli, 2011). The commodity chains literature indicates that changes in production have coincided with the movement of power away from manufactures, in two directions. Downstream to large retailers, and upstream to investors (Neville et al., 2018). Trends brought on through outsourcing, offshoring, the increased availability of transportation, liberalised global trade, or those otherwise brought under the conceptual umbrella ‘globalisation’ - have catalysed this power shift (Gerrefi et al., 1994). The environmental consequences of the downstreaming of power has been documented through studies of the role of retailers (Dauvergne and Lister, 2013), logistics firms (Coe, 2014), and sustainability standards (Fiorini et al., 2018), whilst the environmental consequences of the ‘upstreaming’ of power to the financial sector has received less scrutiny.

The term financialisation, though often used as a catch-all, is helpful when used to describe the changing character of the financial sector within the organisation of production, and with the economy as a whole. Financialisation, in this sense, refers to a shift in power relations within global markets (French, Leyson and Wainwright, 2011). Within production, the role of investments in agrifood systems has been widely documented by IPE scholars, who describe how the use of complex financial instruments, such as derivatives, indices and futures, all increase the distance between physical production and its financing (Clapp, 2014). This serves to reinforce the power and central place of large corporations compared to primary producers. When coupled with the rise in importance of shareholder value in the US and UK economies (Lazonick and Sullivan, 2001; Gamble and Kelly, 2001), this suggests that investors, shareholders, and the financial actors ‘upstream’ have increased power in global energy governance, and hence are of interest to those considering the viability of an energy transition

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The Green Shoots of Finance

In order to realise the transition to a green global economy, there is an urgent need for ‘public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency, and prevent the loss of biodiversity and ecosystem services’ (UNEP, 2011: 2). How such transformational investment is financed is the major question that the emerging ‘green finance’ discourse seeks to answer. The green finance literature recognises the particular power that financial sector professionals exercise over the energy transition. Through the control of investment decisions, financial decision makers influence the movement of capital - where it flows and where it does not - which is integral to the realisation of an energy transition and the adaptive capacity of economies responding to a warming planet. The future of the global ecological system is therefore entangled in financial decisions, or as Jason Moore (2016) has put it: ‘Wall Street is a way of organising nature’. In other words, the demands of the political economy of the Anthropocene require that we view finance, its instruments, ideas and institutions, as an important force shaping the socio-natural present and future.

Broadly, research concerning climate finance has outlined and sought to find resolutions for the twin ‘market failures’ involved in the private governance of a green energy transition, identified by Jaffe et al., (2004). The first concerns investment: so far, the mobilisation of funds for renewable technologies needed to replace carbon intensive fossil fuels has been meek, as these technologies have primarily been viewed as additions, rather than alternatives to a mainstream portfolio. As Andersson, Bolton and Samana (2016:3) claim, investors continue to see investments in green technology as ‘a bet on clean energy [rather] than a hedge against carbon risk’. The second concerns disinvestment: in order to dissuade investors from continuing to seek return from FFCs, the risks they pose through harmful pollution needs to be internalised, in order to smooth over the potential losses and uncertainties involved in the transition. These two elements are intertwined, as the failure to see fossil fuels as potential future liabilities contributes to the anaemic investment in renewables, and vice versa. There are, so to speak, two sides to the green finance coin. Green finance is needed to balance between the elements of Schumpeterian ‘creative destruction’ in order to smooth a path to a low carbon future. Investment is a means to (i) stimulate the creation of novel forms of sustainable energy, and (ii) destabilise the incumbent FFCs and smooth over the destruction of the fossil fuel energy order (Covington and Thamotheram, 2014: 45).

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Creative destruction is a political act

The intertwined aims of the ‘green finance’ agenda, expressed in terms of a ‘twin market failure’, are stripped of their essential political content. Engineering a form of green ‘creative destruction’ implies taking important decisions as to who to divest from, how quickly, where to direct funds for a renewable transformation, and when to act. These decisions are political in that they involve contestation and have consequences of public significance. Moreover, in this politicised context, inaction loses its status as neutrality. Instead, those who do not seek to act are taking sides. It is therefore crucial to view the wider discussion of green finance as a form of public discourse, which, though often technical, is shot through with politics.

With regards to the creative element of green finance, a myriad institutions (state, private, national and international) looking to mobilise funds for renewable energy have emerged in the past decade. The Paris climate agreement Article 9 states that ‘developed country parties should continue to take the lead in mobilizing climate finance from a wide variety of sources, instruments and channels, such as public funding, private investment, loans, carbon markets, and even developing countries’. Similarly, article 2.1 makes explicit the imperative to ensure that financial flows are ‘consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development” (UNFCCC 2016). Scholars have noted the increasingly politicised question of disinvestment from fossil fuels. The activities of the high profile divestment movement are outlined by Ayling and Gunningham (2017), who argue that through ‘symbolic action and norm entrepreneurship’ this transnational campaign pressures investors to relinquish their holdings in FFCs, and ought to be regarded as a ‘novel form of private investor-targeted climate change governance’. In a similar vein, Macleod and Park (2011) detail the attempts of ‘activist’ investors to exert influence over the behaviour of FFCs - noting the ability of investor networks to shape business norms relating to climate change. However, recent studies into the activism in the US found that environmental campaigns at the shareholder level were ultimately unable to influence the decision to pursue hydraulic fracking in the country (Neville et al., 2018). Aside from attempting to influence FFC decision making through shareholder advocacy, scholars have considered the problem of whether or not the assets of FFCs may eventually become ‘stranded’, as governmental regulation prohibiting their use (Caldecott et al., 2016).

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Despite this emerging politicised discourse, the orthodox financial literature, and market practitioners, are generally remains somewhat removed from it. A recent study of leading 21 finance journals from 1998 and 2015 found only 12 articles out of 20,725 (0.06%) related to climate finance, three elite level journals did not publish any articles in their sample period on the effects of climate change on financial risk (Diaz-Rainey et al., 2017). If the majority of financial theorists are seemingly unconcerned, then why expect those within the market to be? Christophers (2019) notes that whilst there is a wealth of ‘forceful advice about how investors should think about climate change and fossil fuel risk’, attention to how investors actually think about climate risk is conspicuously absent (2019: 3). Drawing on in-depth interviews across the institutional investment landscape, he identifies the presence of ‘environmental beta’ which is the excess risk associated with continued investment in FFC assets, as a common theme through his interviews. ‘The future FFC investment landscape is likely to be highly volatile and to precipitate exactly the kinds of instability feared by regulators’. This volatility is linked to the ‘destructive’ element of the green transition - FFCs with financial power, if they are to see their assets divested from, will likely generate volatility through their central position in the financial system, and their active resistance to change. He argues that across the investment industry, different actors have different approaches to this ‘environmental beta’. Whilst the uptake in ESG (Environmental, Social and Governance) suggests and improved awareness of the role of investment in the green transition, there remains an inherent feeling amongst some of his interviewees that ‘the ESG people are largely symbolic’ (7). Fund managers continue to prioritise financial performance, regardless of the environmental implications

The Rise of Passive Investment

It is important from the perspective of green finance to understand changes in the investing landscape and examine their implications.Passive investment, an evolution in the fund management industry, has enjoyed a steady rise in popularity in the past decades. Instead of picking a set of stocks with the aim of beating the market, passive investing instead aims to track the performance of an underlying index. An index is the sum of all stock in the market, representing the market as a whole – the most famous being the S&P 500 – though there are countless across the financial industry today (Robertson, 2018a). Over $3 billion of flows per day are exchanged via passive investment in indexes, which began to grow with the rise of pension fund investment in the 1980s. The rise of passive investment has been investigated from three primary angles. (i) The financial economics literature investigates its

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effects on financial instability; (ii) the corporate governance literature investigates it in terms of the growing concentration of ownership it has brought; (iii) and the social studies of finance literature addresses it in terms of the effects of the performativity of economic theory. I address each in turn below.

(i) Financial Economics: Passive investment, efficient markets, and systemic risk

Financial economics generally sees the rise of passive investment as a feature of the evolution of the fund management industry. Fisch et al., (2018: 1) argue that the emergence of passive investors - through index funds and ETFs - is ‘the most important development in modern day capital markets’. In light of influential Efficient Markets Hypothesis (EMH), which provided the theoretical justification for the intuition that over long time periods, active stock picking funds could not ‘beat the market’, investment entrepreneurs created the first index fund in the 1980s (MacKenzie, 2006). Index funds typically aim to minimize their ‘tracking error’ - the extent to which their performance diverges from that of the index which they track, their ‘benchmark’, and as such offer readily available information signals to potential investors. Aided by advances in computerised trading, index funds also offer investment products with significantly lower fees than traditional actively managed funds. The most recent iteration, the Exchange Traded Fund, or ETF, exemplifies the low-fee, high liquidity model. Advances in computer processing technology have enabled the dramatic expansion of indexing beyond traditional historic market benchmarks, further catalysing the rise of passive investment. There are now more existing market indices than there are US stocks3_{. The ETF market now accounts for}

nearly US $4 billion in assets under management (AuM) globally, of which US $2.3 trillion are US equities (ICI, 2019).

(ii) Corporate Governance: Passive Investment and the concentration of ownership

Scholars of corporate governance note how the trend towards passive investing has driven a new concentration in corporate ownership. As more investors internalise the key doctrines of modern portfolio theory - that active, stock-picking funds, which charge high fees, are unable to ‘beat the

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market’ over the long term - increasing volumes of capital are being diverted towards passive, low-fee,l index tracking products. As shown in the figure below - global flows out of actively managed equity funds are mirrored by flows into index tracking funds between mid 2006 - 2017. The immense outflows from actively managed funds - in the region of US$2.7 trillion - appears to map onto the inflows experienced by passive funds during this time - around US$2.6 trillion. Fichtner et al., (2017) illustrate that whilst the outflows of the former came from a fragmented and diverse group of actively managed funds, the inflows into the latter have been concentrated amongst a small group of passive management firms. The authors claim that in contrast to the centrifugal forces at work in actively managed investment, where ‘there is no significant advantage to being bigger than the competitors’, passive investment is characterised by centripetal forces, working through ‘powerful economies of scale’ and first-mover advantages to create dominant position for its major beneficiaries. At the apex of this ownership concentration stand the ‘Big Three’ US asset management firms: BlackRock, Vanguard and State Street, account for 90% of all assets under management in passive funds (2). This growing concentration in equity ownership has important consequences for corporate governance. Corporate ownership conditions how corporate control manifests, particularly with regards to important governance dilemmas, including short term shareholder value maximization versus long-term investment, and environmental and social issues. This concentration has led to recognition of the power of such companies, as ‘the new power brokers in capital markets’ (Fisch, Hamdani and Davidoff Solomons, 2015), and a renewed engagement with ownership as a form of ‘hidden power’ in the financial infrastructure (Fichtner, Heemsker and Garcia-Bernardo, 2017), which affords them a great deal of influence over corporate policies. Whilst the corporate governance literature provides interesting insights into the growing concentration of power arising from the ‘passive revolution’ it leaves the important dynamics embedded within ETFs underexplored.

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Figure 1

Source: Fichtner and Heemsker (2018)

(iii) Social Studies of Finance: Passive investment as performative effect of finance theory

A number of scholars have recently called for such integration as a means to realise an alliance between ‘non-economist students of the economy’ (Braun, 2016: 262). Christophers (2014) suggests that political economists’ natural suspicion of the ‘techno-cultural’ approach to market exchange taken by the SSF literature obscures the areas of productive mutual interest between the two. In a similar vein, Beckert (2013: 73) asserts that in order to understand the ‘expansive dynamic of capitalism’, one needs to gain an understanding of the ‘micro-processes underlying macro-outcomes’. SSF has, rather than cede ground to economists, attempted to apply a sociological lens to the micro-functioning of markets, by interrogating the social relationships involved in financial markets, the technical instruments employed by market participants, and the collective psychology that informs their behaviour. Braun (2016) argues that this analytical tradition ought to be brought to bear on contemporary political economy, which has been traditionally focussed on a ‘hierarchical ontology’ positing states, regulators and politics generally as working to constrain markets -seeing the functioning of markets themselves as less important than the political struggles involved in regulation. This is short-sighted, as by disregarding markets dynamics at their ‘micro-institutional’ level, there is a

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failure to recognise them as important ‘sites of politics’ (Ibid: 255). The realm of actions within financial markets are of interest to scholars of environmental governance because they can have material effects on the economy, and are arranged, designed and maintained in a way that privileges a certain rendering of financial reality, or the status quo.

Economic sociologists have also analysed the rise of passive investment, through the lens of performativity. In a seminal contribution, MacKenzie (2006) analysed of the development of the US stock markets since the 1960s, described how the developments of financial economics as theory played a critical role in the development of passive investment practices. This is exemplified through the first ‘passive’ investment index funds, created by finance theorists working with Wells Fargo in 1971 (MacKenzie, 2006: 84-8). This was followed by the development of ‘open ended’ index funds in 1976 by Jack Bogle, the founder of Vanguard, who emphasises the importance of economic theory in spurning the drive to develop a tracker fund. However, it was not until the development of the ‘index funds younger, more complex and more tradable cousin’ the Exchange Traded Fund, that the passive investment became a ‘mass phenomena’ (Braun, 2016: 266).

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Theoretical Framework

Building on the above literature review, in this section I outline the theoretical framework within which my analysis will take place. As FFC investment becomes increasingly politicised in the age of the Anthropocene, questions as to where agency, and therefore responsibility, lies on the investment chain are of critical importance to those seeking to challenge the power of the political-economic energy status quo. Understanding the effects of the rise of passive investment on the green finance transition therefore involves outlining a theory of agency within the passive investment chain

When applied to passive investing, existing examinations of this responsibility have attempted to fit it within predominant conceptions of ‘voice’ versus ‘exit’ (Jahnke, 2019). Passive managers, in such an account, have forfeited their agency, or the ability to ‘exit’ the holdings of an underlying index, and as a result are limited to exercising ‘voice’ with companies in their funds. However, such an approach leaves the ‘black box’ of passive investing intact. I argue that any consideration of the responsibility of passive investors must grapple with the black box itself. That is, they must examine the constituent human, material and technological parts that make up what we call ‘passive investment’.

I apply the theoretical insights of the SSF as a means through which to understand the mechanics of passive investment. The SSF literature conceives of agency within financial markets as distributed and material (MacKenzie, 2010: 10), not limited to expression in by human beings, but enabled through their relationships with technology, or ‘market devices’. The concept of hybrid human and technological agency embedded in ‘socio-technical agencements’ allows for a more exacting analysis of agency, and therefore responsibility in the passive investment chain. Through a brief account of how this ‘agencement’ is achieved in the structure of an ETF, I explore the inner workings of this ‘black box’, before turning to how it relates to the emerging political demands of green finance, in the subsequent sections. I argue that rather than being lost in particular details, the SSF approach allows us to re-politicise the operation of ETFs in the face of their de-politicisation in technical discourses. Doing so provides a critical means through which to attribute responsibility in the age of anthropogenic climate change.

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Critics of financialisation often struggle with to identify the ‘financial actor’ that they seek to criticise (Konings, 2017). Financial markets, shrouded as they are in complex mathematics, technical instruments, institutional arrangements and terminology, leads some to dismiss the development and extension of financial markets as a form of ‘alchemy’. Depictions such as these rest on a kernel of truth – financial markets, are systems characterised by their ‘reflexivity’ – meaning that they have no ‘solid anchor outside of market participant’s assessments’ (Stellinga and Mugge, 2017: 394). This means that financial products are often self-referential, as seen by the proliferation of derivative products, which construct an ‘artifice of indifference’ between the financial realm and the ‘real’ economy (Wigan, 2009). When confronted with this reflexivity and self-referentiality, however criticism can easily slide between depicting agency fundamentally absent from its operation, and hence creep towards technological determinism (Streeck, 2014), or depict it as being concentrated amongst a few corrupted, or corruptible hands, or in ‘agential peaks’ (MacKenzie, 2010: 22).

In contrast, the theory of agency put forward STS argues that action and therefore agency in financial markets is irreducible to either its human or technical elements. A provocative approach to market agency has been central to the flourishing of the SSF field since its inception. Callon (2007), seeking to implement the insights of Actor-Network Theory on the study of the economy, utilises an agnosticism with respects to human agency. Economic action cannot be reduced to either its human drivers, or its technical devices, but exists in the combination of the two – within ‘socio-technical agencements’ (STAs). These STAs are made up an assemblage or arrangement of human beings alongside material, technical and textual devices. Just as the action of discovering a new galaxy involves the combination of cognitive, material and textual devices, across a range of contexts, understanding action in the economy is best seen as distributed (as with indexes) and material (through technical calculative devices). The notion of the financial economy constituted by STAs demands that ‘a panoply of entities be flexibly taken into account and described, in detail, whether they are human beings or material and textual elements’ (Calliskan and Callon, 2010: 8)

Another way of expressing this idea is through the notion that in order to act intentionally in financial markets, your ‘market equipment’ matters (MacKenzie, 2010; 20). In the highly technologized environment of contemporary financial markets, daily activity is made up of human beings, and their machines, without the use of particular technologies, acting within the financial would be nearly impossible. The equipment that financial market participants use in the process of acting in a financial

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market are therefore not ‘mere technicalities’, but actively change the nature of economic agents, their actions and markets themselves. This equipment can be physical – via computerised trading algorithms (LRB, 2017), screens (Knorr Cetina, 2015), or it can be cognitive – as with the Capital Asset Pricing Model (CAPM), the efficient markets’ hypothesis (Jovanovic, 2019), or the Black-Scholes theory of option pricing (MacKenzie, 2006). The calculative and cognitive processes behind the establishment of financial ‘facts’ is distributed and intimately tied up in the material functioning of certain machines. Rather than seek to break down this distribution to more fundamental precepts, STS adapts its theory of agency so as to include this ‘market equipment. Agency in financial markets is ascribed to ‘socio-technical agencements’ – referring to the assemblage of material and human elements that cannot be reduced to their constituent parts.

ETFs as the ‘socio-technical agencement’ of the passive investor

The notion of market agency as being made up of ‘socio-technical agencements’ is a useful tool through which to understand the rise of passive investment, and its current evolutionary manifestation, Exchange Traded Funds (ETFs). ETFs serve as an example of such ‘market equipment’, both in terms of its cognitive and technical components. An evolution of the earlier index fund, ETFs ‘completed’ the ‘socio-technical agencement’ through which passive investing was translated into tradeable products, enabling it to become ‘a mass phenomenon’ (Braun, 2016: 267).

Paul Samuelson outlined the theoretical rationality underlying index investing in 1974:

What logic can demonstrate is that not everybody, nor even the average person, can do better than the comprehensive market averages. That would contradict the tautology that the whole is the sum of its parts. If you select at random a list, of say 100 stocks and buy them with weights proportional to their respective total outstanding market values, although your sample’s performance will not exactly duplicate that of a comprehensive market average, it will come close to doing so – closer than if you throw a dart at only one stock, but of course not quite as close as with a sample of 200, 300, or all the stocks available in a marketplace.

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This logical insight combines elements of two of the cornerstones of modern portfolio theory. Markowitz’s Capital Assets Pricing Model (CAPM) and Fama’s Efficient Market’s Hypothesis (see Ruggins, 2018: 163-168). The story of the emergence of passive investing as an agencement involves the translation of these theories into material, investible products. The development of index investing was itself intimately bound up with the development of technology (Bernstein, 2005), and so too were the development of ETFs. Earlier index tracking funds faced two major problems relating to index replication of the underlying index: transaction costs and share creation/redemption. With regards to the former - indexes are dynamic entities that reflect the fluctuations of stock prices across a broad range of securities over time (Low, 2015). Tracking therefore requires keeping abreast of these fluctuations, keeping the composition of the fund in line with that of the index through the buying and selling of securities in line with their index weights. Such a process entails transaction costs, as the buying and selling of illiquid securities involves paying brokers and other actors to find willing sellers/buyers. Therefore, a trade-off exists between minimising ‘tracking error’ (the extent to which the performance of an index fund deviates from that of its underlying index over time) and minimising transaction costs. For traditional (mutual) index funds, whose operation limits the purchase and redemption of shares to the end of each trading day, the problems of transaction costs are compounded: balancing the inflows and outflows from the fund whilst maintaining a low tracking error becomes a costly undertaking (Braun, 2016: 265-66).

By implementing an innovative dual trading structure, ETFs sidestep these indexing problems. The design of ETFs (Figure 1) allows them to act simultaneously as stocks (tradeable intra-daily) and funds (tracking an underlying index). In the ‘primary market’ the fund enters into a creation/redemption mechanism with an ‘Authorised Participant’ (typically an investment bank) who facilitates the in-kind creation and redemption of shares – by suppling large blocks of shares in the underlying index (Deville and Oubenal, 2012; Madhavan, 2016: 20-24). This process occurs at the end of the trading day, meaning that the price of the continuously traded ETF shares in the secondary market often deviates from the market value of those shares (or the Net Asset Value per-share). To limit these deviations, the AP can engage in arbitrage across the two markets: simultaneously buying shares trading below market value in the secondary market, and selling them to the fund for a profit, and vice versa (Braun, 2016: 266). Through this mechanism, ETFs created an efficient solution to the transaction costs/tracking error trade off. This solution was crucially enabled through advances in computational

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software, that allow large baskets of trades to be executed at once – ‘traders and their technologies gradually entered a relationship where each extended the capabilities of the other, introducing a new form of socio-technical agency that enabled new basket-style products to flourish. It was not just the traders’ use of technology that extended their agency, but the fusion of human decision making with technological capability that produced new abilities and ways of thinking about the market.’ (Ruggins, 2018: 51). Treated as a market device, this innovative structure of ETFs amounted to the ‘practical translation of [modern portfolio] theories into actual investment products’ (Deville and Oubenal, 2012: 215). By embedding the logic of the ‘market portfolio’ into products with low transaction and operating costs, ETFs enabled ‘socio-technical agencement of the passive investor’ (Braun, 2016).

Figure 2: Exchange Traded Fund Dual Operating Structure

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Socio-technical agencements, performativity and politics

What does the understanding of agency offered by the SSF literature offer for questions of political economy? Socio-technical agencements have mostly been developed and discussed in economic sociology, and some political economists treat them with suspicion (Christophers, 2014). That the major proponents of the SSF approach stress an account of the economy as made up of socio-technical agencements. This, they argue ‘demands that a panoply of entities be flexibly taken into account and described, in detail, whether they are human beings or material and textual elements’ (Calliskan and Callon, 2010: 8) strikes some critics as ‘missing the wood for the trees’ (Roberts, 2012, in Braun, 2016: 262).

The notion of agency expressed in socio-technical agencements is also intimately tied up with SSF claims as to the ‘performativity’ of economics. This can be seen as a particularly potent form of market reflexivity, or a neat feedback loop between economic theory and market reality (Stellinga and Mugge, 2017: 397). Performativity refers to the ways in which calculative processes involved in economic theories, can, in their practical application in market devices, not only describe economic reality but contribute to its construction and material reproduction. MacKenzie (2006) illustrated how the Black-Scholes theory of option pricing led to the actions of financial actors, and their portfolios to increasingly resemble the reality described by the model. This strong form of ‘Barnesian performativity’ resembles a closed reflexivity loop in which economic theory creates the reality it purports to describe. However, financial theories can have the opposite effects - ‘counterperformativity’ describes how a model may serve to guide actions that shift reality further away from the model world. In these strong examples of market reflexivity exercising agential characteristics in the economy, financial theory acts as an ‘engine, not a camera’, reflecting its power to create and drive the functioning of markets, rather than merely describe their function (Ibid). The performativity thesis has ignited a lively debate across a range of different approaches to studying the economy (see Muniesa, 2014 for an overview) . Its critics argued that in stressing the importance of situated, descriptive analysis of the power of economic ideas and technical devices to create markets, they had neglected questions of politics, and of political economy more generally. However, the orignators of the performativity thesis themselves tend to stress the centrality of politics in an economy

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characterised by reflexivity, agencement and performativity. To Callon (2010: 168) ‘the performativity of economics does not sign the death warrant of politics; on the contrary, it introduces it into the heart of debates on the organization of economic activities.’ This is because socio-technical agencements that close the ‘performativity loop’ (Watson, 2007) between financial theory and practice are ‘fragile and rare’. Callon (2010) is the first to admit that within a framework of economic reflexivity and performativity - power still matters. There remains, to Callon, a hierarchy in calculative devices, processes, norms, that reinforce the economic status quo. In general, Callon argues that his approach stresses that economic theory should not be viewed as something that performs the economy as a rule but tries and, more often than not, fails to bring about the reality of its ideals. The rare moments were economic theory is neatly translated (‘performed’) into practical reality are the exception. Moreover, translation is always prone to ‘misfires’ meaning that their legitimacy is questions. Performativity, in this guise, is not an approach to the study of economics that is unable to attend to questions of power, rather it provides a new and useful set of tools with which to think about economic power, and politics, within markets themselves. Ultimately, this makes room for an expanded understanding of how technical and human agency employed in markets are constitutive of a site of politics, whereby actors attempt to bring their ideas to bear on markets, but inevitably face challenges, contestation and the inevitability of politics. The notion of the socio-technical agencement enables the deconstruction and disaggregation of finance, from ‘all-powerful agent or overwhelming systemic logic replete with the resources of ideological legitimation’ to a ‘dynamic, contingent, performative, and contested set of networks that can be unpicked through careful analysis of calculative and classificatory devices and practices’ (de Goede 2005). It is with this in mind that I turn to my case analysis.

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Case

In this section, I utilise the above theoretical framework and apply it to my case. To address the implications of passive investment in the transition to green finance, I analyse ETF investment in an ailing US coal company - Peabody Energy. The company filed for chapter 11 bankruptcy in 2016 after becoming over-leveraged in a volatile coal market. Following a legal settlement with creditors, it was re-listed on the New York Exchange in April 2017. Subsequently, it was reincluded on prominent US small cap indexes, and bought by ETFs tracking them. This mechanism was brought to the attention of the green finance debate in December 2018, when a report revealed that the sponsors of these ETFs were the largest owners of coal in the investment sector, in terms of both absolute holdings and their intensity (InfluenceMap, 2018). The report prompted the Financial Times to question ‘how seriously they take the issue of tackling global warming’ (Mooney, Hook and McCormick, 2018). Others argued that as investment norms shift towards green strategies of exclusion and divestment, the sponsors of such funds may find themselves in an increasingly contentious position as ‘holders of last resort’ for ailing fossil fuel companies. (Jahnke, 2019: 23)

A common wisdom in discussions of passive investment and its relation to green finance is the inability of passive funds to divest. The nature of the index tracking process, it is argued, prohibits passive managers from excluding certain assets from their portfolio. As a result, passive managers are limited to exercising their ‘voice’ as shareholders, by engaging with companies looking to raise environmental, social and governance (ESG) concerns. By becoming ‘forceful stewards of the commons’, passive behemoths can serve the public good (Serafeim, 2017). The sponsors of passive funds themselves promote this conception, BlackRock’s response to the revelations concerning its investments in coal, stressed that they were engaging with coal companies and seeking to ‘understand how they are managing and responding to climate risks’ (Mooney, Hook and McCormick, 2018). Whilst such a view of passive investing is commonplace, the reality is more complex. By taking a closer look at the passive investment products that these companies employ, I cast doubt on their claims to passivity. Presented as the technical application of modern portfolio theory, I find that the index tracking employed by ETFs is not just a ‘mere technicality’ but involves judgement, both in human terms and in the terms embedded in the market devices themselves.

‘Wall Street is a way of organising nature’ : is passive investment an obstruction to the transition to green finance?