‘Biggest class-action lawsuit in history’
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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