The Agency Costs of Sustainable Capitalism

80 Pages Posted: 26 Jan 2021 Last revised: 31 Dec 2021

See all articles by Anna Christie

Anna Christie

Oxford University Faculty of Law; Newnham College

Date Written: January 13, 2021


The passive index investing revolution and the demand for bespoke environmental, social, and governance (“ESG”) investment products are the most monumental changes to shape the investor landscape for many years. These developments have been accompanied by an unprecedented concentration of power among BlackRock, Vanguard, and State Street (the “Big Three” asset managers). Inevitably, the Big Three are among the most powerful shareholders of the companies that have been identified as major contributors to the climate crisis. Due to the failure of governments to take effective action in the global effort to combat climate change, there has been intense pressure directed at the Big Three to provide investor driven solutions. The Big Three have increasingly purported to assume what I call the role of “sustainable capitalists”.

In this Article, I build upon Gilson and Gordon’s “agency capitalism” framework to put forward a new agency costs theory of sustainable capitalism. In this “sustainable capitalism” framework, I show that the Big Three still exhibit some form of “rational reticence”, especially with respect to firm-specific sustainability activism. There is also a risk that the Big Three may engage in “rational hypocrisy”, similar to corporate greenwashing. The combination of “rational reticence” and “rational hypocrisy” could result in a dual-monitoring shortfall – the “agency costs of sustainable capitalism”.

In the agency capitalism framework, the best solution that emerged was for specialist activist hedge funds to fill the monitoring shortfall by initiating firm-specific activism as “governance arbitrageurs”. In this context, activist hedge funds adapted their strategies to gain crucial support from longer-term institutional investors. Analogously, in the sustainable capitalism framework, ESG hedge funds have the potential to initiate firm-specific ESG activism as “ESG arbitrageurs” in a manner that appeals to, and mobilizes, the sustainable capitalism of the Big Three. Most prominently, ESG hedge funds can play a unique role in nominating specialist climate directors to corporate boards, with the Big Three lending their support to credible nominees. Activist hedge funds already have significant expertise in board representation campaigns and the Big Three have shown willingness to support board changes.

Other “responsible activists”, focusing more on portfolio-wide ESG issues, are also candidates for the role of “ESG arbitrageurs”. However, implementing meaningful strategic changes or board reform using the shareholder proposal mechanism has proven to be much more challenging. Therefore, a valuable role that other responsible activists can play in the ESG investor ecosystem is to focus on the problem of rational hypocrisy and target their activism at the Big Three themselves.

Keywords: agency costs, asset managers, big three, climate change, corporate governance, corporate social responsibility, ESG, hedge fund activism, index funds, institutional investors, mutual funds, passive investing, responsible activists, shareholder activism, sustainable capitalism

JEL Classification: G23, G34, K22

Suggested Citation

Christie, Anna, The Agency Costs of Sustainable Capitalism (January 13, 2021). 55(2) UC Davis Law Review 875-954 (2021), University of Cambridge Faculty of Law Research Paper No. 7/2021, Available at SSRN: or

Anna Christie (Contact Author)

Oxford University Faculty of Law ( email )

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Oxford, OX1 3UL


Newnham College ( email )

Sidgwick Ave
Cambridge, CB3 9DF
United Kingdom


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