We have two interviews today that illuminate core challenges in environmental, social and governance investing. The first, with BlackRock executive-turned-ESG whistleblower Tariq Fancy, raises tough questions about whether sustainable investing is doing anything to address the world’s climate crisis.
The second, with PRI’s Fiona Reynolds, underscores how the growing calls for ESG disclosures can quickly get complicated.
We suspect the ESG community will have strong views about both interviews, so — as ever — do send us your feedback at moralmoney. Read on. Patrick Temple-West
Tariq Fancy: ESG is ‘a dangerous placebo’
We said in Moral Money’s first newsletter that we would not be cheerleaders for ESG but would “highlight what works (and what does not) and spotlight key people and ideas”.
In that spirit, we’re bringing you an interview with a rare ESG whistleblower. Tariq Fancy became BlackRock’s first global chief investment officer for sustainable investing in early 2018, leaving the next year.
This March he shocked the ESG community by writing that sustainable investing boiled down to little more than “marketing hype” and “disingenuous promises”.
Fancy is publishing an insider’s account of his ESG investing experiences next week called The Secret Diary of a ‘Sustainable Investor.’ He gave a preview to Kristen Talman and I.
We asked BlackRock to respond and it said it “believes greenwashing poses a risk to investors”, noting that it had called for ESG regulations. “Investors, including BlackRock, are allocating capital to companies and technologies that are reshaping the world through the reduction of carbon in the production of renewable energy,” it added.
What follows has been edited for clarity and length.
MM: You make this argument against divesting that is, basically, ‘someone else is going to swoop in and buy what you just sold’. Why leave BlackRock when I’m sure there were plenty of people lining up to take your role? Can you drive accountability on the outside?
Tariq Fancy: I realised the only way to drive accountability is to spark a debate.
It’s a hard jump for people to think that [ESG] is actually harmful . . . You have to construct an argument where you say, well, not only does this have little to no impact; even worse, it’s becoming a deadly distraction that slows the kinds of reforms that actually would have real-world impact.
For companies, the most efficient maximisation of profits aligned with their incentives, which are skewed toward the short term, is going to be to market yourself as being green to fend off taxes and regulation. This is actually trying to convince people that the system doesn’t need to be changed. The sooner we have this overdue debate, the more likely we get some sort of actual change.
MM: Are you speaking to ESG investing specifically?
TF: They have misrepresented what they’re doing, which is this idea that you could put ESG factors in all these processes and then get better returns and better societal outcomes at the same time. The value of ESG data to most investment processes, I felt, was very limited.
It’s potentially a dangerous placebo, a lot of marketing that answers inconvenient truths with convenient fantasies . . . There’s no evidence that [ESG investing] has done anything, beyond — I would argue — burning time.
If you believe in the ESG thesis — that responsible companies do better — then I would argue that the best thing we can do is not to just say it and then go put your money in. It would be to actually make sure that regulation is smarter, in particular by penalising irresponsible behaviour at a systemic level, because it is going to help ESG products far more.
MM: Can you explain that?
TF: An ESG fund that underweights high carbon emitters is going to do far better if there is a carbon tax. Instead, it is being used as a placebo to prevent the existence of a carbon tax. To use a sports analogy, It is much better to play clean if there is a referee. But if there is no referee, play dirty.
I’ve no doubt in my mind that in the next five years, we’re going to see what we saw in the last five, an increase in ESG assets, and an increase in all the pretty-sounding words around it, which I now call sustain-a-babble. And it’s going to happen alongside an increase in carbon emissions and inequality.
The only clear benefit is to the asset manager who now has found a way to sell a little bit of a higher-fee product to you. With their marketing around ESG and ‘stakeholder capitalism’ right now, they’re holding off taxes and regulation with one hand, and with the other exploiting the growing social angst that’s resulting by selling a bunch of ‘green’ products that have no impact.
I think of it as giving wheatgrass to a cancer patient: it sounds nice but does nothing.
MM: What do you tell friends who ask if they should invest in ESG funds?
TF: The answer is no. I would say absolutely you shouldn’t, because there’s no compelling reason to believe you’ll outperform non-ESG strategies. Nor will you have any real-world environmental or social impact. All you’re doing is rewarding money managers through higher fees.
Worse, in the aggregate, you are going to help contribute to a giant societal placebo and it is going to slow government action.
MM: Europe has acted much faster in enacting ESG regulations for the financial sector. Do you see the US increasing scrutiny of Wall Street’s ESG embrace?
TF: Finance is going to do what finance does, which is find the best profit opportunities. There is a reason Goldman Sachs isn’t trying to IPO the Sinaloa cartel. I’m certain that they would if it were legal, because it’s probably a really lucrative high cash-flow business. But the reason they’re not doing it is not because of some business ethics statement or ESG policy. Nonsense. It is because it is illegal, and they can’t. They didn’t get where they are by leaving money on the table.
If you want something to not happen, you can make it illegal. If you want something to happen less, then you can make it less profitable. You can do that with the carbon tax.
And then you get to a place where, amazingly, you don’t need to have green funds and ESG funds because everything is green.
MM: What do you think of the investors who are launching climate or clean energy transition funds?
TF: What people don’t realise is that, when you dig underneath the surface, those are big numbers but most of them have absolutely no impact.
A small subset of products do have impact, [by adding a societal benefit]: if I buy this fund, will it create some impact on the world that would otherwise not have occurred?
You cannot make that argument for an ESG ETF or some mutual fund that’s just trading secondary shares in the public market. I do think you can make that argument for a climate tech venture capital fund or some breakthrough ventures fund. Because if you didn’t invest in it, that fund wouldn’t exist, depriving innovators of the direct, primary funding they need to build the solutions that society needs right now.
The issue is that, with no real rigorous debate or standards, everything is being sold as ESG.
MM: The asset managers voted with Engine No 1 in its campaign at ExxonMobil. How do you assess their efforts to force change?
In situations where companies are profiting in the short term from things that are dangerous to the long-term public interest, you can’t rely on proxy voting.
The people making those votes are constrained by fiduciary duty. I’ll give you an example. As part of my role [at BlackRock], I had to help advise voting on sustainability issues for some of our ESG ETFs. For many companies, I saw that satisfying proposals to improve their environmental and social footprints would cost them a lot of money.
As a fiduciary, you’re supposed to say, ‘yep, vote against it because it is going to hurt our profits — and our job is to maximise shareholder returns’. The only way you could vote in favour is if someone is likely to ‘internalise’ that cost, which economic theory tells us is most likely to occur through smart government regulation.
MM: Are you calling for new government interventions?
Business leaders are trying to have their cake and eat it too, [saying]: ‘Republicans are blocking climate legislation, therefore we are going to go sell this green product as the answer.’ My answer there is, ‘wait a second, did you give any money to Republicans?’
If the entire business community is saying that climate change and inequality are pressing problems, and the solutions are getting blocked by certain politicians, you can’t back those politicians and then argue that the only solution available is through the free market, meaning your great new premium-priced green product that has little to no impact.
The second part of the puzzle is taxes and regulations — which costs them money.
MM: You have talked a lot about the need for government intervention, especially a carbon tax. Are you a capitalist?
TF: I am a capitalist. My biggest concern right now is that capitalism is under threat, and it is not under threat from [senator] Bernie Sanders (pictured). It is under threat from the people who think that it doesn’t need any significant reform. We don’t seem to notice that over half of millennials now don’t believe in capitalism.
I don’t blame them. They’re seeing a s— version of capitalism that is clearly committing a form of intergenerational robbery — maximising short-term returns [and] kicking the can down the road on long-term societal problems.
UN PRI responds: ‘We tried to do too much in a year’
We told you on Wednesday that the UN-backed Principles for Responsible Investment had delayed until 2023 the date by which signatories must report how they measure up to its sustainable reporting standards.
PRI’s outgoing chief executive, Fiona Reynolds (pictured), is pushing back against critics dismayed by the delay, telling Moral Money that it will ultimately further the goal of meatier standards.
The tougher reporting standards PRI piloted last year were aimed at making it “much harder to get the top mark”, she said. But technical issues bedevilled the pilot, with the world’s biggest pension funds and asset managers finding PRI’s reporting system difficult to use. After the system broke, gaps in the reported data emerged, making consistent measurement impossible.
“In hindsight we tried to do too much in a year,” she admitted. “I wish we had said in the beginning that the pilot was going to take two years.”
But, she argued, “a delay now means that we can develop a framework which will be more robust and user-friendly for signatories for the long term”.