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The whistleblower who calls ESG a deadly distraction

Today we have two interviews that highlight key challenges in investing in the environment, society and governance. First, BlackRock executives have turned to ESG whistleblowers. Talik FancyRaises a difficult question as to whether sustainable investment is doing something to address the global climate crisis.

The second is PRI Fiona ReynoldsEmphasizes how growing demands on ESG disclosure can quickly become complex.

The ESG community appears to have a strong view of both interviews, so please continue to send your feedback to: moralmoney@ft.com.. read. Patrick Temple-West

Tariq Fancy: ESG is a “dangerous placebo”

© Rumi

In Moral Money’s first newsletter, we are not ESG cheerleaders, but “emphasize what works (and what doesn’t) and spotlight key people and ideas.”

In that spirit, we deliver an interview with a rare ESG whistleblower. Tariq Fancy became the first Global Chief Investment Officer for BlackRock’s Sustainable Investment in early 2018 and left the following year.

In March of this year, he shocked the ESG community. write in That sustainable investment is nothing more than a “marketing hype” and a “dishonest promise.”

Fancy will open an insider account for his ESG investing experience next week. Sustainable Investor Secret Diary.. He gave a preview to Kristen Talman And me.

When asked for a response from BlackRock, he said, “I think greenwashing poses a risk to investors,” and said he was seeking ESG regulation. “Investors, including BlackRock, are allocating capital to companies and technologies that are shaping the world through carbon reductions in renewable energy production,” he added.

The following has been edited for clarity and length.

MM: You have this argument against divestment. So basically, “someone else will raid and buy what you just sold.” Why leave BlackRock when you’re sure there are so many people lined up to take on your role? Can you promote external accountability?

Tariq Fancy: I’ve found that the only way to promote accountability is to create controversy.

It’s a difficult jump for people to think of it [ESG] It’s actually harmful. .. .. You have to build the argument you say, well, this doesn’t just have little or no impact. To make matters worse, it is becoming a deadly distraction that delays the kind of reforms that will actually affect the real world.

For businesses, the most efficient maximization of profits along with short-term biased incentives would be to market themselves as environmentally friendly to fend off taxes and regulations. This is actually trying to convince people that they don’t need to change the system. The sooner this postponed discussion is, the more likely it is that we will get some sort of real change.

MM: Are you talking specifically about ESG investment?

TF: They misrepresent what they are doing. It is the idea that ESG factors can be included in all these processes to achieve better returns and better social outcomes at the same time. I felt that the value of ESG data for most investment processes is very limited.

It’s a potentially dangerous placebo, a lot of marketing that answers the inconvenient truth with useful fantasy. .. ..There is no proof of that [ESG investing] Beyond the burning time, I insist, I did anything.

If you believe in ESG treatises that responsible companies are better, you argue that the best we can do is not just say it and then invest money. It’s really about making sure the regulations are smarter. In particular, by punishing irresponsible behavior at a systematic level to far support ESG products.

Power plant emissions

© Ldphotostock / Dreamstime

MM: Can you explain that?

TF: With carbon taxes, ESG funds that underestimate high carbon emissions would be much better. Instead, it is used as a placebo to prevent the existence of a carbon tax. To use the sports analogy, it’s much better to play clean if you have a referee. But if you don’t have a referee, play dirty.

There is no doubt that over the next five years, we will see an increase in what we have seen in the last five years, an increase in ESG assets, and all the beautiful words around it. Call it Sustain a Bubble now. And that happens with increased carbon emissions and inequality.

The only obvious advantage is that the asset manager has found a way to sell a slightly more expensive commodity. Currently, marketing is centered on ESG and stakeholder capitalism, with social unrest caused by mass sales of unaffected “green” products on the one hand and reducing taxes and regulations. Take advantage of the rise of.

I think it’s giving wheatgrass to cancer patients: it sounds good but doesn’t do anything.

Wheatgrass juice

© AP

MM: What do you tell your friends asking if you should invest in an ESG fund?

TF: The answer is no. There is no compelling reason to believe that it surpasses non-ESG strategies, so I don’t think it should be done. In addition, there is no impact on the actual environment or society. All you have to do is reward your money manager through higher fees.

To make matters worse, overall, you will help contribute to a huge social placebo and delay government action.

MM: Europe has acted much faster in enacting ESG regulations for the financial sector. Do you think the United States is increasing its scrutiny of Wall Street ESG adoption?

TF: Finance does what finance does. It’s about finding the best profit opportunities. There is a reason Goldman Sachs does not try to IPO the Sinaloa Cartel. If it is legal, they will surely do so. Because it’s probably a really lucrative high cash flow business. But the reason they aren’t doing that isn’t because of some business ethics statements or ESG policies. Nonsense. Because it’s illegal and they can’t. They left money at the table and didn’t get to where they were.

If you want something to happen, you can make it illegal. If you don’t want anything to happen, you can reduce your bottom line. You can do it with a carbon tax.

And, surprisingly, it’s all green, so you’ll get to a place where you don’t have to have a green or ESG fund.

MM: What do you think of the investors who are launching the Climate Change and Clean Energy Transition Fund?

TF: What people aren’t aware of is that when you dig underwater, they’re big numbers, but in most cases they have no effect at all.

A small subset of the product has an impact, [by adding a societal benefit]: If I buy this fund, will it have any impact on the world that wouldn’t have happened without it?

Such discussions are not possible for ESG ETFs or mutual funds that only trade secondary stocks on the public market. I think you can have that discussion for a climate technology venture capital fund or some groundbreaking venture funds. Because if you don’t invest in it, that money doesn’t exist and robs innovators of the direct key funding needed to build the solutions that society needs today.

The problem is that there is no rigorous discussion or standards and everything is sold as ESG.

MM: The asset manager voted for engine No. 1 in the ExxonMobil campaign. How would you rate their efforts to force change?

ExxonMobil logo

© Reuters

You can’t rely on proxy voting in situations where a company is making short-term profits from what is dangerous to the long-term public interest.

Those who vote are constrained by fiduciary duty. Let me give you an example.As part of my role [at BlackRock], I had to help advise voting on some ESGETF sustainability issues. For many companies, I have seen that satisfactory suggestions for improving their environmental and social footprints cost them a lot.

As a fiduciary, you should say, “Yes, it will hurt our interests, so please vote against it. Our job is to maximize the interests of our shareholders.” The only way you can vote in favor is if someone is likely to “internalize” the cost. This is most likely to occur through smart government regulation, according to economic theory.

MM: Are you seeking new government intervention?

The business leader is trying to eat with a cake, [saying]: “Republicans are blocking climate law, so we’re going to sell this green product as an answer.” My answer is, “Wait a minute, did you give the Republicans money?” ..

If the entire business community says that climate change and inequality are imminent problems and solutions are being hampered by certain politicians, then those politicians cannot be endorsed and are the only ones available. It cannot be argued that the solution is through the free market. A new premium priced green product with little or no impact.

The second part of the puzzle is taxes and regulations. This costs money.

MM: You talked a lot about the need for government intervention, especially the carbon tax. Are you a capitalist?

Bernie Sanders

© Getty Images

TF: I’m a capitalist. My biggest concern right now is that capitalism is under threat [senator] Bernie Sanders (Photo). We are under threat from those who think that major reforms are not needed. It seems that more than half of millennials are unaware that they don’t believe in capitalism.

I don’t blame them.They are seeing an s — version of capitalism that is clearly committing a form of intergenerational robbery — maximizing short-term profits [and] Kick the cans for long-term social issues.

UN PRI responds as follows:

PRI Retirement Chief Fiona Reynolds

© Getty Images at the Concordia Summit

On Wednesday, we announced that the UN-backed Principles for Responsible Investment have been delayed. Until 2023 The date on which the signer must report how to measure up to sustainable reporting standards.

PRI’s retiring CEO, Fiona Reynolds (Photo) opposes late and disappointed critics and tells moral money that it will eventually promote the goal of a thicker standard.

She said the stricter reporting standards that PRI piloted last year were aimed at “making it much harder to reach the top mark.” However, technical issues plagued pilots, and the world’s largest pension funds and asset managers found it difficult to use PRI’s reporting system. After the system broke, gaps in the reported data made it impossible to make consistent measurements.

“Looking back, we tried to overdo it in a year,” she admitted. “In the beginning, I wish I had said that the pilot would take two years.”

However, she argued that “delay means that in the long run we can develop a more robust and user-friendly framework for signers.”

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