BlackRock’s former chief investment officer for sustainable investing says climate change is the greatest market failure in history. Only true regulation can thwart disaster.
Environmental social and governance criteria, a.k.a. ESG, “creates a giant societal placebo where we think that we’re making progress even though we’re not,” says my former BlackRock colleague Tariq Fancy.
That is a bold claim about one of the hottest buzzwords in sustainable investing, but Tariq knows what he’s talking about: He was recruited by the world’s largest asset manager in late 2017 to be its first-ever chief investment officer for sustainable investing — Wall Street’s answer to society’s growing demands for action on climate change and other social issues. It was also at a moment of time when BlackRock was about to begin dramatically expanding its focus on environmental social and governance criteria, a.k.a. ESG, which CEO Larry Fink has described as the greatest investment opportunity ever. Fink has also championed that free markets, not systematic government action, are the route to resolving the climate crisis.
Fancy is pushing back, arguing systematic government oversight is the only way to scalable climate solutions. BlackRock, Fancy says, is a “microcosm” of capitalism itself, and why its approach to climate action threatens climate progress. These are some excerpts from our talk.
You seem to be on an anti-ESG mission. Is that accurate?
I’m pro-environmental and social progress, of course. That’s why I joined BlackRock, having left the industry years earlier to found Rumie, an education technology nonprofit I now run. I was attracted by the promise of using my investing background to help “green” Wall Street and address the urgent climate crisis. But while some of the ESG movement, including various tools and standards, are steps in the right direction, they’re currently not being used correctly. And so we are at a moment in history when skepticism on ESG products is extraordinary. Journalists, fund managers, everyone is quietly talking about it. The major problem that I have is that even if they’re marketed correctly, they actually have no demonstrable impact.
The major problem that I have is that even if they’re marketed correctly, they actually have no demonstrable impact.
“No demonstrable impact” is a pretty big problem. How did you reach this conclusion?
While leading the charge to incorporate environmental, social and governance considerations into all of our $8.7 trillion of investment activities at BlackRock, I started realizing that there’s not a lot of value at all in this data. It didn’t — and it does not — work in most [investment] strategies, since many are short-term and don’t care about long-term issues, and also because, frankly, acting irresponsibly is often profitable. I realized this data was not at all useful to invest in, or at least not nearly as much as [Fink] was implying. It was mainly marketing.
Worse, I also started to realize that all the stuff on “stakeholder” capitalism was hollow marketing — it seemed almost intended to dupe the public into believing that we don’t need the overdue government regulation that we need immediately to address the climate crisis.
One concern you mentioned is that ESG performance incentives are not aligned to short-term business goals.
Yes. I looked at CEO tenure: It is the shortest it has been in decades. CEO pay is the highest it has been in decades. That was worrying. The system works according to incentives and self-interest. And if their incentives and self-interest are on the next five years, and there’s a problem whose impacts may become more acute 20 and 30 years away, then it’s unlikely they’ll act quickly enough or aggressively enough to address what is clearly in the long-term public interest.
So what is an alternative to ESG?
ESG as a measurement standard has value. But using vague ESG information alone as a mechanism of change is disastrous. It doesn’t work and creates a giant societal placebo where we think that we’re making progress even though we’re not. As the old saying goes, what isn’t measured isn’t managed. Measurement is not enough. That data needs to be managed in a way that changes the underlying incentives of the system, correcting the market failure that is at the heart of our climate crisis. That has to be a systematic solution and can only come from government leadership.
ESG as a measurement standard has value. But using vague ESG information alone as a mechanism of change is disastrous.
For climate, you need real regulation. If you don’t want Goldman Sachs to finance something, just make it illegal. Or far less profitable. But don’t ask them nicely or rely on them to suddenly be ethical. That’s not how the system works, and we’ve seen time and time again that relying on Wall Street and big business to “self-regulate” is a recipe for disaster.
Experts have said for decades that we needed systemic solutions at the government policy level to address the climate crisis. That has to begin with a price on carbon. It is the only way to get the entire market to react.
Aren’t a lot of fund managers starting to think about divestment?
Divestment never made sense. I always found it odd that people go one by one, and they say, “Hey, we’ll divest from you. We’ll pressure J.P. Morgan to stop lending.” It’s like playing whack-a-mole. There are 10,000 more holes, and you’re just hitting them all day.
Yes, you’ve said that strategies like divestment are a distraction from the needed focus on systemic solutions to the climate crisis.
Imagine if, in the 1960s, Dr. Martin Luther King Jr. decided to fight his fight for human rights through asking people to use their 401Ks to divest of companies that discriminated against Black people. It would have done nothing and been pretty ridiculous given the urgency and importance of the issue. Instead, he said these companies are based in our country, and we’re a democracy, so we can change the laws and compel them to do what is just and in the public interest. And they marched on Washington to demand that the government use its powers to ensure that human rights are respected across the country and enforced by law.
Systemic problems require systemic solutions led by democratically elected leaders.
Systemic problems require systemic solutions led by democratically elected leaders. Truly averting the climate threat requires governments and the private sector to come together to rapidly transform our economy into one that doesn’t have to be bad for business, but can no longer be business as usual. But that leadership must come from the leaders we elect, not the businesses whose leaders we don’t elect and whose incentives today do not align with the long-term public interest.
Are we using different standards for judging and acting on climate risk compared to the COVID-19 risk?
COVID-19 is a global systemic risk, and we were able to use extraordinary government measures such as restricting travel, making masks mandatory, and closing high-risk venues. You couldn’t leave it to the free market and let everyone do what they wanted to do, otherwise countries like the U.S. would have lost millions of people unnecessarily.
With climate, we’ve not seen any aggressive action from governments. And that’s why we’re in a position where the current estimates are we’re going to increase emissions by 7.5% in a decade when we need to drop by 2%. I feel like the fact that we’re dragging our feet on climate has less to do with the nature and magnitude of the threat and more to do with the incubation period: COVID-19 takes weeks; climate change takes decades. Are current leaders incentivized to care about the long-term?
And this is where you disagree with your old boss, BlackRock CEO Larry Fink?
I heard Larry say the free markets will correct it, and I was like, hold on a second here.
Larry understands the need for government action to bend down a curve on COVID. He’s fine when the incubation period is a few weeks or months, but when it comes to a crisis like climate — which is far worse — and will take decades [to manage], then it’s like, “Oh, well actually, let’s leave it to the free market.” Which translates into “leave stuff the way it is and hope the market figures out what we’ve known for a long time” is the greatest market failure in history.
That, to me, is highly irresponsible.
When did you first become skeptical about BlackRock’s ESG push?
I had to figure out an investment mechanism for how to create social change because Larry was writing that in letters and I kept getting asked by clients, “How does this actually lower emissions?” So I started writing a long paper to explain how ESG and sustainable investing will, over the long term, actually start to transform capitalism into better outcomes. By the time I had finished, I realized I had just written a somewhat tortured argument that the free market will slowly correct itself. And I said, “Oh my god, we’ve known for decades that climate change is the greatest market failure in history.”
I could clearly see that the markets would not “correct” themselves without government action. At some point we have to accept that burning fossil fuels is dangerous to us unless we do something.