The cost of guilt-free investing.
A year ago, Tariq Fancy, the former BlackRock CIO of sustainability, published a three-part insider account essay entitled “The Secret Diary of a ‘Sustainable Investor.” Fancy’s elegantly written essay went viral and was one of the key sparks of a debate regarding the value of so-called ESG investing. Shortly after, the team at Climate and Capital conducted a Q&A with him.
Despite multiple criminal investigations and regulatory and legislative scrutiny, and surging legal inquiries, ESG remains big business for the global asset management industry. Business leaders, bankers, and investors around the world, Fancy says, continue to “feed us convenient fantasies under the banner of ‘responsible capitalism’” that fail to address the inconvenient truths of an international scientific consensus on global warming.
This is Climate & Capital’s first installment in a series from his latest essay on the dismal financial and business response to the climate crisis.
At the end of the 15th century, Johann Tetzel, an enterprising German Friar, and other entrepreneurial men of the cloth stumbled upon the ecclesiastical equivalent of disruptive innovation: Taking payment to help dead relatives escape from purgatory, an unpleasant holding place before the next stop in the afterlife.
Purgatory escape for sale
Tetzel went from town to town, beating loudly on a drum to draw locals in for what presumably resembled a darker, medieval version of the ice cream truck ritual. A naturally gifted salesman, he made potential buyers feel guilty for not seizing the opportunity to aid their dead relatives, who he assured were “clamoring for help” as they awaited a generous payment from us in the here-and-now to unlock their ascent to Heaven in the hereafter.
Tetzel’s talent for seizing on an unexploited market opportunity was remarkable. Had he lived in the 21st century, he would almost certainly have figured out the world of financial investment. Today, Tetzel’s escape purgatory innovation would surely be dressed up in the garb of marketing virtue. It would be classified as an “impact investment” with a high environmental, social, and governance (ESG) score, accompanied by glossy marketing materials that target those looking for more “purpose” in their everyday lives and commercial transactions.
The finance world today consists of many players, many even less scrupulous than Friar Tetzel, selling people dangerous fantasies that claim to be helping even when they’re not.
If the receipt of a good or service you pay for cannot be confirmed as real, what’s to stop the sale of ever more extravagant, unrealistic and undeliverable items? I was in the financial services industry as investment banks happily sold dodgy mortgage-backed securities in the run-up to the financial crisis in 2008, even as they were actively betting that those securities would fall in price.
The finance world today consists of many players, many even less scrupulous than Friar Tetze, selling people dangerous fantasies that claim to be helping even when they’re not.
The cost of guilt-free investing
They are playing on the growing sense of guilt amongst people in wealthier countries due to the massive negative side effects that our lifestyles cause to the planet and to many of the poorest people who live on it.
The obvious answer – changing our ways – is not the easy one. Why? Because it requires sacrifice. The easy answer is plunging our heads into the sand and finding ways to justify business as usual. The consequences of this inaction are high but accrue to others – future generations, the poor, wildlife and the planet. We shouldn’t be surprised that the gears of our economic system have responded with a Tetzelian solution: excusing us of guilt without really changing much.
Consider the example of Caroline, a recent Brown University graduate in environmental sciences. Desperate to help the planet avoid further ecological disaster, she puts her growing savings into low-carbon investment funds so she can grow her wealth while simultaneously fighting climate change and buys only sustainable-branded detergents and other supplies to reduce damage to the environment. Yet her well-intentioned actions achieve little besides making her feel better about the status quo. The financial mechanics behind the vast majority of low carbon funds mean that they just move money around but do not lower real-world emissions. For this service, socially conscious investors usually pay higher fees for the privilege of being attributed fewer emissions on paper. And that green detergent? It is probably sold by the same company that sells a non-green version and is barely greener precisely because, very often, no regulations define what it is to be green in the first place.
Infuriatingly, the growing public thirst for action is met by unverifiable and non-binding pledges statements from the business community that would make Tetzel blush.
History will shrug off ESG
If the planet or unborn generations were at the table, which they never actually are (they’re only represented by people who say they care about them but are humans and have their own interests), they would be unimpressed. And when they pore over the archives someday to figure out where we went wrong, history books may show that business leaders simply shrugged their shoulders because there were short-term profits to be made from selling placebos. This includes the epic, Tetzelian slam dunk of an illusion that has already lasted for far too long that we can pay a bit more for premium, so-called green products to alleviate our woes. Such a scheme is obviously unworkable if no one is verifying that they are, in fact, green and responsible, whether investment funds or clothing, even when that may be the harder or more expensive thing to do.
Moreover, this approach leaves the rest of the world to operate as usual, even though we clearly need everyone to change how they operate, given the scale of the challenge. We refuse to acknowledge the obvious – that our economy is built with incentives skewed excessively to the short-term and in ways that damage the public interest. Instead, we offer expensive, long-term changes with marketing and PR whose main goal is to make us feel better about preserving the status quo.
Infuriatingly, the growing public thirst for action is met by unverifiable and non-binding pledges statements from the business community that would make Tetzel blush. But as he would know better than anyone, if good people are willing to pay up to assuage guilt in their daily lives, the market will find an answer.
Meanwhile, as the clock ticks away, major world economies have committed to roughly halve greenhouse gas emissions by 2030. And so far, the most effective intervention to lower emissions this decade came out of an animal market in Wuhan.
Next week, the rise and fall of ESG
A link to the original three-part essay is available at this link. Also, listen to Fancy in a recent TEDx talk in Toronto on fixing the rules of the system.