Finance

Ex-BlackRock sustainable CIO on how ESG risks turning into a mis-selling scandal

Tariq Fancy was BlackRock’s sustainable investing CIO between 2018 and 2019, and had a unique vantage point into the world’s largest asset manager’s approach to ESG investing.

However, he has gone on to become one of the ESG sector’s fiercest critics. Last month Fancy published an explosive three-part essay via online publishing platform Medium, in which he likened the booming sustainable investment sector to “selling the public a wheatgrass placebo as a solution to the onset of cancer.”

Financial News spoke with Fancy to find out more about his views on ESG, why he thinks investing in sustainable funds will not tackle climate change, and what he hopes to achieve from speaking out.

What is your problem with ESG?

I wouldn’t say everyone thinks ESG is bullshit, but senior people who have invested money know what works and what doesn’t work, and they are very sceptical people by nature.

I was surprised about the lack of people who have investment experience in this space. I liken it to going to a programming conference and nobody has written a line of code before. It’s hard for them to figure out it doesn’t work.

But I had experience as an investor and a vantage point nobody else in the world had — to do this at the largest asset manager in history. As my views evolved, I started to say we needed to have a debate on ESG. If it’s not going to work at BlackRock, there’s no way it will work anywhere else.

I had come to the conclusion it was like giving wheatgrass to a cancer patient. My views started to evolve after I left BlackRock, and I started to realise the rest of the world thought ESG was amazing. There was this weird consensus with everyone saying it was great. But usually, people are incentivised to say that. There’s billions of dollars out there marketing this.

READ BlackRock’s Fink ‘ducking the fight’ over ESG, claims former exec

As social angst is growing, more ESG products are being sold to exploit this, mostly to millennials who know they will be on the hook for these issues than boomers.

People start looking at their daily life and the products they buy. Ultimately, it’s neo-liberal bullshit. You can’t possibly solve a problem like climate change with individual action.

What prompted you to speak out?

Covid-19 pushed me over the edge.

We would never have left it to the free market to bring down the infection curve. Imagine telling everyone they could do what they want, leaving schools and bars open. It’s the same thing with climate change. Science is telling us there is a curve we need to flatten — in this case its greenhouse gas emissions.

But what you find is business leaders — the same ones who agreed with government action on Covid 19 — arguing that the free market is the answer to climate change.

The big difference between flattening these two curves is the incubation period. One is a few weeks, the other is a few decades. The problem with the one that’s a few decades is that it’s way out of the purview of business leaders’ incentives.

Today the average CEO gets paid 320 times the average industry worker — the highest it’s been in decades. The average CEO tenure is five years, the shortest it’s been in decades. They are not paid to think about these long-term issues.

Everyone buying ESG funds — retail investors, in particular — believes they are providing more capital to causes and companies that are good, without realising they are moving money around with shares that are being traded in the public market. They are being charged higher fees for the privilege of being a socially conscious investor.

The Americans need to hear this message more than the Europeans. I’m not giving the Europeans a free pass, but Americans are slightly behind on this.

What feedback have you received following your criticism of ESG?

Behind the scenes I’ve had an avalanche of people getting in touch, through LinkedIn or people guessing my email, to say they agree.

The only people in this space who have responded to what I’ve said are a few ESG people. There is a subset of people who have written articles in response who are very angry. But if you tell the world Santa Claus doesn’t exist, some of the elves are going to be angry. They are wondering if their jobs are at stake.

The people who have not responded are the titans of business who have endorsed these ideas. Larry Fink has gone out of his way not to respond. I worked on the inside and I know what cards they are holding. I’ve constructed an argument to which I know there is no answer.

Is there a potential for ESG funds to become a mis-selling scandal?

I think there is. The most galling part is what they are doing is probably not illegal.

The industry is smart enough every step of the way to make sure they are on the right side of the line.

What’s happened in some cases with ESG funds, there is no line or regulation, these people do not leave money on the table. They have incentives and targets and realise if you splash a green label on it you can sell more for higher fees.

READ Investment firms’ ESG claims could do more harm than good

The game has been to make the minimal changes to the underlying product while getting the maximum marketing benefit. The person buying it almost certainly thinks it has impact. In reality, it does not.

There are ESG ETFs shifting around publicly traded shares. No additional capital goes to those companies or causes. There is no impact. The marketing was purposely intended to create the impression you are doing something good for the world and to exploit that need.

It reminds me of the financial crisis. What was galling was that so much of what was being done was unethical, but very little of it was illegal.

What are you hoping to achieve by speaking out?

There is debate that needs to happen in the US. If the US were to lead, the EU and Canada would follow. But I don’t think the US government has the political capital to be able to make the changes we need made. That’s because business has an extraordinary amount of power.

I want to spark a debate in the business community. If the Business Roundtable goes out and says stakeholder capitalism is the answer, I want to call bullshit on them and say they should rename themselves the Baby Boomer Business Roundtable.

Larry Fink is 68 and gains the most from the status quo and is least at risk of the consequences of inaction. A 22-year-old who is at the bottom of the totem pole gains the least from the status quo and is most at risk of the consequences of inaction.

To me, the business community needs an internal debate. The guardians of capitalism are doing what is in their own short term interests, and try to represent the entire business community and all capitalists. That’s the fight that needs to happen. If it happens in a way that splits the business community, that gives room for politicians to step in and do something meaningful.

What is your message to your former boss, Larry Fink?

I’m not targeting BlackRock specifically, it’s the system. The system doesn’t work and it should be subject to an honest debate.

Larry has to accept that if we needed government action to bend down a fast-moving systemic curve that threatened the interests of baby boomers more than Gen Z, he can’t possibly say we don’t need government action to bend down a slow-moving systemic curve scientists tell us to flatten that is a greater risk to younger generations.

He needs to come out and accept we need a public debate on this. I don’t think business leaders have the right to stand on stage and evoking social purpose and fighting climate change and all these critical societal challenges, and duck accountability when insiders who ran it for them say this doesn’t work. Right now he’s ducking the fight.

To contact the author of this story with feedback or news, email David Ricketts

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