A few weeks ago, I shared a conversation with Alison Taylor, executive director of Ethical Systems, about the pervasive misconceptions of ESG and why ethics are, and must be, "part of the equation." It was clear that a massive swath of you dear readers got a lot of value from it. 

I suspect it's because Taylor identifies tough truths about the state of and trajectory of sustainable finance; offers insights with an intellectual breadth and depth that few can credibly emulate; and is a brilliant and lucid communicator. 

I’m eager to share the voices, such as Taylor's, within the ESG camp that have illuminated some issues that, rightfully, give pause as to what we’re celebrating in the space.

As such, I decided to check in with two other notable voices in this vein — Tariq Fancy, BlackRock’s former (and first) chief investment officer for sustainable investing, and Gillian Tett, chair of the Editorial Board and editor-at-large, U.S., at the Financial Times. 

It’s maybe no surprise to many of you why I’d check in with them. Fancy’s three-part series on Medium challenged orthodoxies around ESG investing’s capabilities that hit home for many folks in the space, even if a decently sized swath of practitioners have or have had trouble sharing the sentiment openly. 

Tett has had an ongoing back and forth with her colleague Robert Armstrong, the Financial Times’ U.S. financial commentator, on the efficacy or inefficacy of ESG investing. Their conversations have provided a window into dominant strands of thinking in the space, with Tett taking the role of believer and Armstrong the skeptic. 

As I did with Bob Eccles, founding chairman of SASB and professor of management practice at Oxford, and Jean Rogers, SASB founder and now global head of ESG at Blackstone, I asked Fancy and Tett to respond to the same questions on the topic of ESG investing. The two responded to these questions separately, without a view of the others’ responses. Their comments have been edited for clarity and length. 

I’d be curious to hear your thoughts on the takes I’ve shared — feel free to share with me at [email protected]. And, if you want to hear more from them in person, they will both be speaking at GreenFin 22, June 28-29 in New York. Request an invite here. 

Grant Harrison: Most issues that ESG investing aims to address demand — and justify — broad democratic decision-making to resolve. As we’re in a proxy season that's shaped up to be an especially active one for ESG issues, how much stock do you place in the power of proxy voting to create substantive change on ESG issues within companies, and why? 

Gillian Tett: I think that proxy voting has helped to reframe the debate about what is or is not acceptable. As Pierre Bourdieu, the French sociologist, says, it has reframed the "doxa" or arena for public discourse. In some cases, it has also forced tangible change, too. The key issue, though, is that the growing activism has made ESG a risk management factor for companies — if nothing else, to ensure they avoid reputational damage.

Tariq Fancy: We must always be careful not to confuse individual action with large-scale, systemic reforms. There’s no question that shareholder activism can help by creating incremental changes that would not have otherwise occurred. It’s a bit like me deciding to wear a mask during the pandemic, and thus doing my part to follow expert warnings to flatten the curve of a systemic crisis that threatens us.

The most important ESG issue for most people also involves flattening a curve: greenhouse gas emissions. COVID showed us that individual action wasn’t enough. We needed the kind of rapid systemic changes that only elected governments can implement, such as mandatory mask mandates that apply to everyone. So, my concern is when proxy voting is not just presented as marginally useful, which it is, but somehow as the solution we need to fight climate change. It’s not, and it’s dangerous to waste time ignoring leading Nobel Prize-winning economists to instead pin our hopes to yet another free-markets-self-correct idea, which is exactly what this is. 

It’s dangerous to waste time ignoring leading Nobel Prize-winning economists to instead pin our hopes to yet another free-markets-self-correct idea ...

It's also worth noting that most management teams know how to run their businesses. They’re not making the ESG-related changes that society demands for a simple reason: The business case doesn’t exist. That’s the point of regulation: adjusting the incentives of the players in the system — say, by fining pollution — to create a business case for all of them to act in ways that serve the public interest rather than damage it.

Harrison: Tariq wrote that "businesses and markets have referees too … It’s time that the private sector asks them to do their jobs," and JPMorgan Chase CEO Jamie Dimon has said that "the American dream is alive, but fraying." What do you think it would it take for Dimon and his ilk to take the lead in asking market referees to do their jobs? 

Tett: More transparency on political lobbying would be a good start, both bilateral and via industry trade groups. And then shaming via activist campaigns.

Fancy: I don’t believe for a second that business leaders truly think that individual actions are the answer to society’s challenges, especially with respect to climate change. They’ve read our leading economists and know well that this will require widespread, systemic reforms. And on top of that, they showed their hand during the pandemic: to flatten that curve they quickly realized that the free market approach wouldn’t be enough, and thus urged governments to use special powers to restrict travel, close risky venues and so on. 

So why don’t they react the same way with climate change? As always, in this industry, it comes down to incentives. And theirs are unfortunately skewed toward the short term. So for them to ask the referees to do their jobs would be against their own financial interests. In the short term, it’s cheaper to market yourself as green than to actually become green. Waiting for them to ask to be regulated may unfortunately be a fool’s errand — the leadership we’ve seen from the industry in recent decades leaves me unconvinced that its leaders will put the long-term public interest ahead of their own short-term private interests.

Harrison: Neoliberalism is often reduced to a description of "pro-market policies." But it’s also the condition that now permeates all we practice: that competition is the only legitimate organizing principle for economics and politics. Do you think a clean and just economy can be successfully built on a neoliberal foundation? 

Tett: As Adam Smith recognizes, markets can only operate amid a foundation of trust and social cohesion, which is best created through shared social and ethical norms. That is why he wrote two books, not one: "The Wealth of Nations" (extolling competition) and "The Theory of Moral Sentiments" (lauding shared ethical values to create trust). 

We take the latter as the source of inspiration for the Moral Money newsletter. So, competition works best with clear rules, credible referees, democratic access to markets and widespread access to information. And, a sense that there are exchanges underway that give everyone enough skin in the game that they have a desire to support the system for competition.

Fancy: I do not. Let’s be clear: I’m a capitalist. I’m a former investment banker, and I’m a strong believer that fair, robust competition brings out the best of human ingenuity. But I don’t believe in the "free market" since there’s no such thing. Like a competitive sport, all competitive markets have rules — no rules, no market. And because business and markets serve society and not the other way around, those rules must be actively updated and enforced to protect the public interest, whether it means fining polluters or making sure companies can’t misuse our personal data.

Unfortunately, neoliberal ideology today attempts to convince us that we can have our cake and eat it too — that if only we have more ESG data and products, then the green transition we need will come. But we know that’s not the answer. It’s a market failure, and the sooner we get governments to step in and correct it, the better. My concern is that an excessive faith in the free market — despite evidence that incentives are excessively short-term and are not aligned with protecting the environment — now endangers capitalism itself. Two generations alive no longer believe that capitalism makes sense. Guess who? Gen Z and Millennials. Can you blame them? They know they’ll inherit this mess that capitalism is creating.

Harrison: You’re sitting at the table with the heads of ESG investing for the five largest global asset managers, and you’ve got the floor for 10 minutes, uninterrupted. What do you tell them, ask them or implore them to do or not do?

Tett: Don’t focus too much on aggregate ESG scores — break them down into constituent parts. Recognize upfront that ESG is all about trade-offs, and tell investors honestly what trade-offs you are making and why. Recognize that it is a young and immature field and there is label confusion, opacity, hype and the risk of mis-selling, but efforts are underway to counter that and need to be supported. 

And, realize that other issues need to be discussed too, like tax strategies and political lobbying. Last, but not least, realize that the zeitgeist around business is changing and will not change back again soon: It is all about lateral vision, today, not tunnel vision, when it comes to evaluating companies.

Fancy: ​​First, I think they need to accept that the ESG industry needs reform. The tools, data and standards can be helpful. But the products are misleading, since most imply real-world impact that does not exist. And the narratives are dangerous, because they actively seem to mislead the public and delay regulation — a point I made in the third part of my essay, "The Secret Diary of a Sustainable Investor" — and lull us into believing that something is getting done when it’s not. ESG leaders shouldn’t be in the position of defending these outcomes; they should be at the forefront of cleaning things up and demanding a higher standard across the industry.

Because business and markets serve society and not the other way around, those rules must be actively updated and enforced to protect the public interest, whether it means fining polluters or making sure companies can’t misuse our personal data.

Second, they should look at the broader context of their firm and ask if it makes sense. BlackRock, Disney, Netflix and Boeing are all companies that release glossy CSR and ESG reports and yet have successfully fought off shareholder resolutions demanding they disclose political spending which, as we know in the post-Citizens United era, is opaque yet hugely influential. To extend the sports analogy, these are players who eagerly offer us talking points on their clean play and good sportsmanship, yet refuse to disclose if, how and why they’re paying the referees behind the scenes. Does that make sense? If you’re an ESG leader at a company that is lobbying against legislation that would address climate change and key ESG issues, you cannot let your work be a marketing foil to hide irresponsible corporate behavior.

Harrison: What is one key outcome/milestone/achievement you most hope to see realized in sustainable finance and ESG investing come 2023? 

Tett: The U.S. Securities and Exchange Commission creating consistent, credible and enforceable standards for ESG reporting. This will have a wider domino effect. 

Fancy: Hopefully, greater rigor around what is ESG and isn’t. Today, with no standards, ESG labels will get slapped on everything — a bit like "organic" stickers on fruits in the grocery store decades ago. If people will pay more for a product with the sticker, and there’s no rules who can put it on, do we really think Wall Street will leave money on the table? The last year or two have seen a series of greenwashing scandals that will only get worse unless something changes — the ESG industry needs to lead this charge rather than resisting its clear need.

Harrison: Gillian, you lucidly explained ESG's importance in February 2021. It’s been quite a time for ESG since. How would your description of ESG’s importance differ [this month]? 

Tett: The issue of trade-offs has become increasingly important after the Russian invasion of Ukraine, and we need to talk about this only to investors. But it has also become clearer than ever that Milton Friedman’s vision of shareholder-only capitalism was a product of a particular late 20th-century context. 

Today’s upheaval in Ukraine and the recent COVID-19 pandemic, coupled with the era of radical transparency, means that companies have to embrace stakeholder perspectives and think about ethical issues to a degree that was unimaginable before.

Harrison: Tariq, it’s been over two years since you left your post at BlackRock, which has simultaneously brought the largest growth spurt the sustainable investing space has yet experienced. In these past two years:  What about the way the space has grown and been received surprises you most, and what key advice or takeaways would you want to share with the up-and-coming generation of ESG professionals? 

Fancy: I’m a bit surprised that it has grown so fast, especially given the lack of clarity around the impact of ESG factors on investment returns for most strategies and the lack of any evidence of much real-world impact created by sustainable funds (outside of a small subset of private, longer-term funds that provide primary funding to businesses). But I kind of get it: I, too, entered the industry wanting to believe that we could buy a low-carbon [exchange-traded fund] to fight climate change and make lots of money at the same time. It’s the ultimate win-win thesis at a time that we’re not ready to accept the alternative, which necessarily requires sacrifice.

Unfortunately, the latest IPCC report makes clear that we’re not moving fast enough. My advice to the next generation of ESG professionals is to take a fresh look at the ESG industry and their work with a goal to making sure that it’s creating real-world impact that would not have otherwise occurred, rather than serving as a set of unfounded marketing narratives and high-fee products that don’t lower real-world emissions or improve society in any way.