Free Markets And ESG Investing Won't Fix The Climate Crisis, Says Former Blackrock Sustainability Chief

Tariq Fancy spent nearly two years as the first global chief investment officer for sustainable investing at $8 trillion investment management giant BlackRock.

Fancy left the New York-based financial services conglomerate in September 2019, going on to found technology non-profit the Rumie Initiative. Earlier this month, he caused an uproar with an op-ed in USA Today in which he spoke of his experience and said thaat, “The financial services industry is duping the American public with its pro-environment, sustainable investing practices.”

Forbes sat down with Fancy to ask about that piece and have him expand on his views of ESG investing, climate change, financial regulation and the solutions he sees to the problems he wrote about.

Why did you decide to speak out now with the op-ed you recently wrote for USA Today?

It is good we are talking about the piece I wrote because it doesn't get across the full argument because it can't in that many words. The reason I spoke out was that I was sitting inside the machine, responsible for integrating ESG considerations into all of our investment properties, and started to realize that there really wasn't that much value in ESG data. I wish I could tell you that if you have a higher ESG score then your shareholder returns are better because ESG linking to returns is the proxy for saying more responsible companies profit more. It sounds good but it's not actually the answer. We're in this bind because it's not that profitable to be responsible. 

When I left, I started to realize that despite the marketing there's no impact. I believe in markets, I'm a former investment banker, an MBA, and a pro-business capitalist. But I also know that there are limitations in markets and when you have market failures you need to fix them. 

ESG assets could increase and we could do more in our investment processes but there's no reason to believe that's going to reduce emissions at all. It's about divestment, which aligns your values but doesn’t create actual impact.

Think of an Islamic investor who doesn't want to own alcohol or pork and screens it out. None of them think it's going to stop people from drinking around the world, it's just that they don't want to be involved in it. 

People confuse boycott and divestment. If you boycott something and it loses 10% of its revenue, that matters. If shareholders boycott a stock and 10% of the market doesn't buy it, it has no impact because a whole bunch of hedge funds buy it. No company needs 100% of the market to buy the stock, nor will that ever happen. 

I came to the conclusion that society is a cancer patient and climate change is growing like a cancer. We're selling wheatgrass to the cancer patient. It's well marketed, but there is no evidence it is going to help stop the spread.

After I left that I saw the marketing reach level that implied that by doing this you can fight climate change and impact social causes, it was a rush to gather assets.

I started to wonder whether it was actually harmful because it had a placebo effect. If you go back to the wheatgrass analogy, it's kind of like the wheatgrass is being marketed in a way that it is actually delaying the patient from starting chemo. At that point you can't make the argument that it's harmless, it is delaying the reforms we need.

How does the Covid-19 pandemic figure into your outlook?

I looked at how business leaders responded to Covid-19 and that's what got me to speak out. This crisis is a systemic challenge and science told us we couldn't rely on the free market to fix it.

Imagine we left it to the free market and left everything open and hoped people would be responsible, obviously that doesn't work. It is fairly clear that government action was necessary to restrict travel, close risky venues and make masks mandatory. Even the Business Roundtable agreed with mask mandates, clearly understanding the need for government action. Systemic challenges require systemic solutions and you need government action to do that. 

However, as recently as January, Larry [Fink] said we can rely on the market when it comes to climate change, saying: “I prefer capitalism to self regulate.” We have a right to look at what Larry and other business leaders are advocating around market policies and climate change and ask why it is that we need government action on a short term challenge but not on a long term challenge.

How has your first hand experience influenced your views?

I remember one portfolio manager at BlackRock told me: “I believe in climate change and if the government put a carbon tax in place we would all adjust our portfolios overnight, we would have to do it because we chase yield and profitability and suddenly yield would be affected. My incentive as of now is not to do that, and it is the same for my competitors.”

They absolutely all know climate change is real. The problem is the incentives are not set up correctly. I saw a similar problem time and time again with every single one of our portfolio managers. They have a fiduciary duty to focus on maximizing risk adjusted returns and their financial obligations and incentives are aligned the same way. It doesn't matter what Larry [Fink] says they all have autonomy to operate as they see fit according to their investment strategy. Another problem is that with six month hold periods, investment strategies are very short term and so they don't have to care about climate change. 

Does ESG have a role in a larger initiative to tackle these challenges?

There's no question it can be a tool in the toolbox. ESG data and standards are helpful. What is extraordinarily worrying is the narrative that the free market will self correct being sold alongside. It’s been 13 years since the financial crisis and decades since we've known that climate change is the greatest market failure in history.

Businesses are built to extract profits, and that’s not disparaging, it’s realistic. But we need real changes and right now the messages coming out of businesses are actually delaying real changes and that's disastrous. 

Are you optimistic about the future of these issues?

A debate needs to happen now while Covid-19 is fresh in our minds. Since the 1980s western democracies have been beholden to a thesis that free markets solve all problems and in 2020 business leadership is saying the same thing decades after we've known that the damage to the climate is a market failure and they're doing something different on Covid-19. That is an argument I find difficult to reconcile.

In terms of fighting climate change, they're moving around deck chairs on the Titanic. I'm supportive of companies becoming more responsible, but I want that talk to be matched by action and that doesn’t happen outside rule changes. 

I am optimistic because Covid-19 is extraordinary and fresh in the public memory when we need change on climate issues. It's going to focus public attitudes on systemic solutions to systemic problems. While Covid-19 has been painful it's like stepping on a pin before noticing a landmine. If we avoid the landmine because we looked down and learned our lesson, it can be a good thing. 

The second reason I'm optimistic is the reality that we had a president who didn't believe in science and now you have an administration that understands science. There's a lot of competent people in that administration that know there's a once in a generation opportunity to do something about climate change. I know people in the government, including  [Director of the National Economic Council] Brian [Deese] and others who I worked with at BlackRock, as some of the hardest working and smartest people I've met.

I hope there is wind on their sails to enact comprehensive climate regulation. It doesn't have to be bad for business, but it can't be business as usual. It needs to concretely bend down the curve, because low carbon ETFs could go up 10 times in the next five years and rise concomitant with greenhouse gas emissions because there is no demonstrable link between the two.

There is room to create private vehicles that demonstratively show they're creating impact that would not have otherwise occurred and the onus should be on measuring it rigorously.  But it can’t be marketed as making more change than it is in reality because that creates a placebo effect where people invest in private equity funds to fight these problems and are less likely to then call their congressmen and ask for a price on carbon. For public markets products, they can market value alignment, but they cannot imply that it's actually affecting the problem. That's going to have to come from government action.

What changes would you most like to see enacted?

Forget the financial services space, I would like strong rule changes on how companies operate, the actual underlying emitters. You need to change the incentives and if you do that effectively you don't need to do much on Wall Street, because it's a capital allocation machine and all they care about is chasing yield and profitability. That would lead capital to more responsible businesses and business incentives will change because they're actually getting dinged for the negative things they're doing to the world. 

That being said, it's a good trend to have a set of products that are leaning in that direction, because they’re going to encourage greater data and transparency. I do think that measurement helps and as ESG funds do better people will invest more money. That becomes a virtuous cycle, but it's not gonna happen without real change. On the Wall Street side if there isn’t more strict regulation on ESG claims it will lead to greenwashing because the incentives is to just take what you're already doing and slap a green label on it.