Investment firms’ ESG claims could do more harm than good

For those who sell responsible investment funds, the pandemic has proven to be a marketing gift. Covid was a “sustainability” crisis that should focus investors’ minds on the biggest looming crisis of climate change, fund managers said. Buying sustainable funds would help fight global warming and improve returns at the same time. A win-win.

More broadly, the pandemic has added to the pressure on companies to demonstrate a purpose other than making money for their shareholders and to go beyond legal environmental, social and governance.

However, there was another lesson from the pandemic according to Tariq Fancy, former chief investment officer for sustainable investing at BlackRock. Tackling the Covid crisis has required dramatic government action, from imposing lockdowns to funding vaccine development. Politicians had to take the lead.

Yet when it comes to the climate crisis, investors and companies have been pushed, or pushed themselves, into the lead, Fancy says. Investors are expected to decide what policies companies should adopt on climate change and persuade them to adopt the right strategies, either through discussion or by selling their shares. Investors and other financial firms have neither the expertise nor the legitimacy to make such decisions, Fancy says.

Many business leaders would agree. But in his new publication, The diary of a “sustainable investor”, Fantasy goes further. He argues that the private sector has taken the lead because it wants to avoid governments imposing much stricter rules that would hurt profits. He quotes BlackRock Chief Executive Larry Fink’s comment earlier this year that we should rely on free markets to address market failures: “I prefer capitalists [to] self-regulate. »

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Here, I think Fancy misses its mark. Most companies are taking the lead not to avoid more drastic action from governments but because, in the face of political inaction, they believe that the little they can do is better than nothing. In the private sector, most finance bosses are very frustrated that governments aren’t doing more, like imposing hefty carbon taxes.

As BlackRock points out, Fink has been consistent in publicly calling for more government action. Indeed, Fancy himself quotes Fink as saying that governments are “failing to prepare for the future” and that “society is increasingly looking to the private sector and asking corporations to respond to broader societal challenges”. Whether other companies are making this point forcefully enough is another question.

After leaving his role at BlackRock after two years, Fancy made headlines in March when he blasted the industry’s sustainable investing claims as little more than “hype, public relations and dishonest promises”.

He rightly pointed to the spread of “greenwashing” where companies exaggerate the extent to which they take ESG factors into account. All major companies feel under intense pressure to shout about their ESG credentials, even when the reality is less impressive. More recently, DWS, the asset management arm of Deutsche Bank, was accused by its former sustainability director of overstating its ESG focus.

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Fancy also points to the very mixed evidence that, even when rigorously pursued, an ESG focus produces better investment performance. Many active managers argue that it is wrong to expect passive ESG funds sold by Fancy’s former employer to outperform. In a recent article, Duncan Lamont, head of research and analytics at Schroders, said ESG investing “can outperform” more traditional approaches. “However, this is only a realistic outcome for actively managed strategies.”

Yet Fancy’s most disturbing claim is not that companies are exaggerating the impact of sustainable investing on ESG issues or investment performance. It is by talking about the impact of their actions that they risk reducing the pressure on governments to take politically unpopular decisions.

According to a poll commissioned for the book, Americans exposed to headlines touting investors’ sustainability initiatives were far more likely to say that business rather than government would lead the way in tackling climate change.

Fancy’s fire is particularly directed at Washington, but the UK government also likes to hedge behind private sector efforts, giving the impression that climate change can be fixed by the city at no cost to ordinary consumers. Just look at the government’s weak policy on replacing domestic gas boilers and its expected mitigation of the proposed ban on new installations after 2035.

Even if you think that standard ESG funds will have a beneficial effect on climate change, it is clear that this would be marginal compared to the impact of concerted government action. So if companies want to shout about their ESG virtues, they also need to use their platforms to pressure politicians to take the actions they know are needed. Otherwise, as Fancy warns, their ESG efforts could do more harm than good.

To contact the author of this story with comments or news, email David Wighton