Blackrock’s former sustainable investing chief now thinks ESG is a ‘dangerous placebo’

Climate change and low-carbon solutions are impacting investors’ portfolios.

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LONDON — A former BlackRock executive has outlined why he now thinks that sustainable investing is a “dangerous placebo that harms the public interest,” after previously evangelizing the trend for the world’s largest asset management firm.

Environmental, social and governance — or ESG — investing has grown increasingly popular in recent years, mainly in the wake of the coronavirus pandemic.

A report published in July, looking at five of the world’s top markets, said that this type of investing had $35.3 trillion in assets under management during 2020, representing more than a third of all assets in those large markets. And the trend is not showing any signs of slowing down.

But Tariq Fancy, who was BlackRock’s first global chief investment officer for sustainable investing between 2018 and 2019, warned that there were some fallacies associated with this area.

“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” Fancy said in an online essay posted last week.

This is because “most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” he added.

BlackRock was not immediately available for comment when contacted by CNBC on Tuesday.

He also argued that financial institutions have an obvious motivation to push for ESG products given these have higher fees, which then improves their profits.

According to data from FactSet and published by the Wall Street Journal, ESG funds had an average fee of 0.2% at the end of 2020, whereas other more standard baskets of stocks had fees of 0.14%.

But there are other issues with ESG investing, according to Fancy, including its subjectivity and the unreliability of data and ratings.

Others in the industry have questioned the lack of clarity with these types of investments.

Sheila Patel, chair of Goldman Sachs Asset Management, who told CNBC last year: “When you think about the composition of ESG funds, it’s first of all important to remember they are still meant to be a fund invested to get a return for the portfolio. And so, they can tilt based on industry groups, based on sector views and that may or may not relate to an ESG view.”

The necessity to make profits also leads market players to think about ESG investing within a short-time horizon, according to Fancy. This could become an issue when trying to address climate change and governments’ plans to achieve carbon neutrality in the coming decades.

Fancy used a basketball analogy to describe the situation in ESG investing.

“Players have collectively engaged in forms of dirty play for decades because it scores points and wins games. The rules generally haven’t changed: in most such cases dirty play can still help maximize points, and players remain under strict instructions to score points and only partake in good sportsmanship insofar as it contributes to (or doesn’t detract from) the scoreboard. And on top of that they’re exceedingly focused on the short-term (think: today’s game), a time horizon for which few believe that good sportsmanship has much of a link to points,” he said.


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