Former Blackrock Chief Sustainability Officer Says ESG is a Dangerous Placebo

LONDON – A former BlackRock executive explained why he now thinks sustainable investing is a ‘dangerous placebo that harms the public interest’, after previously evangelizing the trend for the world’s largest asset management company .

Environmental, social and governance investments – or ESG – have become increasingly popular in recent years, mainly in the wake of the coronavirus pandemic.

A report released in July, examining five of the world’s largest markets, said this type of investment had $ 35.3 trillion in assets under management in 2020, which is more than a third of all assets. in these large markets. And the trend shows no 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 errors associated with this area.

“Green bonds, where companies go into debt for environmentally friendly uses, are one of the largest and fastest growing categories of sustainable investment, with a market size that has now surpassed 1,000 billion dollars. In practice, it is not entirely clear if they create a lot of positive things. environmental impact that would not have happened otherwise, ”Fancy said in an online essay published last week.

Indeed, “most companies have some qualifying green initiatives that they can raise green bonds to fund specifically without increasing or modifying their overall plans. And nothing is preventing them from pursuing decidedly non-green activities with their other sources of funding. “, did he declare. added.

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

He also argued that financial institutions have a clear motivation to push for ESG products as these have higher fees, which in turn improves their profits.

According to FactSet data and published by the Wall Street Journal, ESG funds had average fees of 0.2% at the end of 2020, while 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 unreliable data and ratings.

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

Sheila Patel, president of Goldman Sachs Asset Management, who told CNBC last year: “When you think about the makeup of ESG funds, it is first of all important to remember that they are always meant to be a fund. invested to get a return for the portfolio. And so they can switch based on industry groups, based on sector views and which may or may not be linked to an ESG view. “

The need to make a profit is also leading market players to think about ESG investing in the short term, according to Fancy. This could become a problem when trying to tackle climate change and government plans to achieve carbon neutrality in the decades to come.

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

“Players have collectively engaged in forms of dirty play for decades because it scores points and wins games. The rules have generally not changed: in most cases, dirty play can still help. maximize points, and players remain under strict instructions for scoring points and participate in good sportsmanship only to the extent that it contributes (or does not take away) from the scoreboard that good sportsmanship has a link with the dots, ”he said.