CEOs everywhere are now driving the ESG agenda – environmental, social and governance.
It means company leaders profess to care about both profits and carbon emissions, both hiring the best people and ensuring they have a diverse workforce to do things right.
They do so mainly because of pressure from large institutional shareholders, who in turn are responding to the changing social and political norms of their constituency, who say their money should do good in the world.
But when Vladimir Putin ordered an invasion of Ukraine in February, it sparked a capital flight out of Russia as companies and investment funds shut down operations and drained funds out of the country.
If investments were truly based on ethical principles today, surely the western world’s largest companies and asset managers would already have left Russia, which has long been known as a repressive state that threatens its neighbors.
The problem, according to Tariq Fancy, is the tension between value and values in the corporate world – a tension he says ESG investing has failed to resolve.
“When you talk about value, it’s objective,” he says.
“If it makes money, it makes money. If it doesn’t make money, it doesn’t make money. This is the model. But when you start talking about values, it gets really tricky. And the major issues like war… I just don’t think Larry Fink should be making those decisions.”
Not long ago, Fancy was the chief investment officer for sustainability at Blackrock, the world’s largest wealth manager. And Larry Fink was his boss.
Fink is possibly the most influential person in the financial markets. He turned Blackrock into an investment giant with $10 trillion in assets under management. There’s probably not a publicly traded company in the developed world that Blackrock doesn’t have a stake in. And that gives Fink tremendous power, which he seeks to use to advance a green agenda and gender and racial diversity initiatives, among the companies Blackrock invests in.
But in the short two years that Fancy was in charge of carrying out Fink’s orders, he changed his mind about whether this approach made sense and whether he could achieve his stated goal of saving the world without government interference. In short, whether capitalism could undo the damage done by capitalism.
As a result, he left the investment industry entirely and now runs a non-profit educational organization he founded. But he has continued to engage in the ESG debate, even going so far as to publish a lengthy whitepaper last year outlining his growing concern that the fad for ESG is actually impeding progress on the world’s biggest problems. instead of speeding it up.
“The biggest concern I have is this fantasy narrative that the private sector will lead itself, just like the free market will do what it hasn’t done in decades,” he says.
“Capital will flow into the things we don’t want as long as they are not penalized for it.”
And that explains why Russia rolled in western money until the moment it became a public relations issue. In other words, it cost companies value rather than mere values. Even Blackrock, the ESG’s leading light, has posted an estimated $30 billion in losses investing in Russia – a number that indicates the size of its exposure to the country.
“The cost of doing business there has increased significantly,” says Fancy.
“So everyone quickly gets in line and says we have to get out of there anyway. But the fascinating thing about it is that it responds directly to government action.”
This is one of Fancy’s core arguments: investment firms have a duty to make money for their clients, and all other concerns, aside from breaking the law or regulation, are subordinated to the pursuit of profit. Not because fund managers are bad people, but because they have a duty to put clients’ fiduciary interests first.
Given these limitations, the optimistic goals of the ESG movement are impossible to achieve unless perfectly aligned with the profit motive. In Fancy’s view, this will not happen without government intervention, which makes polluting and other unethical practices so costly that fund managers have to count them as investment risks.
He notes that when companies exit Russia, they have been careful not to base their decisions on ESG principles. And the reason has to do with money, possibly the biggest pot of money out there.
“They went out of their way not to dress it up in ethical terms,” he said.
“The reason is that they don’t want to set a precedent because Russia is relatively small for them. China is much larger and is seen as a major growth opportunity for wealth managers. So there’s no way they’re going to go out there and start arguing.”
https://www.independent.ie/business/the-war-in-ukraine-has-exposed-the-limited-influence-of-ethical-investing-41578932.html The war in Ukraine exposed the limited impact of ethical investing