A recent op-ed by Tariq Fancy, BlackRock’s former head of sustainable investing, has struck a chord in the world of ESG funds.
In a March
You might think that as founder and CEO of a socially responsible investment firm, I’d be upset by this hot take. But my primary reaction to Fancy’s article is not anger — it’s sympathy.
Our career paths have much in common. Like Fancy, I used to work at one of the largest asset managers offering ESG-labeled products. Like Fancy, I was disappointed by what I saw. Also like Fancy, I think that greenwashing, the practice of marketing traditional portfolios as socially responsible, is hurting society because it has the potential to lull investors into a false sense of progress by thinking that their investment dollars are working to generate positive impact for humanity and to reverse environmental negative outcomes when they are, in fact, not.
Indeed, there is an additional downside to greenwashing that Fancy may have missed because he is one of its primary victims: Greenwashing can make people so skeptical of socially responsible investing in general that their disillusionment leads them to abandon all hope that any form of it can ever lead to real, substantive change.
I am here to argue that all is not lost.
Certainly, ESG investing, done in a haphazard way by walking investment management dinosaurs who are merely trying to keep up with the times, can be a disappointment.
And I agree with Fancy’s critique that some firms appear to be disingenuous about ESG investing, because although they claim to have done the research on which companies are good and which companies are “evil,” their ESG portfolios often look like a mildly vetted and repackaged version of old offerings.
What is worse, in my view, is that such firms’ “new and improved” options live alongside their traditional ones that make up the bulk of their business and which ignore the principles of their ESG research by holding investments in all kinds of companies that they themselves have labeled as “evil.” So, if they aren’t taking their own ESG research or commitments seriously, then why should we?
ESG is here to stay and it matters to investors.
But that is not the whole story. I also see a class of emerging managers for whom socially responsible investing is not just the flavor of the month but rather the only flavor worth having. For these managers, socially responsible investing isn’t just a profession — it’s a calling. For advisors and clients disenchanted with half-hearted ESG attempts at large traditional asset managers, perhaps these newer, smaller, more quantitative, passionate and committed managers could help them accomplish their socially responsible investment goals.
Regarding the question of which sector is best equipped to make necessary changes, Fancy writes: “In response to the pandemic, we’ve learned that only top-down government action, such as forcing the closure of high-risk venues and mandating masks indoors, makes a real difference.”
I appreciate Fancy’s urgency and agree that the government needs to step in and help regulate away societal damage. But I don’t think we can afford to wait for the government to act. The private sector can often move more quickly and efficiently than government and socially responsible investing could push up the timetable for change. In concert with eventual government action, this one-two punch could be more effective than government mandates alone.
Socially responsible investing can be more than just a feel-good label and I believe it must be one if we are going to try and make an impact. Rather than give up on the idea of socially responsible investing, I think that we — managers, advisors and investors — just need to try harder to do it properly.
