By Frank Sherman
Two experts recently debated the impact of the ESG investment strategies that has reached mainstream (Does Sustainable Investing Really Help the Environment?, WSJ 11-7-2021). Tariq Fancy, formerly the sustainable-investing chief at BlackRock, argues that the investment sector is doing more good for Wall Street than it is for the planet! He left the financial services industry and has become a critic of relying on the market economy to solve societal problems. “Funds that focus on ESG issues are profitable for Wall Street—but amount to a dangerous placebo that doesn’t cure the planet’s problems.” He calls the ‘win-win’ SRI philosophy of being good for business AND good for people & the planet a fantasy. “The ESG industry today consists of products that have higher fees but little or no impact and narratives that mislead the public and delay the government reforms we need.“
Alex Edmans, a professor at London Business School, says that Fancy’s criticism goes too far. While government intervention is essential, he believes engaging with companies on ESG issues has indeed made a difference. Companies that treat their employees well outperform their peers in total shareholder returns. And where some ESG issues can’t be regulated, such as corporate culture, investors can play a role to hold companies to account. He also argues that focus on ESG issues has shifted the Overton window, broadening the range of policy proposals that are acceptable in the political mainstream.
SGI member Duane Roberts, Dana Investment Advisors, agrees with the Professor in thinking Mr. Fancy is too pessimistic. “There are valid reasons for some of his cynicism. Our industry has identified ESG as the new investing fad that can make a lot of money. Thoughtful investors and consultants are trying to distinguish between greenwashing and true ESG investing. But the placebo effect is a real possibility.”
Roberts views sustainable investing vs. public policy as a false choice. “ESG investors and managers see their portfolios, and finance more broadly, as a tool to be applied to the problems society faces. But it should not be considered the only tool.” He agrees with Edmans’ assertion that sustainable investing has influenced public policy. “Business can support necessary policy changes, or work against those changes in their own selfish interest. Investors can nudge companies toward the former.”
I believe we can learn something from Mr. Fancy’s challenge of SGI’s theory of change. Our effort to make the business case to create a win-win can hold faith-based investors back from asking companies to simply do the right thing for their stakeholders. Does there always have to be a return on investment for companies to pay their workers a living wage or to take steps to reverse systemic racism?
SGI Board member Ed Fitzpatrick sums it up this way: “There may be risk of greenwashing; but net-net, investment managers incorporating ESG strategies will ultimately help society.”