Tim Nash is the founder of Good Investing.
It feels almost fashionable to bash responsible investing these days.
Most of the criticism targets the acronym “ESG,” which stands for “environmental, social and governance.” ESG is used alongside traditional financial analysis to account for previously ignored “externalities” such as carbon emissions, boardroom diversity and employee satisfaction. Unfortunately, some circles erroneously refer to ESG as some sort of “woke” form of investing that pushes a “socialist agenda” into capital markets.
These misguided attacks are increasingly coming from people in high places. Elon Musk recently tweeted that “ESG is a scam” after Tesla got removed from a major ESG index for a lack of disclosure around key environmental and social issues and allegations of racism on the factory floor. Noted venture capitalist and PayPal founder Peter Thiel said in an April speech that “ESG is a hate factory” and equated it to the Chinese Communist Party. Even former U.S. vice-president Mike Pence joined the attack, saying “liberal activist investors are forcing private companies to abide by ESG investing principles, elevating left-wing environmental, social, and corporate governance goals over the interests of the business.”
Most of these hit jobs seem intended to score political points with a specific audience. Musk’s comments align closely with his recent embrace of right-wing politics. Thiel’s speech was made at a Bitcoin conference where attendees must have been upset about cryptocurrencies coming under fire for their heavy carbon footprint. Pence was speaking at an oil and gas conference where executives are being asked tough questions by investors looking to decarbonize their portfolios. Investors in unsustainable assets are feeling the heat, so we shouldn’t be surprised that they would fight back with anger against a movement that makes them accountable for the pollution they are generating.
But it’s not all broad-brushstroke political attacks. I’m seeing more nuanced critiques from industry insiders. Tariq Fancy, former BlackRock chief investment officer for sustainable investing, in a recent TEDx talk called fossil fuel divestment a placebo, equating it to giving wheatgrass juice to a cancer patient. Stuart Kirk was suspended from his job as head of responsible investing at HSBC after dismissing climate risk at a conference and telling us what he really thinks: “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place.”
These comments have understandably caused quite a stir. They show that many large financial firms are just paying lip service to sustainable investing, and we shouldn’t kid ourselves to think that they are in it to change the world. Profit maximization is still the end goal, so sustainable investors need to expect greenwashing and do their homework before buying in.
These comments also show that there is a massive skills gap in the sustainable investment industry. Fancy and Kirk have no background in environmental studies, systems thinking or sustainability, and it shows. We are fooling ourselves if we think that a profit-first worldview will help us solve sustainability challenges. Fancy and Kirk have done a great job calling out problems in the responsible investment industry, but they offer little in the way of solutions.
Are these critiques a good excuse to dismiss all responsible investment funds and companies? Of course not. If anything, the political attacks show that we’re on the right track – we’ve got their attention. The more nuanced critiques are an opportunity for us in the responsible industry to step up our game, and fight back. We need better communication and explanation of what ESG is and what it isn’t. We need rigorous academic research to back up our claims. We need to be leaders in disclosure and transparency, opening up the curtain for anyone who asks. And we need change-makers and social innovators to learn finance so that we have people with the right worldview in positions of power at our large financial institutions.
