Around the world, investment firms, corporations and governments are scrambling to respond to calls for increased climate action and societal justice with pledges to measure everything against an environmental, social and governance (ESG) yardstick. But in the ESG stampede, insiders warn that too many stocks are getting tossed into green funds without enough oversight.

There have been grumblings about “greenwash” in the sector for years, but Tariq Fancy turned it up to 11, so to speak, when the former chief investment officer for sustainable investing at BlackRock (the world’s largest asset manager), raked the industry over the coals in a March op-ed.

“Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it,” Fancy wrote in USA Today. In many instances, “existing mutual funds are cynically rebranded as ‘green’ – with no discernible change to the fund itself or its underlying strategies – simply for the sake of appearances and marketing purposes. In other cases, ESG products contain irresponsible companies.”

His charges were damning, but they weren’t news to those paying attention. Last year, UK-based ShareAction examined 75 of the most influential asset managers worldwide and concluded that “50 have a very limited approach to managing ESG risks, receiving either a D or E rating.” Though a third ranked higher than a B (BMO and HSBC Global Asset Management earned Bs, while RBC and Manulife scored Cs), BlackRock, tellingly, was slapped with a D.

Nonetheless, Hugh Wheelan, co-founder of Responsible Investor, says that Fancy is only partly right. “Do we face swathes of greenwash in ESG statements, fund compositions and company ‘assessments’? Yes, with caveats. Little of what goes into environmental funds is 100% green (nothing is), and ESG is not a science.” Still, he urged the public to reject easy cynicism and remain committed: “Now is the time to hold fund managers to account.”

At the heart of the problem is the lack of agreed-upon standards for qualifying for, say, an “ESG-aligned” investment fund. Though that’s starting to change. In March, the U.S. Securities and Exchange Commission announced a new Climate and ESG Task Force in its enforcement division, tasked with “proactively identifying ESG-related misconduct.” Across the pond, the EU’s new rules designed to stamp out ESG-fund greenwashing take effect in June.

Debate rages over whether that green taxonomy is too watered down or too tough to support higher-carbon companies as they transition to net-zero. Mark Carney’s take: “We don’t just need brown/green; we need 50 shades of green and we need a way to communicate more precisely.”

Most agree with Fancy about one thing: “We’re running out of time and need to accept the truth: To fix our system and curb a growing [climate] disaster, we need government to fix the rules.” Or rather, we need to turn up the pressure on government to fix the rules.

Fund spotlight:

BlackRock iShares MSCI ACWI Low Carbon Target ETF (CRBN)

What’s promised: This ETF “seeks to track the investment results of an index [composed of companies] with a lower carbon exposure than that of the broad market,” giving investors “exposure to a broad range of global stocks that are less dependent on fossil fuels.”

What’s inside: Traditional ethical investors might gasp when they see 15 makers of controversial weapons, including Lockheed Martin, nestled in this portfolio. Turns out even the world’s largest maker of bombs, missiles, fighter jets and nuclear subs has developed a low-carbon transition plan (net-zero thermonuclear warheads, anyone?).
Even if you generously assume the same holds true for the handful of for-profit prisons, harmful pesticide-makers and mining firms tied to severe environmental damage in this ETF’s portfolio, low-carbon purists will no doubt take issue with some of the fund’s most climate-contentious holdings, including:

• 6 thermal coal-burning companies
• 11 climate-policy-
blocking companies, including Berkshire Hathaway and Chevron
• 4 deforestation and palm oil laggards linked to clearcuts in the Amazon rainforest and Southeast Asia (deforestation is a primary contributor to climate change), and
• 6 industrial meat companies, including Tyson Foods, America’s largest beef, pork and poultry processor (animal agriculture is a significant contributor to climate change).

BlackRock’s position: BlackRock says the ETF’s MSCI weighted average carbon intensity (tons CO2e/$M sales) is just 64.74, significantly lower than the 178.5 average for benchmark MSCI ACWI Index. Whether that will convince climate-conscious investors that this fund deserves their attention remains to be seen.

Adria Vasil is the managing editor of Corporate Knights. She’s also the author of the bestselling Ecoholic book series.

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Fancy made three main points:

1. Wall Street is hawking funds labelled as green or sustainable that in many cases are anything but.

2. The much-pedalled idea that sustainable investing is good for the bottom line is a myth.

3. Sustainable investing acts as a deadly distraction delaying what really needs to be done to avoid climate disaster: government stepping in to fix the rules.

As is often the case with whistleblowers, his claims were challenged by conventional wisdom, with the head of sustainability research at Morningstar chastising Fancy for providing “only the sketchiest of evidence to support a rather outlandish position.”

I found myself admiring Fancy’s courage. When his article was first published in USA Today, he was still listed on BlackRock’s website as their chief sustainable investment officer, even though he left the firm two years ago. He has now been removed from the site and, one can guess, the BlackRock Christmas card list.

But the admiration quickly gave way to a deep concern. Not because Fancy is wrong about greenwash being rife in the sustainable investment industry. Although he didn’t mention it, BlackRock’s gold-standard sustainability product (iShares MSCI Global Impact ETF) is literally invested in Spam, a factory-farmed salty heart attack in a can. Try squaring that with the fund’s mandate, which is to invest in “companies that derive a majority of their revenue from products and services that address at least one of the world’s major social and environmental challenges.” Potshots aside, many of the investments in the iShares MSCI Global Impact fund (as well as many of the funds in this year’s Responsible Investing Guide) do offer meaningfully increased exposure to companies like Tesla and Ørsted that are clearly delivering sustainable solutions.

That brings us to the next point. I am little bemused by anyone who makes sweeping statements about the impact of sustainable investing on the bottom line. It’s almost like lumping the four seasons together and saying they are all hot or cold. Many carbon-intensive industries are on a long-term sunset trajectory as they’re being priced out by cleaner options, which is why the Canada Pension Plan’s oil and gas stock holdings have plunged from a quarter of its portfolio 10 years ago to just 2% today. There are half a trillion reasons why a chief investment officer at BlackRock should know this; that’s the dollar amount of returns they sacrificed as a result of not decarbonizing their equity portfolio a decade ago, according to Corporate Knights analysis.

(As a side note, I shared this finding with BlackRock’s CEO Larry Fink when we bumped into each other last year in a Swiss mountain village. I followed that up by leaving an urgent two-word message from the “North American office” at his Hard Rock Hotel in Davos: “Short Exxon.”)

And while the market is frothy at the moment with clean economy pure-plays, the compound annual growth rates for major low-carbon markets (green energy, electrification of transport, plant protein, energy efficiency) are jumping off the charts.

It shouldn’t take a rocket scientist to figure out that you will do better in the long-term the more you dial up your exposure to rising industries (low-carbon solutions) and dial down exposure to those in secular decline (high-carbon problems).

Fancy is right that “systemic challenges require systemic solutions and you need government action to do that.” I also shared his outrage when Larry Fink recently suggested that we can rely on the current incrementalist market approach to deal with the climate crisis, saying “I prefer capitalism to self-regulate.”

But the idea that shelving sustainable investing will make way for the government to fix our problems is woefully misguided. Governments do not solve problems in a vacuum. They solve problems when they feel pressure to do so and when they believe the solutions fall within the Overton window (the range of policies that are politically acceptable to the mainstream population at a given time).

Regardless of the imperfections of portfolio construction, when millions of people vote with trillions of their own dollars to invest in a more sustainable world, it shifts the Overton window of what politicians think is legitimate policy.

We have seen this movie before. After the movement to divest from apartheid South Africa spread from college campuses to blue chip corporations, it provided a window for then-Canadian Prime Minister Brian Mulroney to help galvanize the international community to turn up the pressure. That pressure was ultimately credited by Nelson Mandela for helping to bring about the end of apartheid.

Now we are seeing the same thing happen with the climate, where the fossil fuel divestment movement has spread from universities to the inner sanctum of the Bank of England and the G20.

When you vote with your dollars and your ballots you are more – not less – likely to get better returns.

Toby Heaps is the CEO and co-founder of Corporate Knights Inc. and publisher of Corporate Knights Magazine.

This story appears in the upcoming Spring Issue of Corporate Knights.

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