Are funds legally obligated to chase profit? Leads to greenwashing?

Tariq Fancy YouTube Thumbnail

– Former BlackRock sustainable investment head says greenwashing in funds is a big problem.
– Funds might be legally obligated to pursue profits, which could be at the heart of the problem.

This article in the USA Today by Tariq Fancy – the former head of BlackRock’s sustainable investments created quite a stir a few months back (I’ll be blogging soon about the latest from Tariq). Back then, Tariq noted the fund industry is awash in greenwashing. Here is a quote:

In fact, our messaging helped mainstream the concept that pursuing social good was also good for the bottom line. Sadly, that’s all it is, a hopeful idea. In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.

This is something that many knew. It was still a shock to hear it from someone who used to work at BlackRock. The comments on this LinkedIn note from Responsible Investor’s Huge Wheelan about the article are worth reading.

Hugh wrote this article arguing that Tariq’s comments are mostly wrong. Here is an excerpt from that:

The reality is that responsible investment has been ahead of the political and societal curve; even if it’s hard-fought success is based on a paradox. It is a square peg in a round hole. It recognises that real, sustainable ‘economic’ change has to come from ‘within’ the finance world as much as ‘without’, but that finance will not – and in many ways cannot – change, without the will of politicians and savers (and I include asset owners in this) to make it so.

I don’t believe that asset managers or finance will (and legally can, or even should) change beyond what the law requires them to, or what risk, commercial interest, and external/internal pressure influences them to do.

I can’t remember where I read this – but someone noted: “No matter what they tout as green investing, portfolio managers are legally bound (as well as financially incentivized) to do nothing that compromises profits.” That seems to be the essence of the problem?

And here is a rebuttal from Joel Moreland that was published in “Responsible Investor.” Here is an example:

I think Fancy is right, and that responsible investment is maybe inadvertently doing more bad than good by delaying political action across environmental and social issues.
I have seen plenty of comments online that this is just a Blackrock issue, or that it only applies to those using ESG data blindly, etc. However, this is not the case; you can still be part of the problem even if you are investing in sustainable themes, if ESG is fully integrated across every investment team, if you are members of every sustainable finance initiative going, or if your CIO has spoken in Davos!

An example of the damage done is the hype around using an engagement only approach with pure fossil fuel companies. It is without historical precedent that a sector has transitioned its core business model en masse, even with government intervention. Therefore, to do this by engagement alone in the absence of sufficient government action is beyond optimistic. The UK pensions minister, Guy Opperman, loves this ‘engagement only’ narrative. It’s easy to understand why: it avoids the government having to take tough decisions in the real economy. The responsible investment industry needs to take its significant share of responsibility for this misconception and change its behaviour. If you can square your fiduciary duty with using engagement alone – and it would take forceful stewardship of a kind we don’t generally see – that is fine but be clear that it is unprecedented, high risk and requires significant government action.

Investment makes an important contribution via the efficient allocation of capital, but it is not designed to make the environment or every person in the world’s life better and is actually part of a system that is more likely to take advantage of bad working conditions and freedom to pollute to boost profits. This failing is well known but we can usually rectify it through laws, regulations and taxation (on some issues society leads and politicians follow, and sometimes it is the other way round but the order is not relevant here).

After some costly mistakes I realised that in responsible investment we are generally just riding this wave of improving social and environmental regulation. As a keen surfer when I was young, I know you need to scan the horizon for the next ‘set’ in order to position yourself where the peak (first break) will be and start paddling furiously just before the wave comes.