Why a Former Top Sustainability Investor Says the Industry is a Dangerous Fraud

Episode 19 of The Green Investor Podcast from Investopedia (August 18, 2022)

Welcome to the Green Investor, powered by Investopedia. I'm Caleb Silver, the Editor-in-Chief of Investopedia, and your guide and fellow traveler on our journey into what it means to be a green investor today and where this investing team is headed in the future. On this week's show, don't call it a comeback—at least not yet—but renewable energy stocks and ETFs are on the move up and to the right. The passage of the Inflation Reduction Act and an uptick in the broader stock market has brought green energy stocks back to life, and the money is spreading into private companies as well. We'll name some names. And speaking of naming names, we'll hear from one of the top former leaders of sustainability investing in the industry who dropped it all, dropped out and dropped a multipart essay on why the sustainable investing industry is a fraud. Tariq Fancy joins the show for an explosive interview.

If you think it's hot now, fast forward to the year 2053. That's when forecasters from First Street Foundation, which is a nonprofit that studies climate risk, says the heat index will exceed 125 degrees Fahrenheit across an extreme heat belt through a swath of the United States. In a recent report, First Street said its forecast, which it assembles using National Weather Service (NWS) data and other publicly available data, says the heat index in 30 years will easily cross the threshold of "extreme danger." The heat belt is expected to impact about eight million people this year and will grow to impact about 107 million people in the year 2053, which is an increase of 13 times over those 30 years. That belt will include a huge swath of the country that includes the Southeast and areas just west of the Appalachian Mountains, stretching from Texas and Louisiana, all the way up through Missouri and Iowa to the Wisconsin border.

Chicago's airports, libraries, and water purification plants will soon be running on 100% clean energy, thanks to a deal announced by Mayor Lori Lightfoot to shift all citywide operations to renewable sources by the year 2025, making Chicago one of the largest U.S. metropolises to pledge such a move. The city signed an energy supply agreement with retail electricity supplier Constellation Energy, with an initial five-year term beginning in January 2023, according to the mayor's office. The agreement will also allow Chicago to partially source its energy needs from a solar project that's currently being developed by Swift Current Energy. The mayor's office did not disclose how much power the city is buying, or how much it is paying for it.

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Meet Tariq Fancy

Tariq Fancy

Tariq Fancy is the founder and Chief Executive Office (CEO) of the Rumie Initiative, a Canada-based education technology nonprofit that provides young people with digital tools meant to make learning skills fun and interactive.

Tariq previously worked as the Chief Investment Officer (CIO) of Sustainable Investing at BlackRock, the world's largest asset manager, where he was responsible for leading the firm's ESG strategy and integrating ESG solutions into BlackRock's investment process.

What's in this Episode?

If you've been following this podcast and the news around ESG and sustainable investing lately, you'll know that this investing theme is under attack. Regulators like the Securities and Exchange Commission (SEC) are clamping down on greenwashing among companies and funds, investors are doubting the efficacy of ESG and SRI investing, special interest groups are decrying the premise behind the entire concept of sustainable investing, ratings agencies are being attacked for what they are and what they aren't measuring, and industry insiders are coming out against the financial services industry for packaging and selling an investing illusion all wrapped up in shiny green paper with a pretty little bow on top. One of those insiders went very public with his criticisms of the industry after leaving his job as the Chief Investment Officer (CIO) of Sustainable Investing for the largest asset manager on the planet—that's BlackRock. He then wrote a lengthy four-part essay and published it on Medium.com to explain the hypocrisies of sustainable investing and why he couldn't abet it anymore. That insider is Tariq Fancy, and he is our guest this week on the Green Investor. Welcome.

Tariq: "Thanks for having me."

Caleb: "Tariq, you were at the top of the industry—the CEO of BlackRock at arguably its most high-profile product area. You were riding private jets with the Chairman and CEO, Larry Fink, you were talking to world leaders and the largest investors in the world. One would think that you were in the ideal position to shape this industry in a way that really leads to change. Why did you leave?"

Tariq: "I left because I first came to the conclusion that it wasn't helping very much at all. I went in, obviously, and joined the firm in this role, having drank the Kool-Aid and believing what we all want to believe, which is that there's a win-win fantasy where we can keep the status quo the way it is and solve all of our long-term threats that science is telling us to address. I found, fairly quickly, that it was less of a trusting role and more of, almost like a marketing role, and I didn't have a lot of impact. But what really changed for me was after I left, and I started to realize that this is not just not helpful, it's actually actively harmful because it presents what I call a dangerous placebo that harms the public interest. It's a fantasy that we can leave things the way they are and that suddenly this magical area of ESG stuff will appear—data tools, standards—and that will mean that we protect the environment, which, of course, is not what any of our experts are saying, and are just saying we need systemic regulations in place by government. And, you know, I realized that the longer that we put all our stock as a society in ideas like this that don't work, we not only amplify the costs of inaction, we also transfer them. We transfer them to the youngest, the poorest, and the darkest skin people on the planet who are going to disproportionately bear the consequences of inaction on climate change in particular. And that was something that I thought needed to be subject to a public debate. That was my goal in going public."

Caleb: "So that's probably what brought you to write the essay. You could have easily stepped away, returned to Rumie, the company, the online learning platform that you created, where you are now again—we'll talk about that in a little while—but why did you go so public?"

Tariq: "In large part, it was because of the work I did at Rumie, right? I mean, I spent a long career in finance, first as a banker in Silicon Valley, in the group that did the IPOs of Amazon, Google, Cisco, and I eventually went after the Dotcom bubble crash, went into what's called distressed or vulture investing. That was sort of the lion's share of my career as an investor on that side of things—very, very sharp, elbowed, very, very aggressive. And that sort of mentality, where you cut through the bullshit pretty quickly because, you know, in a distressed situation, there's a lot of B.S. going around and fanciful stories, no pun intended. At some point, I switched and started Rumie—it was a very personal story around a friend of mine from business school who passed away of cancer and I decided to follow a path I had been thinking about for years and build a digital nonprofit."

"That was something I was deeply passionate about. Rumie is a 501(c)(3), a charity. I worked for three years for no salary to get it off the ground. And, in my early-to-mid thirties, it was an odd career choice, but it was one that I really deeply cared about. And the intersection of having worked on the extremes of profit, in a sharp-elbowed hedge fund on one side, and on the other side, a purpose-based role running a digital nonprofit that helps people learn and build themselves—that spread is not very common—frankly. And that was one of the things that led me to be considered for this role as sort-of an investor leading the ESG part of things, right?—the sustainable investing part of things. And then I started to realize that this was largely marketing, that this was feel-good stuff that was ultimately not going to work and not going to benefit a lot of disadvantaged communities. It was really the fact that I had left years earlier to do Rumie where I said, "listen, I've made my decision." Like, I'm a capitalist. I believe that investing can bring great value to society. I think that the financial services industry can do as much, but not the way it's being done right now. I decided, yeah, I was going to ruffle a few feathers, but that's not my personally, I don't really care if they don't have a good argument to come back. We live in a marketplace of ideas and that should be exposed so that as a society, we can make better decisions."

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Caleb: "Yeah, and you do invite the industry to reply, to get into the conversation with you through your essays, which are super provocative, very personal. You're talking about also individuals you worked with, some of them very high-profile. It's not like you try to do this under the radar—you name names here. But let's talk about what you see as the inherent problems with sustainable and responsible investing from the industry perspective. You said there's a lot of marketing money put into this—this is one of the greatest marketing efforts probably in the last two decades that we've seen in the industry. We know assets under management (AUM) in these themes are $10 trillion, $12 trillion and growing every year—it's always talked about by the industry how more and more investors, especially young ones, want to get into this investing theme—but you have trouble with it, from the product side all the way through to the marketing side."

Tariq: "First thing you need to do when you look at sustainable investing is define it, because it's sort-of all things to all people, and it's quite murky. So I would say the simplest way to look at it is— and let's take BlackRock as an example—it's two things, right? BlackRock is the firm that last year hit $10 trillion in assets. I think they're below that now, but it's a giant investment firm. So let's just say it has $10 trillion worth of assets. The first thing that ESG and sustainable investing is about is trying to integrate ESG considerations and factors, just like any other new data center or set of parameters, into that $10 trillion. Now, the idea behind that is that by looking at ESG information, you will become a better investor. By the way, you have to say that, because as an investor, you're bound by a legal obligation to only focus on returns. So you have to say, "I'm looking at ESG and it's great for the world and good ESG companies perform better, so this is a wonderful win-win, right?" Where we reward the better companies because they're more profitable, more capital goes to them. That's one half of the equation."

"So the first one is process enhancement. It's not a product, it's just existing processes that are being upgraded. The second one is this giant growing category of sustainable investment products. And at BlackRock, the latest public disclosure mentioned about half a trillion, or $500 billion of the close to $10 trillion. Now, that is one of the fastest growing categories. And if I were to summarize my complaints about sustainable investing as a practice today, it's on both halves of those, right? On the ESG integration bit, or the sort of idea that you can enhance your process with better returns—first of all—most of what asset management firms are actually doing is just paper. They make nonbinding commitments that we will look at ESG stuff as we're looking to invest, and there's this ludicrous fantasy that that is going to create some real world impact, or at a minimum, better investment returns. I saw neither of those things. Does it create better investment returns? I mean, in a few areas, there's a kernel of truth to that, but it's highly dependent on the specifics. If I'm investing in a company, and they're in California or they're in China, then whether or not they have an animal rights controversy may or may not matter. It probably matters in California—I don't know that it matters that much today in China. If you're a company and you're looking at carbon footprint, it matters what sector they're in. If they're a bank, the 'S' and 'G' probably matter more, and if you're a resource company, its the 'E' part."

"As you get into the details, it's very intricate—and there's a few kernels of truth—but most of them have been blown out of proportion. And what I saw actually—and maybe this'll surprise people, maybe it won't—but generally speaking, for a lot of companies, being irresponsible actually is more profitable. So if you're Mark Zuckerberg, the responsible thing to do will probably be not addicting young people to mental health, destroying social media and increasing suicide rates and creating mental health issues so you can pack their attention and sell them ads. Yet that's probably not the decision that Facebook is going to make. The entire structure of it is legally incentivized to squeeze out profit, so they'll keep doing it. And in any kind of competitive endeavor, you always have rules and referees. We know that with sports—couldn't have any kind of sport without referees and rules. Same thing with capitalism. You have rules and you have referees that are regulators. And it just struck me again and again as I looked at it, and I said, the incentives of the system are to not do the right thing; from an ESG perspective and for society, it's actually very often to do the wrong thing. So the ESG integration bit was a lot of marketing and it was really frankly misleading."

"And then the new products, what stunned me is that the vast majority of them can't show any real world impact being created. The majority of them are just funds that take public secondary shares that are already traded in markets, and they just give different baskets of them to people because they figure out, well, wait a second, I can sell two commoditized ETF passive products, but with one of them, if I have a few more green things in there, a socially conscious investor will pay me higher fees to invest in it, and that's a great opportunity. But ultimately, the divergence here is that the person paying more in fees for that ESG fund almost always believes that they're doing something for the world by doing that, that something good is going to happen—more capital going to more socially responsible companies. In reality, the way secondary markets work, all you're really doing is taking a slightly different basket and using it to charge responsible people more, but nothing in the real world actually changes—you're just moving money around."

Caleb: "Let's get into that one, because that's super important, the way that a lot of investors—individual investors—are exposed to this theme, or get exposure to this theme, is through ETFs—exchange traded funds, which are baskets of stocks, or through index funds, which are, again, baskets of stocks or mutual funds. Your point is that, these are on the secondary market—they're not directly investing in these companies. They're investing in the package version of this basket of companies. Yes, there's creation, redemption in the ETFs, and there's additions and subtractions in funds, but they're really not putting the money into the company for the purposes of reducing climate change, or improving governance, or improving social action. And that's a key point, because otherwise, how are investors supposed to get access to these types of companies, or to try to make change with their money?"

Tariq: "It's very difficult. I think that investors can very often create impact, but it's often through private vehicles that provide fresh primary funding. I mean, there's what people in the impact space call additionality. Additionality is as simple as it sounds, its the principle of something additional happening because of what you've done. There are vehicles that can make sense, but the vast majority of the ESG space are things that don't change anything in the real world. Ultimately, they're pretty cynical ploys to get people to exploit the social angst behind society's—frankly—growing failures to address not just climate change, but inequality, and a set of other issues that hurt political stability."

"The funny thing about these products is that the theory of change behind them is based around the theory of divestment. In some part, the climate activist movement has to bear some responsibility for pushing divestment as a solution. Divestment is the stupidest way to drive real world impact that I've ever seen. It's basically cancel culture meets financial markets. Right? It's like, "hey, if I don't own this stock, they will not have capital." That doesn't make any sense, because it's the secondary shares that are being traded on the market. So for you to sell the share, it means someone else would have to buy them, probably some hedge fund that doesn't care whether it's a responsible company or not. And ultimately, it just allows companies to keep doing what they're doing with a different shareholder base."

"And somehow in the climate activist space, where unfortunately there's a dearth of people with financial backgrounds, that somehow became this idea that you can address climate change by selling your shares of a fossil fuel maker, even though CalPERS and others have said in the past that they think they lost $50 million or something by divesting from tobacco in the 90s, people still smoke—like all you have to do is just step aside and it'll still keep happening. And I think a lot of products are built off that idea—that you own less of something in the public secondary market, so you create impact, but in reality you don't, and you don't really change the incentives or the behavior of any of the companies."

Caleb: "Well, there you were, Tariq, at BlackRock, which is the biggest asset manager on the planet, where they're actively invested in companies and could push for change, could push for shareholder resolutions, could use their shareholder power and their enormous size to push through shareholder resolutions. And in fact, did that—or at least showed that they did that through their reports for a couple of years—but may have dialed back on that now. But from your perspective, either that wasn't necessarily happening like it needed to, or they were simply wrapping products under this umbrella, this green umbrella, which just didn't square up with you."

Tariq: "Yeah, ultimately the concern I have is that most of that work was marketing and PR, by which I mean that actually nothing in the real world changes. It's almost a status quo. It's like a drug lulling us into accepting the status quo because we feel like something's getting done, even though it's not. And the reason it's not getting done—the reason we don't have as much capital going to green causes— is pretty simply because the incentives aren't there. It's too profitable to make money in fossil fuels, at least relative to what we need for that to be as a society."

"One way to address that is to say, "well, if you want less capital flowing to an activity that is less desirable in the eyes of the public, then you make it less profitable." That's exactly what a carbon tax does, or a price on carbon, right? It says, okay, well, you can't get away with ignoring the cost of pollution you're creating. We know that people are polluting and passing on a cost that future generations will have to deal with. I mean, people alive today or younger people are going to have to deal with it. And, we need to do something about that, and those ideas have existed for ages. The problem is they can't get implemented because the political system is completely deadlocked. So, you have a bunch of business leaders like Larry Fink for standing up and saying, "hey, we've got a solution." When you actually look at what they're doing, behind the scenes they're using marketing and lobbying to delay systemic regulations like a carbon tax, often through the industry trade groups. So the latest legislation—the Inflation Reduction Act or whatever it's called—that was getting significant opposition from the Business Roundtable, who claims to believe in stakeholder capitalism, from the Chamber of Commerce, from all these organizations. And then at the same time, they're out there peddling their own solution, saying "hey, buy this thing." And there are byproducts."

"They cannot change the underlying mechanics of the system because ultimately capital does flow to where the most profitable opportunities are, and that always happens because everybody making capital allocation decisions usually is doing it with someone else's money. And at its core, the principal-agent problem of capitalism is that you cannot just let them spend on what they want. You really want your PM or your banker designing society? Their job is to focus on value, and that's measured in dollars. And if you have an entire system built around links in the chain where everybody is financially incentivized and legally obligated to focus on dollar value and maximize it, you end up in a situation where people are forced to exploit all kinds of loopholes, whether it's not paying the costs of pollution, evading taxes, and so on and so forth. That's a systemic problem. And I would argue that leadership today—business leaders—it's not even that they can solve this problem. I would argue that they can't, but they're lying and saying that they can, so that they can sell you a bunch of ESG products. And it's all because their incentive structure is very short-term."

Caleb: "Let's get into some of the solutions. You write a lot about a carbon tax, which is effectively a consumption tax as one of the only ways to change the behavior of billions of people, which we need. We don't need 100 million people to change our behavior. We don't need the United States to change its behavior. We need all countries to change their behavior. Is a carbon tax even realistic at the scale that you're talking about?"

Tariq: "The question around the design of the policies is an important one, but I would even zoom out. I think a carbon tax or a price on carbon in some form is almost inevitable. And I think a lot of senior business leaders kind of know that behind the scenes, that something like that will happen, but they think it's politically unpalatable right now. I think the fundamental challenge that we face today is not even about consumption tax or this policy or that policy, because ultimately, one way or another, you actually read the details. It looks like we as a society have built a way of living that borrows against the prospects of future generations. That happens when you build a $5 trillion energy industry based on fossil fuels, and then all of a sudden scientists tell you, well, all that capital expenditure you put in and all that know-how—everything you've done, the land rights you've bought—you probably can't exploit that the way you want to. And we have to build an entire new system that's going to require innovation and scaling and so on, so forth.

"Is it doable? Of course. Is capitalism the right model to address that? Yes, I think so. But it's not going to happen by magic, because it's going to require sacrifice. It is probably true that a Big Mac is going to cost a bit more, travel's going to cost a bit more. Hopefully we can achieve that kind of sacrifice, those changes in a way that just doesn't put the burden on the communities that already are strained. But what I think really needs to happen is ultimately a bunch of serious regulation that internalizes the externalities to use economic theory parlance and changes the incentives of players in the system. We have not seen that yet."

Caleb: "Is anybody doing this right? Are there any countries out there or markets—market places—where you see this happening the way it should happen in the way that actually has potential to—let's just take the green part of it—help reduce climate change, help turn around some of these issues that we have right now in the environment. Any countries or anybody that's actually got it right?"

Tariq: "There are definitely sectors of the market where people are doing things that we need more of. So I gave the example before, if yours is a public markets fund that's just rearranging baskets of shares already traded in secondary public markets, that has no real impact, and it's probably unethical to sell under the idea that it does, and is anyway a placebo or dangerous. But private vehicles that will invest in fresh funding for an innovator—so let's take a climate VC—there is definitely additionality in that, because if you invest $100 million from that fund to back some new entrepreneur, and she has figured out a way to build some great new carbon capture and storage mechanism, you making that investment changes the world because if you didn't do it, then maybe she wouldn't have had the tools to scale it and the world would be a different place. So there is a subset of things that are interesting.

"I think it's less defined by geography and more by the type of investment it is, number one. Number two, I would say that certain countries are doing it a little bit better than others, but some part of that is determined by the business culture and how much they care about these things. In Europe, clearly they lean more towards it and I think are a bit more ahead of the curve in thinking about the fact that this needs to be robust and real than it is in North America today, which feels a bit like the Wild West. And I'd say that certain governments are thinking very honestly about how can we work with industry to create credible goals. So to give you an example, in Singapore, even the government, they said, "listen, we don't have a net zero plan that's public yet." And I said, "why?" They said, it's not because they're not thoughtful—it's not that they don't believe in climate change—but because they said, "look, we don't like to put our name on something unless we know we can achieve it and have a plan to get there."

"The problem, I think, in Western democracies today, is that people are so short-term oriented that no one really even feels on the hook for what's going to happen in 2030. Average CEO tenure is five years. That's despite the fact that CEOs get paid higher than they've ever gotten paid— it's 320 times the average industry worker. So they're not really focused on 2030, much less 2050, because they're going to make their money before the decade's out, and the politicians are focused on the next electoral cycle. There are governments that are doing it well, but to be honest, right now democracies are doing a terrible job of it because they don't actually have people at the wheel who really think they need to plan for 2050."

Caleb: "Let's get back to you. Let's get to the Rumie Initiative, he company you founded—the nonprofit you founded—to try to teach financial literacy to kids, where you ultimately ended up after your stint at BlackRock. Tell us about what you're doing there."

Tariq: "So Rumie is something that's actually probably the coolest thing I'm working on right now, because effectively Rumi started out by saying "we're going to deliver free learning to smartphones around the world." The reason we did that is because I had worked years earlier on investments to bring mobile phones into emerging markets even, places like Kenya, where my parents are born and raised. And you could see that it was the great equalizing force if people didn't have landlines. Some did. Some didn't. Everyone went to mobile phones and then suddenly everyone's using the same up-to-date technology. And so as smartphones have grown around—there are now six-and-a-half billion of them worldwide—we saw a lot of potential to use that as infrastructure to equalize the playing field for learning, because with the smartphone you have high-quality learning quizzes, it's interactive, it's adaptive. The team started building that."

"And today, the premier solution is based on something called microlearning—you learn in five- or six-minute snippets quickly on your mobile phone. Research shows that people get a difficult mean rush when they refresh social media—that's what social media tries to get you on is refreshing it and you get that hit. Well, you also get a dopamine rush from learning a new skill or concept. And so we took the model, and we said, "we're going to give you a dopamine rush for something good for your mental health." And then we started taking cues from social media—animated GIFs, memes, all kinds of things that keep it fresh and interactive so they don't just get bored, and you can have even two or three paragraphs of text on a phone because most younger people—they're off—they're used to talk algorithm. And so, what's really incredible is that during the pandemic, it exploded in growth. It has now hit a million learners a couple of months ago and it's growing exponentially, so it's doubling every four or five months. But the coolest part is that it actually has learning gains—22% learning gains versus the baseline. And here's the crazy part: 88% of the learners say that it's a positive replacement for social media time."

Caleb: "We will link to the Rumie Initiative in the show notes as well as your essays on Medium. Tariq Fancy, thanks so much for joining the Green Investor. Really good to talk to you."

Tariq: "Thanks, Caleb. Great to be here."

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