Monday, June 7, 2021

A Downside to ESG?

Friend of the BLPB Bernie Sharfman recently alerted me to an online piece he posted on environmental, social, and governance (ESG) investing, How BlackRock Strikes Out On the Issue of Climate Change.  In his post, offering BlackRock as an example, Bernie raises concerns about the negative aspects of establishing ESG funds.   Specifically, he offers that a focus on ESG investment and reporting can reduce a sense of urgency in remedying climate change and can have other unintended undesirable effects.  He also notes that BlackRock has only limited influence in establishing efficacious ESG investments, due to the nature of its role and investment portfolio.  He concludes as follows:

BlackRock can be part of the solution by attempting to add “financial innovation” as a tool in the battle against climate change. Such financial innovation should be targeted to creating new private equity funds that help provide the billions of dollars of funding that will be needed by new and growing carbon-cutting companies. BlackRock can market these funds to the millions of retail investors who currently invest in its products.

ESG investment opportunities are a hot topic these days.   Bernie's post offers some food for thought about the double-edged sword they may present.

Joan Heminway | Permalink


Thanks for the post. My op-ed is built on the insights provided by Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, in an op-ed published in the Globe and Mail, "BlackRock hired me to make sustainable investing mainstream. Now I realize it’s a deadly distraction from the climate-change threat."

In that op-ed he stated: "The vast majority of our work at BlackRock helped the bottom line, but showed no demonstrable positive impact on society. I realized that the only way providing more ESG information and launching ESG funds would create any real-world impact was through a slow, plodding and highly uncertain “free market self-corrects” mechanism – a ludicrous response to the greatest market failure in history."

Given this realization, Mr Fancy came to the conclusion that only governments can have a real impact on climate change. Moreover, he concluded that a focus on ESG investing harmed mitigation efforts 'by creating a societal placebo that delayed overdue government reforms.' That is, this focus has reduced our sense of urgency to advocate for strong governmental actions that will have a real impact on mitigating climate change. Mr Fancy refers to this as a 'deadly distraction,' and I agree.

In that context, think of what was actually accomplished in Engine No. 1's proxy contest. It is my expectation that a lot of carbon intensive asset sales to private investors will occur, but no real impact on mitigating climate change will occur. Just another "deadly distraction."

The op-ed was republished in the Oxford Business Law Blog.

Posted by: Bernard S. Sharfman | Jun 8, 2021 5:55:18 AM

Thanks for adding this information, Bernie. I am concerned about climate change and certainly do not want us to become complacent by thinking that one solution resolves all issues. I appreciate your contribution and that of Mr. Fancy.

Posted by: joanheminway | Jun 8, 2021 6:00:58 AM

There is another interesting article just out that by Rachel Adams-Heard, et al., "The Retreat of Exxon and the Oil Majors Won’t Stop Fossil Fuel, that makes the argument that the carbon intensive assets are not just being transferred to private investors but also to nationalized oil and gas companies. The expected result is the same, less transparency and more emissions.

Posted by: Bernard S. Sharfman | Jun 9, 2021 12:13:05 PM

Thanks, Bernie. Please continue to post links to relevant materials in the comments here. I appreciate you doing so.

Posted by: joanheminway | Jun 9, 2021 12:20:40 PM

And the beat goes on. "Exclusive-Shell weighs blockbuster sale of Texas shale assets," . My guess, another sale to a private investor who is not going to be as transparent about carbon emissions.

Posted by: Bernard S. Sharfman | Jun 13, 2021 1:41:46 PM

Thanks for this additional information, Bernie. Interestingly, my BLPB co-blogger Ann Lipton reported on Twitter this morning that several commentators on the ESG disclosure proposal favor extending disclosure mandates to privately held firms . . . . Something to watch.

Posted by: joanheminway | Jun 13, 2021 3:35:54 PM

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