When BlackRock chairman Laurence Fink first began rethinking his company’s stance on climate change, he turned to Tariq Fancy to help him figure out what “green” investing should look like. In 2018 and 2019, Fancy was the company’s chief investment officer for sustainable investing. Last year, Fink shocked the investment community when his annual letter to CEOs called for a new attitude toward sustainability and being good stewards of the Earth. Credit Fancy with helping to influence Fink’s thinking. Here are portions of that letter:
Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. (Emphasis original)
The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organizations – including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk – is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.
Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?
Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.
These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital. [Emphasis original.]
This Is Not Going To Work
Fancy now runs the digital learning nonprofit Rumie in Toronto. In an interview with The Guardian this week, he looked back at his experience at BlackRock and had this to say about “green” investing: “This is definitely not going to work. I have looked inside the machine and I can tell you business does not have this, not because these are bad people but because they run for-profit machines that will operate exactly as you would expect them to do. It’s not because they are evil, it’s because the system is built to extract profits.”
Investors have a fiduciary duty to maximize returns to their clients and as long as there is money to be made in activities that contribute to global warming, no amount of rhetoric about the need for sustainable investing will change that, he believes. “In many cases it’s cheaper and easier to market yourself as green rather than do the long tail work of actually improving your sustainability profile. That’s expensive and if there is no penalty from the government, in the form of a carbon tax or anything else, then this market failure is going to persist,” Fancy suggests.
Huge amounts of money are pouring into sustainable investment through vehicles like exchange traded funds (ETFs). Fancy believes the trend could continue for years with no discernible impact on climate change because “there is no connection between the two things.” Moving money to green investments doesn’t mean polluters will no longer find backers. The argument is similar to that of divestment, another strategy Fancy says doesn’t work.
“If you sell your stock in a company that has a high emissions footprint, it doesn’t matter. The company still exists, the only difference is that you don’t own them. The company is going to keep on going the way they were and there are 20 hedge funds who will buy that stock overnight. The market is the market. I don’t think the public realizes we are not talking about stopping climate change,” he said. “We are literally talking about selling assets so we don’t get caught up in the damage when it hits.” (emphasis added)
Climate Change & Covid-19
Fancy offers us a thesis that is highly unpopular with the business community — government intervention. When the coronavirus hit, business leaders were immediately supportive of government-led initiatives to restrict travel, close venues, and shutter the economy. “The Business Roundtable said we should make mask-wearing mandatory. They were right about all those things,” he said. The world needed government to use its extraordinary powers, Fancy said, “because if you left it to the free market everything would have been open in the US and we would have lost millions of people, It wouldn’t have been half a million.” Climate change is a similar challenge, he believes. “The difference is the incubation period. It’s not a few weeks, it’s a few decades. For that they are still saying we should rely on the free market. That’s where I have a problem.”
Part of the problem is that the leaders of the business community tend to think short term. “The reality is that their incentives are very short-term,” he said. “My concern is that when it comes to climate change, it’s actually expensive. It’s like saying when it comes for Covid-19 that’s a crisis and an opportunity. Well yeah, it’s an opportunity for Zoom, it’s not an opportunity for society. If you put a tax on carbon, every single portfolio manager would adjust their portfolio,” he said.
Few people take notice of the powerful incentives for short term thinking built into the US Internal Revenue Code which allows senior executives to avoid paying income tax on their compensation if they are paid in stock options instead of cash. That makes CEOs focus on increasing the value of the company’s stock in the short term. We are all self interested, so it is no surprise that executives pull every lever to inflate the value of their stock options. It’s just a lousy system if the objective is long term solutions to long term problems. It also robs the country of an important source of revenue from those who can most afford to pay, which makes the burden on everyone else that much greater.
BlackRock disputes Fancy’s analysis. In a statement the company said: “Sustainable investing can deliver strong investment returns while also helping to address urgent social and environmental concerns.” It added that greenwashing “is a risk to investors and detrimental to the asset management industry’s credibility, which is why we strongly support regulatory initiatives to set consistent standards and increase transparency for sustainable portfolios.”
But for Fancy, the primary point is that real change has to be led by government, not Wall Street. “If I was on a panel and someone asked me what’s the best way to tackle climate change? Should I buy an ETF or should I call my congressperson and demand legislation and a price on carbon? The truth is someone is better off calling their congressperson.”
The Free Market Isn’t Free
We hear a lot about the free market and level playing fields. Both are nice in theory, but the reality is that an economic system that permits business to pollute the environment while avoiding any costs for its actions is not a “free market.” It is a market fraught with distortions that favor the wealthy at every turn. It is understandable why the rich want to preserve their cozy little setup, but don’t insult our intelligence by calling it a free market. The fix is in at every level and the Earth is the loser.
The system we have today is like playing baseball without umpires. It’s not a free market. It’s a kleptocracy where the rich and powerful keep all the rewards for themselves, a “heads we win, tails we lose” game where the losers are you, me, and the environment. The truth is, we must stop relying on fossil fuels as the basis of our prosperity or risk defiling the Earth to the point where most humans will no longer be able to survive. If it takes government intervention to protect the environment, so be it. I’d rather my grandkids have a world they can live than make it possible for some C Suite hero to buy another Gulfstream G650.
So stop with the “level playing field” trope. If we really want a level playing field, we would demand polluters pay for the damage they do. That’s what a carbon tax would do and the only way that is going to happen is if governments make it a requirement for doing business in the modern world. So don’t buy an ESG fund. Call your senator or representative and demand a fair shake for the Earth — and those of us who live here.