Is ESG investing a dangerous placebo and an agent of political bias?

Attendees at December’s Net Zero Investor annual conference would do well to check out the rules of basketball in advance, as a sporting analogy is likely to be centre stage (or court).

For basketball is the basis of Tariq Fancy’s (in)famous critique of all things environmental, social and governance (ESG). According to the former BlackRock CIO for sustainable investing (and speaker at the conference), capitalism is like professional basketball – private firms are the equivalent of the players taking part in a competitive market or competitive sport based on a set of rules.

In Fancy’s analogy, the “dirty play” that can score points and win games in basketball is often equivalent to the pursuit of profit in business, while a focus on the short term (“today’s game”) is similar to the short time horizons adopted by ESG investors.

Fancy, now CEO of education charity Rumie, was once an evangelist for sustainable investing, but more recently decries it as a “dangerous placebo that harms the public interest”. In a March 2021 opinion article for USA Today, he opened with: “The financial services industry is duping the American public with its pro-environment, sustainable investing practices.”

Such forthright opinions have seen Fancy labelled as one of the leading critics of ESG investing.

Holes in the hoop analogy

Also speaking in the same session at the conference is Professor Alex Edmans, who believes that Fancy’s basketball analogy has two fatal flaws: basketball is a zero-sum game – one team can’t win without the other losing – but business isn’t zero sum; secondly, regulation is “easy” in basketball, but, in business, many activities are invisible and cannot be regulated.

Edmans, professor of finance at London Business School, asserts that Fancy has adopted a “black and white view” by suggesting that the whole financial services industry is duping the public rather than “some players” in the industry.

According to Edmans, it is an exaggeration to say that the “whole sustainable investment industry is a ruse” and he warns neutral observers to be wary of such one-sided arguments. As Edmans wrote in a September 2021 blog post: “Shades of grey get lost in the shadows if we only look for black and white.”

Edmans’ latest academic paper is entitled “The end of ESG”, not to signal the death of the term but that it has evolved from niche to mainstream practice. He highlights the growing recognition that ESG factors are critical to a company’s long-term value.

“Considering long-term factors when valuing a company isn’t ESG investing, it’s investing,” he writes. “Indeed, there’s not really such a thing as ESG investing, only ESG analysis.”

Joining Fancy and Edmans in the conference panel session – ‘Is ESG investing a dangerous placebo and an agent of political bias?’ – are Professor Paul Watchman and Nazmeera Moola.

ESG goals

Watchman, special legal adviser at the UN Environment Programme (UNEP) Principles of Sustainable Development, has promoted ethical investing and environmental issues for more than 40 years. In fact, the term “ESG” goes back to a groundbreaking 2005 report produced for the UNEP Finance Initiative under Watchman’s leadership.

The former professional footballer was named by Ethical Corporation as one of the six most influential figures in the development of sustainable finance. He remains passionate about ESG and last year became chair of the advisory board of the not-for-profit body Lawyers for Net Zero.

Watchman is highly critical of greenwashing. On LinkedIn, he stated: “One of the facets of greenwashing is over claiming that a product or a service is more ESG sustainable than it actually is. The usual suspects are aviation, fashion, banks, fossil fuel companies, food retailers and outlets.”

Similarly, Nazmeera Moola, asset manager Ninety One’s chief sustainability officer, has been vocal on ESG issues, including the divestment/engagement debate and the need to make progress in emerging markets. She told FT Adviser that Ninety One does not believe in divesting from heavy emitters and prefers to work with high-emitting countries and companies to ensure they have credible transition plans.

Interviewed as part of the Fiftyfaces podcast recently, Moola said: “[Ninety One has] become very vocal in this idea of net-zero targets needing to be implemented in a way that results in 1) real-world carbon reductions, but 2) in a way that is equitable for emerging markets.”

Moola, Watchman, Edmans and Fancy are likely to produce a lively and stimulating discussion. Look out for Net Zero Investor’s coverage in December.

Net Zero Investor’s annual conference takes place on 12 December at the London Stock Exchange. Other speakers include: Tony Juniper, environmentalist, campaigner and chair of Natural England; Adam Woodhall, CEO of Lawyers for Net Zero; Heidi Finskas, vice president for corporate responsibility at KLP; and Mark Manning, sustainable finance and stewardship lead at the Financial Conduct Authority.