Does ESG Work? Tariq Fancy on Investing Greenwashing and the Need for More ‘Rules and Referees’

In March of 2021, Tariq Fancy penned an incendiary USA Today op-ed. “The financial services industry is duping the American public with its pro-environment, sustainable investing practices,” Fancy wrote in the opening of his piece. “This multitrillion dollar arena of socially conscious investing is being presented as something it's not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction.”

Fancy has the experience to back his iconoclastic stance. As the former chief investment officer of sustainable investing at BlackRock he led a global push to incorporate environmental, social and governance into their investments, enforcing the messaging that “social good was also good for the bottom line.” But after investing much effort and time, Fancy became disenfranchised. ESG, he came to believe, “boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”

Fancy’s words caught the attention of our founder, Eva Yazhari. She wondered: Does Fancy believe ESG is a moot point, or does he believe there are changes that can be made for it to have impact? This provided the basis for their fascinating conversation, which can be viewed in full here and broken down into four key takeaways below. As Fancy revealed to Yazhari, an obstacle is the fact that the current financial and capitalistic system is rife with leaders focused on the short-term. There is also a critical lack of critical governmental oversight. “Unless you have that systemic change, there’s a risk that [ESG] becomes a placebo[…] and that it has no impact and distracts us from what does.”

Tariq Fancy’s Views on ESG and What Needs to Change

#1: ESG is “well intended” but merely rhetoric without governmental action.

There are a lot of good people working in ESG, believes Fancy, and “they’ve come up with a lot of interesting tools that can be used to really drive forward some of the stuff we need done.” But based on how financial markets work, ESG cannot create any impact without the government stepping in. “I would argue it’s window-dressing a system that needs change rather than actually changing that system, which honestly only comes through action. Governments have the power.”

#2: The free market does not solve everything.

Fancy compares competitive markets to competitive sports. “Every sport has rules and has referees to enforce those rules,” he says. “We’ve seen for decades this narrative in business and finance that says we don’t need any rules and the free market solves everything—which doesn’t make sense because there is no such thing as a free market. There are rules in place and those rules benefit certain groups more than others.” The most disadvantaged groups today, he continues, are the youngest and the poorest that are watching “as we window dress an economic system that needs significant change.”

#3: The financial markets “need rules and referees.”

Adding to the sports analogy: If a game starts getting dirty, you look for referees, says Fancy. If need be, you give the refs more marching orders to maintain a competitive game without consequences. “Capitalism works the same way,” he says. Where teams are trying to score points, in capitalism you’re trying to score profits. The challenge? The “players” in today’s capitalistic system are getting away with things that hurt the greater good. “They’re polluting too much. They’re underpaying their employees,” says Fancy, who argues that governments need to implement rules that serve the long-term public interest. “Any of the theorists, whether it’s Adam Smith or Milton Friedman, believed this, and what we’re seeing today is an aversion to the idea that you need rules and referees.”

He continues: Since the 1980s, the economic system has been driven by narratives that say free markets solve all problems—a whole set of things that are ideological. And because of that people say that we don’t need referees. “They’re saying the real answer is good sportsmanship—and that’s effectively what ESG is.” It's a set of ideas around stakeholder capitalism and the ideas that companies will do the right thing on their own. But his “voluntary compliance,” says Fancy, is not the impactful way forward.

#4” “The solutions are the ones we’ve all known.”

In the 1950s, 60s, and 70s the US had better outcomes from capitalism. “More inclusive economy,” says Fancy. “Less inequality. Even better environmental protection.” But there was no acronym ESG or parallel financial system of green funds “that purport to undo the damage of the regular financial system,” he says. “The reality is that government was just doing its job.” Now, we’ve listened to the scientific experts who say that climate change is real, he continues, and there’s a second layer of experts that are policy experts and economists—and “they’re pretty much in uniform agreement that we need policy changes.” Fancy offers two examples: William Nordhaus, recipient of the Nobel Memorial Prize of Economics, has had a central argument—since the 20th century—that we need carbon tax. Similarly with inequality, Thomas Piketti wrote about imposing wealth taxes in his book Capital in the Twenty-First Century. “He doesn’t talk about private equity funds that claim to fight inequality,” says Fancy. “The challenge is that solutions are the ones that we’ve all known. That existed previously in capitalism. They’re very unpopular because they don’t suit the interests of certain groups that benefit the most from the [current] system.” 

Tariq Fancy is the founder of Rumie, an innovative and accessible free learning platform. To learn more visit rumie.org.

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