Blackrock Investment Guru Busts The ESG Investing Myth

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Over the past few months, one of the most influential investors on Wall Street has been throwing its full weight behind ESG and the clean energy transition. Back in January, BlackRock Inc. (NYSE:BLK), the world’s largest asset manager with $9 trillion in assets under management (AUM), disclosed plans to pressure companies to do a lot more to lower their carbon emissions by leveraging its mammoth asset base.

A couple of months ago, BlackRock CEO Larry Fink called for corporate climate disclosures while proclaiming that companies must have a purpose beyond profit.

In fact, BlackRock says it plans to stop investing in the worst offenders of greenhouse gas emissions.

But now a former BlackRock head honcho is claiming just the opposite: Green investing does little to stop climate change.

Tariq Fancy, a former chief investment officer for sustainable investing at BlackRock, says greenhouse investing is headed for massive failure because the entire energy investment system is merely designed for profits.

Primed for profits

Fancy argues that in many cases, it’s actually cheaper and easier for a company to market itself as green as opposed to actually doing the long-tail work of actual sustainability. Not only is that expensive, but it also incurs zero penalties from the government in the form of a carbon tax.

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Fancy, who currently runs the digital learning non-profit Rumie in Toronto, says BlackRock’s move is fundamentally flawed because the climate crisis cannot be solved via free markets ‘‘because the system is built to extract profits.’

Fancy argues that investors have a fiduciary duty to maximize returns to their clients, which essentially means that they will continue to invest in activities that contribute to global warming (read: oil and gas) as long as returns there are more favorable.

Even oil and gas divestments are doomed to fail.

According to Fancy:

“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.’’

Fancy is hardly alone in that view.

No energy restrictions

Back in February, analysts at Bloomberg Intelligence (BI) published a research note about the banking industry aptly titled “What Energy Restrictions?” The research notes that JPMorgan has provided nearly $250 billion of loans and bonds to fossil-fuel companies since the ratification of the Paris Agreement in December 2015, nearly 30% higher than its closest rival Wells Fargo (NYSE:WFC), which provided $193B over the timeframe.

Collectively, Wall Street’s biggest six banks provided nearly $900B in loans and bonds to the oil and gas industry over the past five years alone.

Fossil fuel apologists contend that JPM’s sheer size and the fact that it has its fingers in so many pies make it nearly impossible to avoid involvement with climate-unfriendly businesses. 

In its defense, JPM has lately become more proactive at fighting climate change than ever before.

JPM [belatedly] made its debut in the green bonds market in September 2020, selling $1 billion in green bonds maturing in four years. Green bonds are fixed-income instruments that are specifically earmarked to finance environmentally friendly projects.

However, that represented a mere sliver of the more than $300B in green bonds sold last year.

After a lull in the first half of the year due to the pandemic, green bond issuance spiked to $62 billion in September and maintained strong volume through the tail-end of the year. Last year saw a total of $305.3 billion in green bonds issued, 13% higher than 2019 levels, thus bringing cumulative levels since 2007 to $1 trillion.

JPM’s climate commitments also pale in comparison to what its peers are doing.

In 2019, Goldman Sachs (NYSE:GS) became the first big U.S. bank to rule out financing new oil exploration or drilling in the Arctic, as well as new thermal coal mines anywhere in the world before the rest of the horde joined the bandwagon. In its environmental policy, GS declared climate change as one of the “most significant environmental challenges of the 21st century” and pledged to help its clients manage climate impacts more effectively, including through the sale of weather-related catastrophe bonds. The giant bank also committed to investing $750 billion over the next decade into areas that focus on climate transition.  Related: The Future Of U.S. LNG Hangs In The Balance

In October, Morgan reiterated its commitment to achieving operational carbon neutrality by aligning with Paris Agreement goals. The bank announced that it will establish intermediate emission goals for 2030 for its financing portfolio with a heavy focus on the oil and gas, electric power and automotive, and manufacturing sectors and set and continue to support “market-based policy solutions” such as putting a price on carbon.

Not my money

But as Fancy has observed, giant Wall Street investment companies such as BlackRock, JPM, and money managers have a hard time divesting themselves of oil and gas.

Critics have in the past pointed out that BlackRock has not been moving fast enough to fulfill climate pledges and pointed at the firm’s $85 billion of assets tied to coal, not to mention big holdings in major oil and gas producers such as Royal Dutch Shell (NYSE:RDS.A) BP Plc. (NYSE:BP), and ExxonMobil (NYSE:XOM).

“BlackRock remains waist-deep in fossil fuel investments and the world’s top backer of companies that destroy the Amazon rainforest and ignore the rights of indigenous people,” environmental group Extinction Rebellion has carped.

BlackRock’s defense has been: ‘‘It’s not my money.’’

Turns out that much of BlackRock’s fossil fuel companies are held in passive index funds, meaning it cannot directly divest.

BlackRock, though, says it’s working behind the scenes with coal companies, urging them to adopt cleaner technologies. CEO Fink acknowledges that financial markets have been slow to reflect the threat posed by climate change but has promised that:

“In the near future–and sooner than most anticipate–there will be a significant reallocation of capital.”

But BlackRock appears to have its priorities right.

Some money managers have been defending their decision to continue buying oil and gas stocks by claiming that divestitures don’t get these companies to change.

According to Mark Regier, vice president of stewardship at Praxis Mutual Funds:

“There’s a fundamental mythology in the divestment movement that when you divest, you’re somehow fundamentally hurting that company, and that’s just not how the markets work. When we sell, someone else buys.’’

Chris Meyer, manager of stewardship investing research and advocacy at Praxis, says that by selling oil and gas stocks, investors are missing the opportunity to advocate for change and also fail to support companies powering a transition to green energy.

Praxis owns shares or green bonds from companies such as The Southern Company (NYSE:SO), ConocoPhillips (NYSE:COP) and NiSource Inc. (NYSE:NI).

Praxis cites its decision to stick with NiSource Inc. (NYSE:NI), an energy holding company that operates as a regulated natural gas and electric utility, as a textbook example of what can happen when [large] investors advocate for change. Praxis says that it started engaging with NiSource back in 2017 and managed to convince the utility to commit to a complete coal phaseout by 2028 to be fully replaced with wind and solar power generation. If successful, that scale of renewable investments will cut Indiana’s overall greenhouse gas emissions by 90%, according to Meyer.

Climate advocacy can certainly work, but claiming that it’s the best way to solve the climate crisis is questionable wisdom at best and downright disingenuous at worst.

By Alex Kimani for

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