ESG investing is a hot topic, but can you really chase both morals and profits? : The Indicator from Planet Money ESG investing claims to pursue both profits and morals at once. But is it really the future of finance, or just a PR sham? In part one of our series on the topic, a former ESG guy argues the latter.

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Impact investing, part 1: Money, meet morals

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC'S "WAKING UP TO THE FIRE")

WAILIN WONG, HOST:

So last week, the state of Florida said it was taking back $2 billion it had given to money manager BlackRock to invest in the markets.

MARY CHILDS, HOST:

The state's top financial officer said it was because it objected to what's called ESG investing. Those letters stand for environmental, social and governance.

WONG: So why is Florida waging war against this ESG thing? And how did BlackRock become the ESG boogeyman?

CHILDS: And it's not just Florida. Republican leaders across the U.S. are pushing back against this growing movement that they often call woke investing.

(SOUNDBITE OF MUSIC)

WONG: This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

CHILDS: And I'm Mary Childs. On today's show, ESG - sustainable investing; the idea that you can invest your dollars into companies that are going to help improve the world by mitigating pollution or encouraging responsible labor practices and make money by doing so.

WONG: In the next two episodes, we're going on a tour of the investment industry to find out if enormous money managers can sell us products that will save the planet and solve inequality, or if it's just a craven political marketing scheme to cash in on anxiety.

(SOUNDBITE OF MUSIC)

CHILDS: In 2017, Tariq Fancy hears from a friend of his at BlackRock, the world's biggest money manager. BlackRock was hiring for a big, new job - global chief investment officer for sustainable investing.

TARIQ FANCY: I mean, I thought to myself, well, wait a second. Like, this is really interesting, right? Not only do you get massive scale of their operations, it's a beacon for the industry to follow.

CHILDS: Because BlackRock is enormous, overseeing literally $8 trillion. And because of that scale, it owns a lot of, basically, every major publicly traded company. So in this job, Tariq could call, basically, every major publicly traded company and they will answer.

WONG: And this job is particularly appealing because, over the past decade or so, Tariq had turned into a climate person.

FANCY: I have a really big problem with wastage. Like, it actually causes me anguish sometimes when, you know, like, you're at a restaurant, and you're like, well, they've given me this stuff. Like, what do I do with it now? There's no way to recycle it easily.

CHILDS: And every time, I'm like, this is enough utensils for five people, (laughter) like...

FANCY: Yeah. Well, that's the whole challenge. Our system right now is that if people paid the true cost of the environmental damage, they're definitely going to stop giving you utensils for five people, right? Because they're going to say...

CHILDS: But maybe with this BlackRock job, he can help fix that. Maybe via BlackRock's holdings in restaurant companies, he could single-handedly staunch the flow of plastic utensil trash to landfills.

WONG: So Tariq takes the job. And almost immediately, the CEO of BlackRock does something that changes everything. He writes a letter to a bunch of CEOs.

FANCY: Larry - Larry Fink, you know, my old boss and CEO - had put out his annual letter. And in the January 2018 letter, that was one that caused shockwaves around the world. And it was my second week on the job.

CHILDS: Larry Fink is one of the world's most important investors and CEOs. And his annual letter is this big, agenda-setting thing, required reading for all of finance and every executive of every public company.

WONG: And the 2018 letter was shocking because it was the first time Larry Fink had taken the stand on these issues. He was saying, yeah, ESG matters to profitability, but also every company needs to have a social purpose. The old way of thinking, that companies could just make money, that wouldn't cut it anymore. And this was huge for the industry and for Tariq in his new job.

FANCY: This was all great - right? - because it was all sort of creating momentum behind what we were trying to do, right? There was more fuel in the gas tank of ESG and sustainable investing. So, you know...

CHILDS: Excuse me, more charge in the battery.

FANCY: Ah, yeah. Right, right, right, right, right.

CHILDS: Stay on message, OK?

FANCY: Exactly right. Right. But I was encouraged that, well, we have the potential to change the industry. Because if we do it right, everyone will follow. And so I remember thinking to myself, this is all I could ask for, right? Like, I'm in this role.

WONG: So he goes to BlackRock's portfolio managers, the PMs who buy the stocks that go in the funds, to help them make that investing more sustainable.

CHILDS: And as he's talking to them, he remembers them being like, yeah, man, I hear you, but I can't really care about your 30-year time horizon of not destroying the earth. I care about this quarter.

FANCY: The individual managing it - and I had met a lot of PMs, and they said, I believe in climate change. Like, they wanted to do something. But the system didn't work that way because the most important thing to remember is that that's not Larry's money, right?

CHILDS: It's not Larry's money. This is one of the sticking points in the whole ESG thing. This is why Florida is putting on this show. It's their money. BlackRock is just investing their money on their behalf.

WONG: Which is why Florida gets a say in how their money is spent. BlackRock can't just do whatever it wants.

FANCY: You can't give away my money - right? - effectively, if I'm the client, and lose 1% of return because it's way better for the planet because you're not supposed to be making that decision. You're supposed to just focus on return.

WONG: Now, the research is split, but there is some evidence that ESG strategies can perform better than non-ESG. It remains something people like to squabble over. And ESG has become a political cudgel for people who don't like causes like cutting back on fossil fuels.

CHILDS: For Tariq, the more pressing question was whether or not him doing his job would actually staunch all that wastage, actually help change anything. If it's just, like, peer pressuring companies, that kind of means that we're hoping that the market will self-correct. And Tariq could think of so many examples where that didn't happen, like tobacco companies, Facebook.

FANCY: Capitalism has gone in a direction where all these companies have been - being built from the ground up to do one thing really, really well - right? - to extract profits.

CHILDS: While Tariq is becoming increasingly skeptical of the whole ESG argument, the industry is booming. More and more money is pouring into ESG strategies.

WONG: Eventually, he gets fed up. He's like, whatever I'm doing here, it's not working. It's helping BlackRock sell more products and make more money in fees, yeah. But the private sector is never going to be able to fix these problems. The government has to.

CHILDS: Not two years after he started, he quits. He goes back to work on an online education nonprofit he'd founded called Rumie. And the further he gets from the BlackRock experience, the more he starts to think that he wasn't just not helping, he was actively causing harm; and not just him, but the whole ESG thing.

FANCY: That's when I started realizing that this is actually very dangerous because it's a placebo that's going to waste our time. I think it's morally reprehensible.

WONG: To check this feeling, he conducts a study in the summer of 2020. He did it with a polling firm and Ryerson University, now known as Toronto Metropolitan University. And their study found that people who saw headlines about vague ESG promises or Larry Fink's letter, they felt like things were under control, and they were more likely to say that business, not government, can get us to a more sustainable economy.

CHILDS: Which, to Tariq, is exactly the wrong message. This is why he thinks ESG is so dangerous. It makes us complacent.

WONG: Tomorrow, we hear from people who are not complacent; who say, no, ESG is fine. We're facing some intractable issues and this approach, ESG, gives us options.

UNIDENTIFIED PERSON: I use the language sometimes of, like, a potluck supper, right? A lot of the critique of different pockets of practice within the ESG is just saying, oh, I don't like your dish. Well, that's fine. You know, don't eat it. You know, there are other dishes here that are really good.

CHILDS: It's almost like what you're describing is a market...

UNIDENTIFIED PERSON: Yeah (laughter).

CHILDS: ...Where people have choice (laughter).

UNIDENTIFIED PERSON: Exactly. And so it's true. Like any market where there's a lot of new products in a short period of time, it's true. Like, you need to read the label to see what you're buying.

(SOUNDBITE OF MUSIC)

CHILDS: Hopefully, the label is recyclable.

WONG: This episode was produced by Corey Bridges and Andrea Gutierrez. Robert Rodriguez is our engineer, and Sierra Juarez checked the facts. Viet Le is our senior producer. Additional editing today by Jess Jang (ph). Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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