Explaining ESG investing and the "woke capitalism" backlash : Planet Money "ESG" investing – Environmental, Social, Governance – has attracted a lot of attention from investors, and from Republican politicians who call it "woke investing." On today's show, what the fight over ESG reveals about the potential and limitations of sustainable investing.

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Two Indicators: The fight over ESG investing

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For the past five years, Larry Fink, the CEO of BlackRock, one of the most influential people in investing at the world's biggest money manager, has been using his platform to make the case for this type of investing called ESG.

LARRY FINK: I could see a world in five years where ESG is meshed in everything we do. And I believe that's where it's going.

CHILDS: BlackRock, we should say, is a sponsor of NPR.


ESG stands for environmental, social and governance. So, like, environmental - stop polluting, stop pillaging the rainforest. Social - pay your workers a fair wage and stop using child labor. And governance - is your management team diverse and not abusive? Larry Fink has been saying things like, companies must profit, but they also must have a social purpose. Like, yeah, we are shareholders, but we are also stakeholders, members of a larger world that's affected by corporate behavior too. Accountability should extend beyond just the people and companies who own shares.

Larry's message has been met basically how you might think - a lot of people love it so much, a lot of people hate it so much. And recently, the response has gotten a lot less rhetorical and a lot more action-y (ph). Republican leaders are increasingly pushing back against what they often call woke investing. In November, the state of Florida said it was taking back $2 billion it had given to BlackRock to invest in the markets, saying it was because it objected to BlackRock's ESG investing. Here's the treasurer of Florida, or what they call the state's chief financial officer, Jimmy Patronis.


JIMMY PATRONIS: Somebody wants to influence policy, they should go run for office, go give money, their money, to those charities to influence it, but not use the taxpayers of Florida's money to do this.

WONG: West Virginia and Louisiana have also pulled their money from BlackRock with the same complaint, and now fund companies have started making products for anti-woke investing - funds that compete with BlackRock's products, but that invest in, for example, oil companies or divest from companies that they say have liberal policies.


WONG: Hello and welcome to PLANET MONEY. I'm Wailin Wong.

CHILDS: And I'm Mary Childs. Today's show, ESG - sustainable investing - the war that is tearing finance apart.

WONG: This is a show that originally ran as two episodes of our daily podcast, The Indicator. Today it is reunited as one big PLANET MONEY, but a story in two parts. We'll hear one investor's journey into the heart of BlackRock's ESG business and some of the doubts and hard questions he encountered along the way.

CHILDS: And we'll hear from people outside of BlackRock who are trying to reckon with those same doubts and maybe answer some of the questions.


WONG: So we're going to start with one optimistic investor's quest to save the world via BlackRock and ESG investing and how it all fell apart.

CHILDS: In 2017, Tariq Fancy hears from a friend of his at BlackRock. 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 publicly traded company. So in this job, Tarek could call basically every 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 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. 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...

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 sends 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's annual letter is this big agenda-setting thing. It's required reading for all of finance and every executive of every public company.

WONG: And Larry's 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: Oh, 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 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 - maybe next 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 big sticking points in the whole ESG thing. This is why Florida is putting on its 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.

CHILDS: So if someone like Florida wants BlackRock to optimize solely for returns, it doesn't want expensive hippy dippy programs that make the earth happier, but eat up profits with no additional benefit, right?

WONG: And in fact, in November, BlackRock got a letter of its own from one of its own shareholders, a tiny little hedge fund called Bluebell, which held a tiny little handful of BlackRock stock. This little hedge fund said Larry Fink should step down, that all those letters and all that ESG talk was exposing BlackRock to, quote, "reputational risk," end quote, and that BlackRock shouldn't, quote, "impose ideological beliefs on the corporate world," end quote, especially given how politicized ESG is becoming.

CHILDS: The politics are indisputably a lot right now. That is just true. But on the returns point, we can actually look at the data, right? There is a lot of research that shows that ESG funds underperform non-ESG funds. And there's also research that shows that ESG funds outperform non-ESG. It kind of depends on how you measure it, what you count as ESG and over what time period and so on.

WONG: But there was this NYU review of 1,000 of such studies. And they found that more studies found that ESG outperform non-ESG than underperformed or about the same. They found that ESG won.

CHILDS: For Tariq, whether ESG funds were earning a little more or a little less than non-ESG was kind of beside the point. 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 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.

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. The way to make companies stop doing something profitable but undesirable is to make them stop, to regulate away the undesirable thing.

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.

CHILDS: Tariq is starting to worry that if people invest money in an ESG fund because they think it's going to save the planet, they might let themselves off easy. They might think, oh, good, I did my part, and then not do the hard work that actually needs to get done, like elect new politicians or change the way they consume, fly less.

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 Tariq says 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 were more likely to say that business, not government, can get us to a more sustainable economy.

So not only is Tariq dealing with portfolio managers who don't think sustainable investing generates better returns and who can't think on long enough time horizons to make it relevant, he also now thinks the entire premise of the thing, that the market can help, is a morally reprehensible and dangerous distraction. Big yikes - but of course, money continues to pour into ESG because there are more and more people who do believe in it, who think it's not a dangerous placebo, who think it's necessary to put the world on a slightly better trajectory.


CHILDS: That's after the break.


CHILDS: In the year before Tariq Fancy took the ESG job at BlackRock, Katherine Collins started as the head of sustainable investing at Putnam Investments, another big money manager. And like Tariq, she has faced her share of skepticism from investors. Like, early on in that job, she was sitting down with a health care executive to talk about the company's business - normal part of the job. She's supposed to find out if companies have good plans or bad and invest accordingly.

KATHERINE COLLINS: And then at the end, we said, well, OK, any other, you know, core sustainability issues that we didn't touch on? And the person threw up their hands and said, ah, that ESG stuff. I can't stand those people. And I was like, oh, well, hello. That would be me.

WONG: Oops.

COLLINS: And he said, oh, but you're asking about our strategy. And I said, well, yeah. And he said, oh.

WONG: Oh. Katherine gets this attitude all the time because as this new label of ESG has caught on, a lot of people have jumped on and new products have sprung up, some more dedicated to the cause, others that just fill out a checklist, like, yeah, we found a woman to put on our board of directors or we planted some carbon offset trees and they're doing great.

COLLINS: There is a part of ESG practice that is very report card-y (ph) - you know? - and very focused on scores and ratings and rankings. And there's some utility in that, but it's not complete in and of itself.

CHILDS: For Katherine, sustainable investing is more about accounting for the things we ignored when we prescribed what finance cares about. We decided to care about how many widgets you sell, not the environmental degradation in the process of creating those widgets. But also, if you want an ESG fund, you're the boss. You get to pick what kind.

COLLINS: I use the language sometimes of, like, a potluck supper, right? A lot of the critique of different pockets of practice within 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...

COLLINS: Yeah (laughter).

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

COLLINS: 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.

WONG: And this is true not just in ESG. Like, you're supposed to be reading all the labels, looking at all the factors that go into what you buy and what you don't, and forming opinions about what matters and what doesn't.

CHILDS: Like, do you think emissions matter to Ford's profitability in the next five years? Are you more optimistic about the growth prospects of chip companies versus homebuilders? Do you like momentum stocks or growth stocks? Great. Love that you have opinions. That is the normal and necessary stuff of investing. People have different opinions about everything, including ESG. In order to form any of those opinions, though, generally speaking, one needs information, which, for a long time, was harder to come by in ESG land.

WONG: George Serafeim, a researcher at Harvard, remembers hearing about ESG a little over a decade ago. He was researching opaque, financial, difficult-to-value factors, and it seemed like sustainable investing might be a rich area for exactly that. So he starts a spreadsheet to track whatever relevant data companies are disclosing to see what's out there - labor practices, water use, whatever.

GEORGE SERAFEIM: And many organization don't even - didn't even have the data internally around employee-related issues, supplier-related issues, customer-related issues. They don't - they just never had them.

CHILDS: So at first, George's spreadsheet is mostly blank. And even when companies were measuring things, it was totally random what they measured and how. He remembers two big companies were both measuring their carbon footprint, but one owned their trucks and the other didn't. So one looked way better, but it was just that the numbers were not at all comparable.

WONG: So George sets out to make better data. He calls up companies, asking what metrics they're focusing on, what and how they're measuring. He fills in his spreadsheet, and he publishes a big paper with his findings. And nobody really cares at first.

SERAFEIM: I was invited in several of the Wall Street firms to present some of the findings. And I remember I went to pretty much all of them. And across all of them, everybody was super skeptical. They said, oh, this is just soft. This is not important. Who cares? This is not value relevant and so forth.

CHILDS: Not value relevant. The same thing Tariq would encounter at BlackRock with those portfolio managers. I love your spreadsheet, man, but I just can't actually do anything with it. So as George is plugging along, something else starts happening. More and more companies - major companies - are starting to disclose useful metrics here and there. Coca-Cola and Pepsi start saying how much water they use to make a liter of Coke and Pepsi. Mining companies, including BHP and Rio Tinto, start disclosing data on employee safety - how many people get hurt or killed on the job.

SERAFEIM: One of the most critical moments was when actually important companies such as Unilever, for example, were starting to release more and more data but also making the case about how efforts to improve performance were actually improving their performance, either from a cost structure perspective or from a revenue perspective.

WONG: In other words, companies were saying that being more conscientious was saving them money and making them money.

CHILDS: George's research suggests that companies tend to follow this kind of progression. First, companies realize they can save money by paying less in fines. The fewer employees are hurt in work-related accidents, the fewer lawsuits. The less you dump toxins into rivers, the fewer fines from, you know, the EPA. Next, companies start finding ways to be more efficient. They improve their cost structure by saving water or energy or materials. They improve productivity. And then companies start coming up with new products and services which help them expand. It creates new markets like making shoes with recycled and upcycled materials, speaking from experience - of buying them, not making them.

WONG: All of which, the idea goes, will add up to more future profits, which should show up in a company's share price. That, in turn, should spark more interest in these metrics, kicking off a virtuous circle.

CHILDS: And for George, there's this big, promising moment in January 2018 - that big Larry Fink letter.

SERAFEIM: There is no doubt that the Larry Fink letter, where he's articulating the importance of ESG issues for the competitiveness of organizations - it's elevating that issue to a corporate governance issue - changed the discussion inside boardrooms.

WONG: To George, this is progress because, yes, he agrees with Tariq that BlackRock can't just decide to invest other people's money however it wants, that its power is limited. But within those limits, it's still power, and George sees how to use it. First of all, company management and boards listen to Larry. If Larry Fink brings up environmental stuff to a company's board, that is a big deal. And more to the point, BlackRock owns a ton of shares in basically every major public company. And as shareholders in those companies, it can vote.

SERAFEIM: I can tell you as a board of director member, that is a pretty strong enforcement mechanism. (Laughter) You can't be voted out of office.

WONG: By the way, as George says, he is on many boards, including that of an ESG consultancy that companies and investors hire on these issues. So he has some skin in the game.

CHILDS: Either way, to George, BlackRock throwing its trillions of dollars behind ESG was basically the start of that virtuous circle. The more funds like BlackRock ask these questions, the more good data we have, the more people like George can fill in their spreadsheets to see if this stuff actually helps boost performance, which builds the argument that sustainable investing factors were value-relevant all along.

WONG: George says we now finally have enough data that it's actually becoming useful. We can see who's doing well and who's doing poorly, which means we can make real, informed decisions in the stuff we buy and the stocks we buy.

CHILDS: And if you ask Katherine Collins, the sustainability investor, yeah, it's been slow. That's how things happen sometimes.

COLLINS: Power is constantly circulating, and change happens all the time. And you don't always know where it's coming from or where it's going to, but you can influence it. Like, you can be part of it. To me, that's a much more hopeful set of endeavors, and it's also much more true to how the world actually works.

WONG: This is the fundamental disagreement between Tariq Fancy, the disillusioned ESG investor, and George and Katherine. Tariq says we don't have time for all of this. We're soothing ourselves with a dangerous placebo when we need urgent government action.

CHILDS: Katherine and George agree - we don't have time. But for investors, ESG is what's available right now. It's at least something to do.

COLLINS: There are lots of famous videos trying to define phase changes that look at a pile of sand and, you know, one grain, one grain, one grain, the pile's the same, the pile's the same, the pile's the same. All of a sudden, the one millionth grain - whole pile collapses. You want to be putting your grains, you know, in the direction that you think is right. You know, I don't know why we'd shy away from that. You know, it won't hurt. And it might really, really matter. Isn't that worth trying? Like, isn't that interesting to you? And I have learned it's not interesting to everyone. So that part's a little depressing. But it is interesting to enough people that, like, you know - do you want to try? Like, let's try.


WONG: You can email us at planetmoney@npr.org or find us on all things social at @planetmoney. We would love to hear from you.

CHILDS: This episode was produced by Sam Yellowhorse Kesler, Corey Bridges and Andrea Gutierrez, with engineering by Robert Rodriguez. Sierra Juarez and Dylan Sloan checked the facts.

WONG: Additional editing today by Jess Jiang and Keith Romer. Kate Concannon edits The Indicator. I'm Wailin Wong.

CHILDS: And I'm Mary Childs. This is NPR. Thanks for listening.

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