The Secret Diary of a ‘Sustainable Investor’ — Part 1

By Tariq Fancy
August 2021

This is the first of a three-part essay that shares how my thinking evolved from evangelizing ‘sustainable investing’ for the world’s largest investment firm to decrying it as a dangerous placebo that harms the public interest. It’s not short. But this topic is critically important: it lies at the heart of how we reform capitalism to address important environmental and social challenges with concrete action. I challenge business leaders who have advocated the ideas I question below to offer a serious rebuttal.

We’re running out of time: we can no longer afford to answer inconvenient truths with convenient fantasies.

JUNE 2022 UPDATE: TEN MONTHS AFTER PUBLISHING THIS THREE-PART ESSAY, I ADDED A FOURTH AND FINAL CHAPTER HERE

“[Tariq Fancy]’s confessional essay… is riveting.” — The Economist

“…full of powerful and darkly funny anecdotes about high finance.” — Financial Times

“[Tariq Fancy] more or less went nuclear, declaring the whole industry not just fuzzy and vague, but actively destructive.” — Fortune

“Masterful job… it’s long but worth every minute of your attention.” — The Dude

The Secret Diary of a Sustainable Investor

I. How the System Works
II. Why we can’t rely on ‘good sportsmanship’
III. The Danger of Fairy Tales
IV. Epilogue:
The Hero We Deserve (New: June 2022)

A PDF version of the original three-part essay is available at this link. A PDF version of the epilogue is available at this link.

I. How the system works

My father-in-law passed away at a hospice on a cold, dreary Sunday morning in March 2019. His brutal two-and-a-half-year battle with colorectal cancer reached its tragic conclusion. In his final days, in what now feels like a movie scene in my head, he reiterated to me his advice to travel less and focus more on family. After a quick Muslim burial and a couple of days with my wife and grieving family members, I left directly from a memorial event in his honor for the airport — sprinting through the terminal with my carry-on to just barely catch a redeye bound for Zurich. The next morning, after overdoing it with three espressos to combat the lingering grogginess of jet lag, I took the stage at BlackRock’s Annual Conference for Swiss Clients, suited, booted, and sufficiently caffeinated to wax lyrical about the most exciting growth-area in financial markets today: sustainable investing. Also known as impact investing, responsible investing, ethical investing, and environmental, social, and governance (“ESG”) investing, this area of finance makes you feel good. It’s based on the premise that in addition to getting a solid market return on your investments, your investment also makes the world a better place. This promise is what lured me to join BlackRock to begin with.

We left immediately after the conference to catch BlackRock’s private plane for Madrid, where we would perform the same rigmarole at the Annual Iberia conference the following morning. As a group of us trundled across the Zurich airport tarmac in a small, cramped shuttle bus, Larry turned to me. “So now that we finally have a minute, what’s the latest?”

The first time I met our CEO, Larry Fink, was in 2017 in his office at BlackRock’s Global Headquarters on East 52nd Street in Manhattan. Known simply as Larry within the firm, he made my job interview into a natural and flowing conversation. I instantly appreciated him as being different from other senior financial executives I had met before. Despite having led BlackRock from a startup in 1988 to the world’s largest asset management firm in under 30 years, he had the kind of healthy sense of self-doubt and fear of hidden risks that you’d expect from someone who began their career as a bond trader, making a living understanding the risks of lending money to others. A comment he once made at an internal offsite for senior executives stuck with me: “It’s not the risks that we’re talking about that I worry about. It’s the ones we’re not talking about.” As a former bond investor myself, I knew he was right: it’s usually the risks we’re not thinking about that creep up and cause us problems. But his sensible caution seemed perfectly balanced with a burning desire to be ahead of the curve against the industry, not least by expanding earlier than competitors into growth areas such as passive “index” investing and financial technology.

I recall telling my wife about that first conversation in Larry’s office. He and I had agreed early on that her birthplace, Dubai, is generally overrated as a place to visit (doubts appeared on her face), then he shared that the first thing he did when he arrived at the office each morning was to call his wife (her face brightened), and finally we discussed how BlackRock was uniquely positioned to lead the world in the direction of a more sustainable version of capitalism (her millennial eyes sparkled yet more).

Larry’s leadership on sustainable investing was cemented in 2018, when in his annual letter to the CEOs of the world’s largest corporations, this time titled “A Sense of Purpose,” he introduced the idea that successful companies needed to serve a social purpose. As Andrew Ross Sorkin put it in The New York Times, Fink informed business leaders that “companies needed to do more than make profits — they need to contribute to society as well if they want to receive the support of BlackRock.” It wasn’t the first time someone had said it, but it was the first time that someone whose firm managed over $6 trillion in assets had said it. And thus, it got the reaction it deserved in the business world, bringing prescience to Ross Sorkin’s prediction that it may be a watershed moment in the debate about the future of capitalism. It was my second week on the job. The resulting roar of approval, some vocal critics, and a general buzz amongst the global elite was deafening. Soon after, Larry became in some ways the de facto leader of a new worldview that purpose and profits are not in conflict and that companies need to serve society rather than just their shareholders in order to prosper.

“Watch your step,” said a cheerful attendant as I stepped up onto the Gulfstream G550 that was taking us to Madrid. There was an interesting cast of characters aboard the jet that night in Zurich, a smaller subset of whom accompanied us on a much longer flight back to New York the following day. I chatted briefly with a former police officer-turned-security official who accompanied Larry on trips abroad. He calmly accepted his duty to take center stage amongst us boring suits in a casual area at the rear of the jet, telling a few animated war stories from his experiences in the aftermath of 9/11 before relaxing back into his seat, his body language making little secret of his preference for this cushier corporate gig.

Sitting across from me was an executive from our London office, who, after a few glasses of whatever was being served, embarked on a fifteen-minute diatribe to all within earshot against the “totally clueless” then-freshman Congresswoman Alessandria Ocasio-Cortez. “She’s a complete idiot — she doesn’t understand anything about anything!” His English accent was so posh that it sounded almost luxurious. Somewhere in the front of the plane, Larry was trying to see if folks wanted to play bridge with him. Knowing nothing about bridge I steered clear, but, given the palpable sense amongst those present that this was a way to get close to him, I wasn’t surprised when one senior executive downloaded a “how to play bridge” iPhone app and began hurriedly cramming, as if preparing for a final exam.

I’d arrived at this exact moment following what can only be described as a peculiar career path. After years of living someone else’s dream — following a well-trodden path from a good school to an investment banking job to a cushy senior role at a private investment firm — I mustered the courage to leave the industry altogether to plow my savings into Rumie, an education technology non-profit I founded to bring free digital learning to the unlucky folks on the wrong side of the “digital divide.” The decision to jump ship just as I entered my prime earning years thoroughly baffled some of my former colleagues. (One of them asked me to explain the decision to him multiple times, in literally the same words but slower, as if I were a foreign language teacher helping him learn a new dialect.) But when BlackRock came knocking with an offer to return to Wall Street, I knew I had to do it: BlackRock was then and remains today the world’s largest investment firm. At the end of June, it had $9.5 trillion under management and was closing in on what the Wall Street Journal called the “once unthinkable”: $10 trillion in assets. Managed well, that kind of firepower could create far more positive impact for the world than possible running Rumie. So I found a replacement and returned to the world of New York finance once more.

I vividly remember a conversation I had on the plane that night with two senior members of our iShares team. Through its iShares brand, BlackRock is the 800-pound gorilla in the exchange-traded funds (ETF) space, a marketplace of low-fee investment products that mechanically track market indexes such as the S&P 500. We had just launched a new range of “sustainability” funds, including a series of low-carbon ETFs. It offered investors the chance to get market-rate returns while tilting the underlying investments toward companies with lower carbon emissions footprints. To BlackRock, it provided the opportunity for differentiation, including a bump in what were otherwise plummeting fees as competition had grown in recent years.

The how-to-play-bridge-app executive was growing agitated. “All they need to know is that it has a lower carbon footprint — they should do it to fight climate change!” she repeated. Nodding approvingly, the second iShares executive, a sales guy from our Madrid office with a Mr. Incredible-like chin and a listless demeanor, agreed: my answer was too long and unclear. Asked a thoughtful question by a Swiss client on how these investment vehicles actually contribute to fighting climate change, I explained how high growth of these products might, in theory, find some way to indirectly increase financing costs for higher carbon-emitting companies, incentivizing them to lower emissions. “But didn’t you see the talking points?” insisted how-to-play-bridge-app, referring to a set of oversimplified bullet points I had not seen arrive in my inbox of overflowing and unread emails the day before. They made clear their view: the key to selling the product was to keep it simple, even if that meant glossing over how it directly contributed to fighting climate change, which was always hard to explain and at best a bit uncertain.

I leaned back in my seat, my mind still switching back and forth between the quarterly sales targets that preoccupied my colleagues and the near day’s worth of Whatsapp messages from family members that it suddenly occurred to me I hadn’t even read yet. I reflected on my role and the impact I was having on the world. Naturally, it seemed a bit bizarre to be flying around on a private jet in order to hock, of all things, low-carbon investment products. But I was nothing if not practical and had come to believe that the emissions we could reduce with our size and influence would far more than offset the small costs to create and distribute these products. I sincerely believed that while sustainable investing was not perfect, it was a step in the right direction in the critical question of how business and society should intersect in the 21st century.

Unfortunately, I now realize that I was wrong. If the COVID-19 pandemic has taught us one key lesson, it’s that we must listen to the scientific experts and address a systemic crisis with systemic solutions. Reacting instead with denial, loose half-measures, or overly rosy forecasts lulls us into a false sense of security, eventually prolonging and worsening the crisis. And yet Wall Street is doing just that to us today with the far more dangerous threat posed by climate change, craftily greenwashing the economic system and delaying overdue systemic solutions, including those intended to combat rising inequality and the insidious political risks it creates. It’s clear to me now that my work at BlackRock only made matters worse by leading the world into a dangerous mirage, an oasis in the middle of the desert that is burning valuable time. We will eventually come to regret this illusion.

Is Sweden the Future of Sustainability?

There is, of course, an opposite view to the private-jets-make-sense school of thought in fighting climate change, best represented by Greta Thunberg. The Swedish teen activist has galvanized people worldwide with her direct and unrelenting moral assault on an existing generation of leaders who, in her view, cling to models of society and business that are destroying the planet. Unlike me, her trans-Atlantic journey the same year to speak about fighting climate change was made on a sailing yacht. Even her detractors (some exist) concede that Thunberg is remarkable — a force to be reckoned with. Or, as a slightly drunk guy I met at a sustainability conference excitedly told me, just moments after introducing himself at the cocktail hour by explaining how his white privilege made him feel a need to give back to the earth: “She’s like the white Malala!”

It’s little surprise that Greta and those in her age range might care so much. According to a recent study in the journal Proceedings of the National Academy of Sciences, barely liveable hot zones may rise from 1% of the earth today to 19% by 2070, leaving billions of people with nowhere to go. It’s not that far away: in 2070 Greta will be only 67 years old. Sylvester Stallone was six years older when he filmed his latest Rambo movie installment, Rambo: Last Blood (yes, really — it came out in 2019). Judging by present energy levels, she’ll not only be nowhere close to retirement by then but may live until close to 2100, at which point one study suggests higher temperatures in parts of India and Eastern China “will result in death even for the fittest of humans.” (Rambo presumably included.)

“We’re so happy to have you here with us in Stockholm!” said Clara Alderin, my liaison from the H&M Foundation, as she greeted me at a dinner the night I arrived. I was in town to attend the final ceremonies for an award I helped to judge, the Global Change Award, a set of cash prizes that the H&M Foundation gives each year to five global startups building fashion innovations for a more sustainable planet. Tall, blonde, and sharp-featured, Clara looked exactly what I was trained by 80s and 90s North American pop culture to expect all Swedes to look like. As she led me through a rooftop restaurant with gorgeous floor-to-ceiling window views on either side of central Stockholm, I noticed that she somehow managed to stop briefly and turn, make eye contact, and smile at the end of every sentence, some of which sounded like they were sung to me, all in perfect, unaccented English.

“I decided to work in sustainability after I went to Sri Lanka with the Red Cross. I think there’s this thing when you’re young and you just explore the world outside of you… and you realize you’re a part of it. Then I developed an interest in trade and where the products we have in Sweden come from.” She had a certain idealism common amongst the growing throngs of young people working in sustainability these days. As the conversation continued at dinner, I noticed that her idealism was combined with Swedish common sense and level-headedness. “We’ve all read the articles online about supply chain issues. It’s very important that big companies do the right things — it’s the only way we’ll get the big change we desperately need.”

The award dinner was the following night at Stockholm’s beautiful City Hall. A lavish affair, it involved dancers, performances, inspirational stories, and a host of other things that made us feel good that progress was being made against laudable goals, such as the United Nations 17 Sustainable Development Goals. A few young entrepreneurs heard I worked at BlackRock, and with Clara’s help, hunted me down to pitch their business ideas to build a greener world. There was a bit of a buzz about the menu for the night, and I was told, with nervous anticipation and by more than one person, that we would be served the same dessert as the Nobel Prize Dinner, held at the very same venue just four months earlier.

Eventually, Clara introduced me to two sisters from Peru, whose startup was one of the competition’s five winners. They had pioneered an innovative technique to build lab leather from Peruvian flowers and fruits, making it 100% vegan and biodegradable. In rusty and broken Spanish, I managed to agree with them that the dessert, some sort of chocolate soufflé, was unremarkable and never really stood a chance against the hype. There were lots of other winners, innovators, and experts all shaking hands, exchanging information, and discussing new ideas to build a more circular economy — one that eliminates waste and allows the continual use of resources, as opposed to our linear and unsustainable economic model today (make, use, dispose…).

I grew up believing that the warm feeling of saving the world generally only came through some level of selflessness and sacrifice, almost as a necessary cost, in line with the images of those supreme beings who had joined the Peace Corps and were in some faraway land working happily in the service of others. Yet it seemed that much of that same excitement and satisfying feeling of purpose was here too, in a chic venue with champagne and chocolate, and without quite as much sacrifice thanks to innovative new models of business, technology and finance. Change was in the air, and at the center of it all it seemed that a large multinational company was leading the way to build a more sustainable future.

Capitalism & Basketball

In most Western countries today, it’s hard to do anything in business and not hear about exciting new sustainability initiatives. They often seem to be defined most broadly as anything “good” for the world, whether contributing to the fight against climate change, diversity and inclusion initiatives, or philanthropic work. A host of organizations, conferences, industry bodies, data sets, standards, certifications, and yet more literature (both academic and marketing) has appeared in short order to surround this growing work. Many are meaningful and produce useful tools to help guide the direction in which we need to go as a society. A small minority of conferences seem to be mainly feel-good get-togethers for those looking for spiritual renewal. After the pandemic began, Nexus Global Summit, an organization that brings together social innovators, philanthropists, and impact investors globally, hosted the virtual session “How to be an Impact Investor During Covid-19” on a Monday. By Wednesday, the focus had shifted to “Tiger King: the Untold Story” — an intimate conversation with Carole and Howard Baskin. But while some part of the discussion around business and sustainability seems a bit more about entertainment, most of it is increasingly serious and draws the top leaders from not just business but across civil society as participants and thinkers.

Much of this growing unrest is simply a recognition of what we all know to be true: we need to change our ways. Other prominent CEOs have joined Larry in making this point more and more forcefully in recent years. “Companies have a responsibility to use their innovation and agility to lead on the climate crisis,” tweeted Tim Cook. The Black Lives Matter protests turned the focus to racial inequalities. “It is my fervent hope that we use this crisis as a catalyst to rebuild an economy that creates and sustains opportunity for dramatically more people, especially those who have been left behind for too long,” said Jamie Dimon, Chairman and CEO of JP Morgan Chase. It seems that everyone agrees: it’s now or never, this decade will make or break us on climate change alone, to say nothing of the risks of allowing racial and economic inequality to continue and even rise unchecked, so we need to do something about it.

Understanding how the economic system works can be tricky, so let’s use a simple analogy throughout this essay: capitalism is like professional basketball.

In capitalism, private firms compete with one another in fair and competitive marketplaces to maximize profit, all of which serves us (society) by fostering innovations and efficiency improvements that ultimately improve our lives and wellbeing. In basketball, players compete on a specially-designed court to score points, all of which entertains us (fans) through a fair and highly competitive game that fosters the best showcasing of skills and inspiration. The scoreboard for the competition is clear and quantifiable for both: profits in capitalism, points in basketball.

In capitalism, the private firms that act as “players” in the marketplace are formed as legal entities to allow groups of us to work together toward a shared purpose, employing us in different capacities to contribute. To keep our basketball analogy connected, let’s assume that the players on the basketball court are robots that are controlled remotely by groups of us fans sitting in the arena. Most of us work for different players, helping to control their various body parts, just as in the economy most people work in different functional areas of private companies. Senior managers, such as the CEO, control the player’s brain and, thus, all major decisions on how those body parts are used.

A high-quality professional game doesn’t magically appear out of thin air: there’s a league that helps arrange the venues, scheduling, manages and updates the rules and regulations, and employs the referees who enforce those rules of the game. No rules, no game — it’s as simple as that. Similarly, nothing exists in a capitalist society without a government to create the preconditions for private firms to compete and safely innovate, devising rules and regulations around private competition in a way that serves the long-term public interest, defining laws on everything from contracts to intellectual property to data privacy, managing court systems to handle disputes, and enforcing the laws on a daily basis. In other words, a competitive market, like a competitive sport, is based on rules. No rules, no game. In one case we pay the price of admission to the arena, in the other we pay taxes. Whatever we call it, in both worlds, we need to fund and staff the organizing bodies without which none of this would be possible.

This is where the basketball analogy gets interesting. Much of what people talk about in regard to making capitalism sustainable is related to what economists call externalities: side effects of specific business activities that affect all of us. They can be positive or negative. In the basketball example, think of externalities as things that are good or bad for the crowd but don’t register on the scoreboard. A negative externality might be when one of the players jumps into the crowd to retrieve a loose ball and ends up seriously injuring a few fans: in that player’s dogged pursuit of points they take on careless risks that endanger bystanders. In our economy, pollution is an example of a negative externality: an undesirable side effect from an industrial process for private profit that we, the broader public, did not choose to incur, but for which we collectively bear the consequences. With some highly dangerous and fast accumulating negative externalities, such as rising greenhouse gas emissions, the threat is becoming near existential: a bit like players engaging in behaviour that somehow damages the foundation of the entire arena. Too much of this endangers not just the game but the venue that is required to host it in the first place.

By contrast, a positive externality in basketball might be Steph Curry’s off-the-court personality: aside from any points he scores, he has the positive side effect of being a likable role model for youth that engages in social and charitable work. In our economy, an example of a positive externality might be the private development of free software that creates side benefits for others, such as Google Maps (used anonymously).

In capitalism, the firms who compete are all technically owned by us, the public. This includes people who don’t think they own anything: whether the lending that a commercial bank does with the deposits in someone’s savings account or the investment portfolio of a pension plan managed on someone else’s behalf, almost everyone has an indirect stake in various private endeavors. This is a bit like saying that the robot players on the basketball court don’t just employ most of the fans in the arena; indeed, they were also built and are owned by the fans. Some fans own lots of shares in lots of players, whereas others own next to nothing, but ultimately the fans in the arena own all of the players.

But that leads to an obvious question: if society owns them, shouldn’t we be able to control them and rein in their most dangerous and damaging negative side effects? We wouldn’t just sit by and watch as robot players we owned and controlled started recklessly harming us, the fans, in a basketball arena. So how is it possible that we allow private firms engaged in market competition to contribute to climate change, evade taxes, and a host of other activities that most of us agree are undesirable?

This is a point best addressed by Leo Strine, until recently the Chief Justice of the Supreme Court of Delaware and, per The New York Times, “perhaps the most influential judge in corporate America over the past decade.” In his view, the CEOs and the boards of large companies in the cockpit have a role to play, but they ultimately take direction from an even more powerful group: the owners, meaning, indirectly, all of us. But if you don’t remember voting the shares in your retirement accounts recently, or picking a CEO and approving their strategy, you’re not alone: most stock today is not held directly by mom-and-pop investors. We have “sports agents” that act as owners of the robot players on all of our behalf. This gives them the right to vote on hiring, firing, and directing the CEOs who control the players’ actions on the court. Hence, Strine’s path to a “fair and sustainable capitalism” goes right through these sports agents: called institutional investors, these agents wield over 75% of shareholder voting power. BlackRock is the largest of them — the super agent that invests more in players than anyone else, mainly through controlling our retirement savings.

But as our agent, BlackRock can’t just do whatever it wants with everyone’s savings. We, the owners, trust them, the agents, to control and supervise our property, and as such, they legally owe us what’s called a fiduciary duty to act in our best interests. (This is BlackRock’s first operating principle, which states that “your goals are our goals.”) But what does it actually mean to invest someone’s assets according to their best interests — what are you looking to achieve with investments made on their behalf? Put another way, if you’re sports agent Jerry Maguire, what are you hiring the senior managers that control these players for their ability to do for us?

The voice of the late economist Milton Friedman has dominated this question for the last half-century. In his seminal 1970 essay entitled “The Social Responsibility of Business is to Increase its Profits,” he argued that “a corporate executive is an employee of the owners” and that their primary responsibility is to maximize shareholders’ profits. Since profits are to capitalism what points are to basketball, the Friedman doctrine, which has come to dominate and define Western shareholder capitalism, has led us to spend decades creating and training basketball players from the ground up to focus on a scoreboard that measures one thing only: points. And our agents, like BlackRock, who act as the owners of the players on our behalf, have spent decades training and directing those players to be point-scoring machines. Indeed, they’ve consistently hired the pilots in the cockpit based on their ability to do one thing: score points. Not only that, but we pay them directly linked to how many points they score and give them handsome bonuses for hitting high point targets. To deal with a competitive economy, we built winners.

That put our work at BlackRock in a curious position. We owned over 5% of nearly all of the companies traded on the S&P 500 market index, giving us an extraordinary amount of power. And besides our legal obligation to do so, we had also made an explicit promise to our clients to focus on generating investment profits. (BlackRock’s second operating principle: “We’re passionate about performance.”) Like all other large and successful investment managers, we wanted our players to put points on the scoreboard. At BlackRock, our portfolio managers, who made the actual buy/sell decisions and managed the investments, were in turn paid based on their investment performance — which of course was driven by profits, meaning points scored.

Unfortunately, many things that are lucrative are also bad for the world. There’s a reason that Exxon pollutes and Facebook tries to addict us to their apps: it makes money. In the face of this unfortunate reality, we led the way in popularizing a new and optimistic view: that companies with better performance on environmental and social issues would enjoy larger profits in the long-term, as there was no disconnect between ‘purpose’ and profits. It was kind of like saying that good sportsmanship in basketball is not at odds with scoring points. Just look at Steph Curry! But it was more than that: we argued that companies that embrace sustainability early create more profit for shareholders over the longer-term, which is a bit like saying that good sportsmanship on the court is linked with eventually scoring more points as a result.

Larry’s 2018 annual letter made explicit the call for better sportsmanship: “Society is demanding that companies, both public and private, serve a social purpose.” After that letter put Larry at the center of a new way of thinking about business, those in the sustainable finance space awaited his subsequent letters like fans awaiting their favorite artist’s new album to drop: in 2019, it was “Profit & Purpose,” in which he argued that “wrenching political dysfunction” meant that companies needed to step into the void to serve society, and in 2020 it was “A Fundamental Reshaping of Finance,” in which he argued that climate risks would turn financial markets upside down. This past January he doubled down, arguing in his latest letter that the COVID-19 pandemic has presented an “existential crisis” that has “driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives.”

His annual letter has become such an event in the industry that the 2019 version was spoofed by an environmental activist group, whose fake letter and website was so convincing that London’s Financial Times newspaper first carried and quickly retracted a story about it. Larry said in an interview that he feared a “severe backlash” for his 2020 letter on climate risks. Instead, like its predecessors, it was well-received, so much so that Bloomberg even wrote an article on Larry’s “sartorial nod to a warming world, ” cooing that his climate-data themed tie at Davos signaled that “his newfound commitment to putting sustainability at the center of his strategy extends to his wardrobe.” (To my knowledge, Greta Thunberg hasn’t yet added a sartorial front to her war against rising emissions.)

The cloudy linguistics of sustainable investing

Sustainable investing is a confusing area of finance that often means different things to different people. Most of the time it means building investment portfolios that exclude objectionable categories, such as ‘divesting’ of fossil fuel producers in an apparent attempt to fight climate change. Unfortunately, there’s a difference between excusing yourself of something you do not wish to partake in and actively fighting against something you think needs to stop for everyone’s sake. Divestment, which often seems to get confused with boycotts, has no clear real-world impact since 10% of the market not buying your stock is not the same as 10% of your customers not buying your product. (The first likely makes no difference at all since others will happily own it and will bid it up to fair value in the process, whereas the second always matters, especially for a company with slim profit margins and high fixed costs.) If it’s not obvious why there’s little real-world impact, think of it this way: if your sports agent sells your interest in a dirty player who is known for recklessly endangering fans, but that player remains on the court (under new ownership), have you really made any difference?

Since the early 2000s, many investors have moved past divestment to faster growing areas of sustainable investing, such as a newer focus on impact and ESG (environmental, social, and governance) products, all with a general goal of leaning toward or even creating positive and often measurable social impact alongside strong financial returns. Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise, since most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding. (Imagine a basketball player letting certain socially-motivated sports agents claim credit for their more sportsmanlike activities: could we be sure that this was increasing their overall clean play?)

Another red-hot area in sustainable investing allows investors to own baskets of more “responsible” stocks, as Larry pointed out in his January 2021 letter: “From January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019.” Since ESG products generally carry higher fees than non-ESG products, this represents a highly profitable and fast-growing business line for BlackRock and other financial institutions. (Imagine these as an agent helping you own shares in a group of players that are on average more sportsmanlike and may do extremely well if good sportsmanship does indeed help score more points in the future.) Since such products own some percentage less of polluters and low-ESG shares than the relevant market benchmark, the underlying ‘theory of change’ behind these tilts is the same as divestment: trillions of ETFs that adhere to this form of ‘soft divestment’ just aggregate into some fraction’s worth of de facto market divestment. But because they collect baskets of shares already traded in public markets, investing in such a fund does not provide additional capital to more sustainable companies or causes.

A series of other sustainable products across the spectrum of financial assets — from debt to equity, public to private — have all grown in recent years, all with similar promises to also satisfy societal needs in the pursuit of profit, often even measuring a second “social bottom line.” In other words, lots of sports agents have recently started selling lots of new products, all looking for our business and offering to get us more exposure to the “good” players and their actions — the more sportsmanlike ones that are not just competing well but doing so without creating a host of negative side effects for us. They even increasingly find ways to carefully measure some of this good sportsmanship so you feel good about how your money is invested.

The best-known market standard for “impact investing” thus far likely comes from the RISE Fund, a groundbreaking $2 billion impact investment vehicle that is managed by the TPG Group, a San Francisco-based private equity firm with close to $100 billion under management. According to the New York Times’ Ross Sorkin in 2017, Bill McGlashan, the RISE fund’s founder, “more resembles a Buddhist monk than a cigar-chomping banker in pinstripes.” In an Icarus-like rise and fall, McGlashan momentarily ascended to near pope status in the impact investing world — appearing complete with Buddhist prayer beads and African woven blankets at conferences where aspiring changemakers marveled at his newfound focus on social good — before being implicated in the college bribery scandal and then fired by TPG in 2019.

I met Bill at his office in San Francisco in 2016, when I was first starting to explore the sustainable investing industry. He had neither reached nirvana yet nor acquired its trappings, so more resembled a standard private equity guy in a suit — complete with the obligatory desire to appear far more interesting than that, something made clear to me the third time he name-dropped U2 frontman Bono, with whom he was in the process of creating the RISE Fund at the time. McGlashan gave me a pitch of what would later be described by the Financial Times as his attempt to save capitalism: “We think we can take this beast called capitalism and help to direct it in a way that is productive.” Leaving aside whether or not the fundraise would be successful and create real impact or not, I wondered to myself: a $2 billion fund may be enough to bump Carole Baskin for a keynote spot at the next flashy social innovation event, but is it enough to make a difference if the majority of the global economy, with nearly $6 trillion in private equity alone and some $360 trillion of global wealth overall (3,000x and 180,000x times larger, respectively), continue operating business as usual? The RISE fund seemed like an ambitious effort that could help, but was ultimately a drop in the bucket against a tidal wave that was going in the opposite direction.

Addressing that larger tidal wave seemed like the real place that capitalism could in theory be “saved.” Accordingly, while new green funds and products represent greater near-term profit potential, much effort in the industry is also focused on the idea of integrating ESG considerations into that existing tide, which for many seems to be a proxy for overlaying ‘purpose’ onto traditional models to extract profits. Given the boundaries of fiduciary duty, however, in most jurisdictions it can only be done if it helps, or at least doesn’t hurt, investment profits — meaning, per BlackRock’s first operating principle, you can’t forego profits with someone else’s money, even if you think it’s for a good cause. And therein lies today the glowing promise of “ESG integration” in the industry: it offers better ways to pick out the more sportsmanlike players, and since those characteristics are now believed to eventually lead to scoring more points, this is a win-win for purpose and profits both. The Principles for Responsible Investment, a United Nations-supported initiative, has over 2,000 signatories representing over $80 trillion in investment assets that consider ESG factors in just this way. Unfortunately, there’s no clear definition of what that means — and much of it is believed to be a surface-level, box-ticking compliance activity.

In late 2017, BlackRock revamped its sustainable investing efforts and doubled down, hiring a talented former senior Obama administration official as the new global head of sustainable investing and myself as its chief investment officer (CIO). Given the more applied focus of a CIO role at an investment firm, I led the effort to incorporate ESG activities across all the firm’s investment activities. This was exactly where I wanted to focus: if we were successful in showing how we could invest trillions of dollars across different strategies and geographies in a way that achieved strong profits while also creating better environmental and social outcomes, the rest of the industry would follow — reforming capitalism in the process.

In 2019, CEOs from the US Business Roundtable, which represents nearly 200 companies such as Apple, JPMorgan Chase, Pepsi, and Walmart, broke with Friedman’s view that only shareholders mattered, advocating a new focus on stakeholders, such as employees, communities, and the environment. This was a bit like the NBA Players Association releasing a statement that it was no longer enough to put points on the scoreboard: players now committed to consider other things too, like the safety of the fans. The New York Times’ Ross Sorkin gave us another round of applause, declaring that Larry “deserves to be doing laps for putting these ideas into his annual letters years ago, when some of those who signed Monday’s statement laughed at the idea.”

We had started a trend. Unfortunately, the view from the inside was different.

This is the first in a three-part essay, click here for part two.

(NOTE: The original three-part essay was published August 2021; a fourth and final ‘epilogue’ chapter was published here in August 2022.)

It was made freely available to the public in order to spark an important and overdue public debate — so if you find it interesting, please share it with others.

(And if you somehow thought it was awesome enough to pay something for, please direct charitable donations to Rumie, a US 501(c)(3) non-profit and Canadian registered charity, which pioneered mobile-first microlearning for youth around the world. This includes programs that just launched and allow girls and women in Afghanistan to safely continue learning from anywhere on a mobile phone in the local languages Dari and Pashto — see darsx.org.)

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Ex-CIO for Sustainable Investing at BlackRock / Founder of Rumie.org

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