The Secret Diary of a ‘Sustainable Investor’ — Part 3
By Tariq Fancy
August 2021
This is the third 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.
III. The danger of fairy tales
Climate change campaigners have drawn links in recent years between tobacco and fossil fuel. Both industries have used dodgy science to muddy the waters and desperately downplay the dangers of their products, cancer and climate change. In some cases they’ve even used the same researchers and public relations firms to deceive us. Before government restrictions on tobacco advertising, cigarette companies had the gall to advertise that cigarettes are not only safe but also good for you. They protect your throat from irritation!
This should be a familiar theme by now. When our leading experts conclude that a certain highly lucrative business activity is a grave danger to society, the machine “innovates” to protect its profits any way it can. And why wouldn’t it? Firms are built to score points within the rules that society lays down. And all the obligatory but meaningless business school talk of ‘codes of ethics’ aside, the fact remains that if the referees won’t penalize players for doing business in a way that yields huge profits at our collective expense and then playing down those negative side effects, they’ll generally keep on doing it. Yes, ethical customs and norms matter. Even Milton Friedman talked about them. But given the scale of the systemic change we need for time-sensitive environmental and social changes, ethical custom and business culture alone can’t possibly change fast enough to accomplish the task at hand in time.
Many of the rank and file employees at companies that create profit in ways that harm the public don’t realize it themselves. Often it’s because they work in silos. Or because the issue is complex. And long-term. Sometimes all of those things. For senior management, it can be tempting to believe a fantasy that happily aligns with their financial interests. As American writer Upton Sinclair once put it, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”
As Ruff and I took our daily escape one day last summer, just after the first COVID-19 wave subsided and his beloved dog park reopened, an alarming new thought occurred to me. I started noticing that the more I explained the concept of sustainable investing to people, the more they seemed eager to believe that it would help — and slightly relieved that it might allow us to leave things the way they are. Many had nothing to do with the finance industry or financial assets, and definitely didn’t understand the mechanisms by which it could in theory help solve our problems, but grasped lovingly onto the idea. Pipe dreams are particularly alluring when they’re easier on our wallets: if fighting climate change were cheap we’d have dealt with it already. Morgan Stanley estimated that preventing climate change will cost $50 trillion, or close to half of the world’s annual economic output. As far as incentives go, that’s a large enough one to sustain a collective denial fantasy for at least a while — costing us a lot more over the long-term.
A new research paper published in the scientific journal Nature in 2019 showed that ‘quick fix’ solutions to address the climate crisis may have a ‘pernicious effect’ in that they seem to “decrease support for substantive policies by providing false hope that problems can be tackled without imposing considerable costs.” This set of observations led me to wonder: what if the work I had been doing at BlackRock was actively harming society, by misleading the public and delaying overdue government reforms?
Sustainable investing is becoming a deadly distraction
The idea that sustainable investing and a set of related ideas that business will voluntarily lead the way on sustainability was a “deadly distraction” worried me enough that I decided to test it out. So, working with Ryerson University and the Strategic Council, a polling firm, we conducted a study at the end of the summer 2020 to better understand public attitudes on building a more sustainable society. The poll included three thousand people of all ages in the US and Canada. In one key section, we showed respondents a headline related to Larry’s 2018 letter on purpose and seven other similar headlines around new sustainability initiatives — mostly to do with businesses voluntarily taking the lead and other headlines in the sustainable finance space — and asked them to indicate whether they thought each was helpful in driving social change or not. All eight headlines were generally believed to be helpful. This is even though a number of them were decoys that I asked the polling firm to include in the study, knowing full well that they were window dressing with little to no real-world impact.
One such area was a headline around former UK and Canadian Central Bank governor Mark Carney warning against climate change risks in investment portfolios. I suspected that every time people read the latest such headline about guarding against climate change-related risks in the financial system, they mistakenly believed that these efforts were helpful in the fight against climate change itself. In fact, the survey found that not only was that true, but that most people think that this kind of work is just as helpful as any other pledge, such as large-scale organizational commitments to become net zero carbon emitters. Unfortunately, protecting an investment portfolio from the disastrous effects of climate change is not the same thing as preventing those disastrous effects from occurring in the first place. It was a bit like reading that people who live near forest fires in California feel safer because one of their neighbours purchases wildfire insurance on their home. But wait — what does that do for you? And what about all the people that can’t get insurance on their homes? And shouldn’t we be trying to prevent the fires from burning down our neighborhoods in the first place?
Unsurprisingly, most didn’t know that fossil fuel divestment campaigns have little real-world impact. A headline about the Norwegian sovereign wealth fund deciding to phase out its fossil fuel exposure, which has no proven impact on emissions, was viewed as roughly as helpful to society as a concrete commitment of $100 million to combat racial inequality, which will presumably achieve at least something. One headline discussed the decision by the UK’s Guardian newspaper to refuse advertising dollars from fossil fuel producers: noble, yes, but ultimately of such a small and limited scale that it’s unlikely to do much besides make a bit of noise. But that bit of noise was eagerly believed by people to be just as helpful as anything else in the headlines we tested.
The truth is, most people have no idea what works and what doesn’t. These are complex issues, but instead of having dedicated policy experts carefully tweak the system, we’re leaving it up to the general public to figure it out on their own. It’s like letting them decide whether or not they want to go to the sports bar during the pandemic — without even bothering to send them the Whatsapp forward with the basic facts required to make that decision. Besides the slowness of rapidly changing billions of economic interactions that way, we forfeit the advantages of being able to quickly adjust the levers of the system, carefully measure the results, and optimize things in a way that efficient management by a democratically elected government would allow for.
This is also where the basketball analogy breaks down. It turns out that people don’t even know what good sportsmanship looks like. They’re busy with their everyday lives and making ends meet — and besides a few hardcores who spend hours researching the details online, the vast majority can’t tell what counts as clean play and what doesn’t. Relying on personal choices alone is even more ridiculous if most people have no idea what helps and what doesn’t.
Unfortunately, it gets even worse: the deadly distraction is real. For half the respondents we removed the headlines entirely, and then compared the views of both groups — those who had seen the headlines and those who hadn’t — on who should lead the way in building a sustainable society. In Canada, it didn’t make that much difference: people generally trust their elected representatives to lead the way regardless. But there was a large and statistically significant difference in the US. Exposure to the headlines made people 17% more likely to say that business, not government, will lead the way in building a more sustainable economy.
Think of it this way: the more they saw isolated anecdotes of a few players playing clean (many of whom actually weren’t), the more they wrongly believed that good sportsmanship, not effective refereeing, is the large-scale solution to the dirty play we’ve seen in the game recently. Never mind that relying on good sportsmanship is nowhere near enough to meet the scale of the challenges we face, or that those same respondents barely know what good sportsmanship looks like. A few anecdotal examples of Steph Currys doing the right thing will not magically aggregate into the kind of mandatory, systemic change we desperately need right now to protect the well being and long-term interests of the youngest and the poorest in the world.
Government acts in many forms, including as both provider and regulator. As provider, it administers things like free public education and funding for science and innovation. Major innovations such as the iPhone wouldn’t have been possible without public investment, as the economist Mariana Mazzucato has argued. As regulator, it sets and enforces the rules of the game — incentivizing the kind of private commercial activity that aligns with the long-term public interest. This is less about the size of government and more about what rules and regulations it uses its extraordinary systemic powers to set. In Canada people generally trust the government to lead the way for important social issues. But after decades of being told that government is always the problem rather than the solution, many Americans today fail to appreciate the critical functions that only a government can deliver and without which society has no backup.
Immediately after leaving BlackRock, I had reached the conclusion that our work in sustainable investing was like selling wheatgrass to a cancer patient. There’s no evidence that wheatgrass will do anything to stop the spread of cancer, but it’s tempting to believe it, especially when the doctor is advising chemotherapy.
Unfortunately, I now realize that it’s worse than I originally thought: the evidence around the deadly distraction made it clear that we weren’t just selling the public a wheatgrass placebo as a solution to the onset of cancer. Worse, our lofty and misleading marketing messages were also delaying the patient from undergoing chemotherapy.
And all the while, the cancer continues to spread.
Does this sound like ‘responsible business’ to you?
Back when I worked in distressed investing at MHR, I remember carefully watching my boss Rachesky operate in meetings with bankers. They would all be thinking about whatever they were discussing, the topic of the meeting. One or two had started thinking about the next step. But Rachesky was usually silently and correctly reading what was going to happen three or four steps down the line. Today, a small subset of business and civil society leaders seem to have outsized voices, resources, and influence, and set the tone of the debate. A few of them may be suckers who got lucky, but most of them got to that level because they’re sharp enough to see a few steps ahead. They know where things are going. And they’re not telling us the truth right now.
Firstly, they must know that they’re exaggerating the degree of overlap between purpose and profit right now. Across virtually every industry, hitting short-term profit targets very often comes at odds with doing what’s right for society over the long-term. In response, we have the BRT’s lofty words on a page entailing vague promises to target “stakeholder value” instead of continuing to focus only on shareholders. Take that Milton Friedman! What’s most galling about the entire debate is how Friedman’s own message has been mangled. Yes, he said that the sole purpose of a business is to generate profits for shareholders. But that didn’t mean that he thought no one should look out for the public interest: in the very same paper he argued that the responsibility for protecting society fell to civil servants, whose authority business executives should not usurp as such roles “must be elected through a political process.” In fact, he called the idea of business executives taking on this role to be “intolerable” on grounds of political principle.
Virtually no one who has heard about the BRT’s heroic divergence from Friedman’s shareholder value viewpoint has heard this second part. We’re made to believe that he offered us an economic model where society had no one at all in its corner — at least until the CEOs of some of the world’s largest corporations magnanimously put us under its wing that is. Friedman, also a Nobel Prize winning economist, is somehow reduced to a now-vanquished gremlin toward whom we should direct our ire. But don’t worry, big business has defeated the evil Friedman curse! It’s kind of like the NBA Players Association responding to calls for cleaner play by taking the last rulebook printed in 1970, stripping out all the bits on rules and referring, and handing us an updated section on good sportsmanship. Not only is it not the right answer, it’s grossly misleading.
Second, these leaders must know that there is no way the set of ideas they’ve proposed are even close to being up to the challenge of solving the runaway long-term problems that we desperately need solved. A hodgepodge of voluntary commitments and non-binding words about caring more for all stakeholders in society will not give us what we need to solve the massive systemic problems we face. Inessa Liskovich, who was careful and measured on every thought she offered, was clear on this point: “There’s absolutely no reason to believe that societal demands, whether from consumers or employees, would ever get to exactly the right level that we’d want for ourselves from a policy perspective.” Yet at a time that we need leadership to make necessary changes before it’s too late, we get bland words intended to preserve the status quo.
Third, it’s not like these leaders don’t know what the right answer actually is. They’re the most highly educated and well read in society, and take full advantage of the latest medical science for their own life and death. Likewise, they fully understand climate science and economics — and have access to the best minds in both areas. The general public may not know who Nordhaus is, partly because his production quality isn’t very slick (he wraps up his Stockholm lecture after his iPhone timer app rings aloud) and also because they’re distracted by billions of dollars in ads to convince us to buy the latest ‘green’ product from the latest new responsible brand. But the elite definitely know who he is. They all went to the same schools, attend the same high-society events, and read many of the same publications. And they know well what he and other policy experts are saying we need to do. Yet as it stands they appear happy to cover their ears and ignore what’s inconvenient to their own short-term interests, as Larry epitomized with his confounding assertion in January that we should rely on ‘free markets’ to address market failures: “I prefer capitalists self-regulate.”
I knew for sure that Goldman Sachs CEO David Solomon knew all of this after reading an op-ed he published in the Financial Times in December 2019. After long passages that proudly list various new Goldman initiatives to be greener, he included a curious near-caveat toward the end: “To give us the best chance of combating climate change, governments must put a price on the cost of carbon, whether through a cap and trade system, a carbon tax or other means.” Perhaps in Solomon’s side gig, as an EDM DJ at fancy parties in the Hamptons and elsewhere, he also saves the best for last. But if DJ Sol, Larry, and other business leaders really want to show true leadership to their fellow citizens, they must find a way to rise above their short-term interests and stress clearly to the public that we need new rules that are mandatory and systemic, because with the way the game is currently set up there’s no way that good sportsmanship will ever save us. And right now all of the other stuff they’re saying — the marketing gobbledygook — is actively misleading people and drowning out the experts’ warnings.
Fourth, observing the positions of many of these leaders on climate change and COVID-19 reveals a worrying hypocrisy. The very same US Business Roundtable that believes stakeholder capitalism is the answer to growing social and environmental problems reacted to COVID-19 by quickly imploring federal and state governments to make masks mandatory indoors. Too many business leaders quickly supported mandatory and systemic measures to flatten the COVID-19 infections curve, which directly affects them today, but still seem fine with only individual and voluntary measures when it comes to flattening the greenhouse gas emissions curve, which indirectly affects someone else tomorrow. Why is that? It doesn’t seem due to a calculation about the relative risks and rewards of dangers that science warned us to prevent early rather than try to cure later, since the ultimate effects of climate change are hard to predict but will almost certainly be far worse than COVID-19. Rather, it seems a reaction to the timeline of those risks and rewards. What’s good enough for climate change was definitely not good enough for COVID-19. I wonder how much has to do with who is bearing those risks and who is collecting those rewards?
OK boomer, enough with the double standards
In early 2020, as COVID-19 landed on our shores, a video did the rounds showing Spring Breakers partying in Miami and ignoring the risk, famously summarized in viral video form by a seemingly inebriated student named Brady Sluder: “If I get corona, I get corona. At the end of the day, I’m not going to let it stop me from partying.” Older folks recoiled in horror, rightly reminding everyone that they were most at risk, and imploring young people to act responsibly for everyone’s sake. The backlash elicited a social media apology from Sluder in which he reminded his peers that his generation has a duty to follow the recommendations of scientific experts.
But instead of apologizing, the 22-year old Sluder could equally have asked a tut-tutting 68-year old Larry and the rest of the BRT signatories a question: if you favor top-down, government-led action to protect against something that’s a greater risk to your generation, why don’t you favor the same approach for something that’s a greater risk to my generation? Or do our current crop of business and political leaders really believe that we need aggressive government action to address threats to baby boomers, whereas bankrupt free market theories are good enough for Gen Z?
In finance, there’s a saying that “everyone talks their book,” meaning they promote what’s in their financial interests (such as telling people to buy a stock you own, or sell a stock you’re betting against). The reason everyone in finance says it is that it’s generally true: read people’s incentives and you’ll understand their behavior. And when I look at many political and business leaders today, I’m not sure I know whose book they’re talking. Is it society’s or their own? A long enough timeline of risks and rewards crosses generations. Most of the wealth in the economy is controlled by the baby boomer generation. Will the elites of their generation voluntarily sacrifice a system that has made them fabulously wealthy?
We all know the standard objection to this line of questioning: they’re in the same boat as everyone else on sustainability issues, since they have their own children and grandchildren and have to care about the planet and future generations and so on. Yes, but don’t forget: those least capable in society will bear the highest costs of climate change, whereas those getting vastly richer right now and their kin will generally be okay, especially if they have a lot more in the bank by then, and have no real incentive to fight inequality or other social ills today if it might mean higher taxes. Since the year I was born, 1978, CEO pay has risen 1,167% while worker pay has risen only 13.7% in the same period. CEOs now get paid 320 times as much as the typical worker in their industry. If you pay someone enough to retire after a year, do they really need to worry about the long-term?
In the United States in particular, the high-growth, inclusive capitalism of the post-World War II period bears little resemblance to the capitalism we see today — one in which marginal tax rates on the richest have plummeted, inequality has skyrocketed, entire regions have been decimated, competition has declined considerably, and the natural environment has been ravaged. I’ve lost count of how many times I’ve heard baby boomers complain that younger generations don’t believe in capitalism. Yes, and there’s an obvious reason for that: a generation of leaders that has done extremely well in recent decades is refusing to let go of a particular version of capitalism that has made them rich and powerful but is increasingly damaging society. And instead of reforming the system, they’re feeding us dangerous placebos intended to preserve the status quo. Has anyone ever bothered to ask how capitalism had better outcomes in the post-World War II period, even though the acronym ‘ESG’ didn’t exist yet? Or how we achieved those outcomes despite having no parallel financial system of premium-priced ‘green’ products that claimed to help undo the damage done by the regular financial system, or to address issues that are clearly in the remit of elected politicians and government?
This would be less irresponsible were it not so obviously clear that business leaders must know that what they’re peddling won’t work over the long term. Most of them absolutely must know by now that the incentives of the system do not, in the aggregate, lean toward the outcomes they claim to want and need from that system. As it stands, the system is so focused on squeezing out profits as fast as possible that the private sector, which has aggressively lobbied for less rules and referees, is now reacting to society’s growing angst about our direction by selling a host of overpriced ‘green’ products with little to no real-world impact into the resulting void: good for profits in the near term but terrible for society in the long run. And faced with growing public doubts about the wisdom of self-regulation, especially after their pursuit of self-interest has damaged society for decades, business leaders are now arguing that, in this wonderful new world, profits and purpose now magically overlap all by themselves.
Make no mistake: athletes arguing for self-refereeing in 2021 know well that this may be met with skepticism from the public, especially if said athletes have been playing dirty for decades because it wins games. Is it any wonder that those athletes would feel pressure to begin claiming that good sportsmanship is the new key to winning games? It’s easier to convince someone that you’ll adjust course and start doing the right thing if you can convince them that it’s now in your self-interest too. Don’t worry, things are different now — you’re preaching to the choir! Having once drank the Kool-Aid myself, I understand exactly why it’s an alluring idea and cast no aspersions on those who work in the industry or believe many of its claims. But as a trained investor who tried to drive what the Guardian newspaper recently called “arguably the biggest, most ambitious, effort ever to turn Wall Street green,” it’s an idea that I can confidently say is now more a marketing narrative than any reflection of reality.
It’s hard to avoid connecting this back to the global financial crisis just over a decade ago. Back then the incentives of many in the financial services industry was to take on excessive and imprudent risks to juice near-term profits, allowing them to collect fat bonuses year after year. Strategies like that were often described as picking up pennies in front of a steamroller: small gains for years until the whole thing comes crashing down and you lose everything. But when the risks they took eventually caused the entire edifice to collapse, they avoided any kind of punishment and kept all their prior years’ earnings and bonuses, leaving the public with the bill to fix the mess afterward. Many later claimed that the bankers were stupid for bringing this onto themselves. They weren’t stupid: they kept the pennies and left the public to get run over by the steamroller. Today, given the short-term financial incentives of many business leaders, they profit most from maintaining a status quo in which they can delay tax increases and overdue regulation in order to squeeze out as much in share price appreciation and bonuses as possible. And all of this creates a long-term mess that someone else — meaning the public and future generations — will have to pay the bill for later on. Pennies in shareholder value today, steamroller for someone else tomorrow. Sound familiar?
Saving capitalism from so-called capitalists
If you actually believe in capitalism, you should be upset: a generation of leaders is ruining everything by defending a skewed version of the system that has disproportionately benefited the few at the expense of the many, irreversibly damaged our natural environment, ‘captured’ regulators to serve their narrow interests, and loaded the government with mountains of debt that future generations will have to deal with, destroying the public’s faith in politics and democracy and raising the risk of not just climate shocks but political ones too.
For years now we’ve been buying a cheap knockoff placebo and calling it the ‘prevention’ — and all that’s really happening is that the eventual bill we’ll need to pay for an actual ‘cure’ is silently rising. And when that bill comes, we’ll have no money left because everything has been milked dry. This is not limited to business leaders only. Politicians, who tend to face reelection every few years, don’t have an incentive to tell people that Santa Claus doesn’t exist if they can point to a vaguely plausible (but ultimately ineffective) way to maintain our current way of life. Greenwashing a product is one thing, but this amounts to something far worse: this is greenwashing our entire economic system.
In 1954, the tobacco industry paid to place a one-page “Frank Statement to Cigarette Smokers” in major US newspapers. The statement argued that the science linking cigarette smoking to cancer was inconclusive, and then offered people a reason to trust them: “We accept an interest in people’s health as a basic responsibility, paramount to every other consideration in our business.” As we know now, the main goal of that publication was to delay long-overdue government regulation, protecting existing lines of profit at the public’s expense.
Similarly, a recent study on the Business Roundtable’s 2019 statement on ‘stakeholder value’ showed that of the companies who responded to the researchers’ request, 98% disclosed that they had not sought or received Board approval for signing onto the ‘all stakeholders’ statement. A recently updated version of the study adds that 85% of the signatory companies didn’t even mention joining what they called a ‘historic’ statement in their proxy statements to shareholders, and none of the 19 companies that did mention it suggested that it would change how they treat stakeholders. This led the authors, both professors at Harvard Law School, to conclude that the statement was most likely “a mere public-relations move rather than a signal of a significant shift in how business operates.” As Mark Twain once wrote, history doesn’t repeat itself but it does rhyme.
After a tumultuous few years, most will accept that we need to reform the system. But it’s important that we’re fully aware that the system will react the way we’ve learned it always does, trying to protect profits at all costs, including by convincing us that we don’t need to change the rules. At its core, the BRT’s statement is little more than that, whether its architects admit it to themselves or not. And it’s causing precisely the placebo effect that it’s designed to have: the deadly distraction works across the board, pretty much across all major segments we tested. But whereas younger progressives, who are increasingly skeptical of business, weren’t really affected by seeing the sustainability headlines, older progressives were a whopping 57% more likely to latch onto the idea that there’s no need to fix the rules — voluntary compliance is just fine.
In fact, older progressives suffer from the deadly distraction more than any other group we identified. Their age is a hint why: those most invested in the status quo are the least likely to want to change it. But when they’re progressives, they also need a way to feel better about maintaining a status quo that benefits them, so any fantasy that combines business as usual with moral satisfaction flies off the shelves. It turns out that everyone really does talk their book. Should we really be surprised that there’s a temptation to answer a very inconvenient truth with a set of rather convenient fantasies?
I decided to speak out about it because somewhere out there, a kid in Bangladesh is going to bear the consequences of our inaction. Increasing cyclones, floods, and extreme weather conditions will cause her and her family to lose their livelihood and turn into economic migrants — even though they have next to no carbon footprint themselves. I thought that in returning to the finance industry with BlackRock I would be helping to change that.
Instead, I was contributing to a giant societal placebo that was lowering the likelihood that we’d ever implement the kinds of concrete reforms that she and billions around the world need right now, and then working to protect wealthier people’s investment portfolios from the carnage that would unfold as a result. And somehow this was being sold to the public under the guise of responsible business. In sounding the alarm, my hope is to expose this illusion for what it is: a dangerous fantasy that primarily serves the interests of the oldest and the richest, and all at the expense of the youngest, the poorest, and the most diverse and historically underserved communities in the world today.
To fix the system, we need to fix the rules
A popular meme doing the rounds late last year involved the Back to the Future movie series. Doc Brown, played by Christopher Lloyd, is wearing his characteristic eyes-bugging-out crazed-scientist expression as he looks off into space and shares an important warning about using their makeshift DeLorean time machine with Marty McFly: WHATEVER YOU DO, DON’T SET IT TO 2020! The most important decade so far in the fight against climate change began with a thud, ushering in ‘the Great Lockdown’ and the economic downturn that it entailed.
It didn’t start out that way for most of us. I kicked off 2020 in West Africa. Joining friends from college, I made the trip to Ghana as a part of the Year of Return initiative championed by Ghanaian President Nana Akufo-Addo, who invited those of African descent to return to the continent in 2019. The date was chosen for its symbolism: it was the 400 year anniversary of the date that the first slave ship left the coast of Africa bound for Jamestown, Virginia, in 1619. Though I don’t think I counted in the way Akufo-Addo meant — my parents were born and raised in Kenya but are originally of South Asian descent — I felt privileged to join close friends as they retraced their roots and explored the rich history and origins from which their ancestors were unjustly wrenched. We made a day trip to visit one of the slave castles along the coast, seeing firsthand how up to 1,000 males and 500 females were shackled in dungeons littered with human waste as they awaited transport to a land in which they would be treated as private property. No light, no ventilation, no water, no sanitation, no space to lie down, and absolutely no human dignity. While it’s possible to read about it from afar, visiting in person meant not being able to look away or change channels when it became uncomfortable, and thus appreciating fully just how vile the crime against humanity really was.
We also had less sombre events planned. This included various music festivals, including one called Afrochella that was poorly organized but still a blast thanks to the energy of the crowd. The Ghanaians in general were jovial and friendly, and frequently in possession of a trait I’m not as used to seeing all that commonly elsewhere these days: a dogged ability to see the brighter side of things. After attending a concert for Nigerian afrobeats artist Burna Boy on our first night, we were stopped by multiple police checkpoints on the way back to the hotel. Even they eventually smiled as they inevitably shook us down for bribes. I ended up building a rapport with a police officer named Winsom, who was around my age and couldn’t hide very well that he was actually a decent chap beneath the whole act. I’m not sure how surprised I was that they set up checkpoints, searched people, and looked for any opening to extract a bribe. Their pay is a pittance. It seemed like so many other locals were benefitting from the massive and historic influx of well-heeled foreigners — hotel workers, wait staff, merchants, and so on. It’s not hard to imagine that when everyone else is making out like a bandit, the guys with automatic weapons strapped to their chests all day long eventually wonder why there’s nothing in it for them too.
From Winsom’s perspective, the honor of the badge and a sense of civic duty didn’t matter as much when no one else believed in or lived by those things either, including corrupt government officials and businessmen who play the system to their advantage at any and every chance they get, dodging taxes, regulations, and rules and norms intended to protect the public whenever they become inconvenient. While it didn’t justify corruption, I understood why, in that situation, Winsom decided that it was his big chance to make sure he could afford holiday gifts for his wife and his mother. And the fact is, given how the rules of the game are designed and enforced there, doing this was probably a fairly rational economic choice for him.
When the rules of the game are drawn and enforced in such a way, how much at fault are the players for playing the game the way they do? In a recent Netflix comedy special, Dave Chappelle brings up an important but often underappreciated point around the anti-apartheid struggle in South Africa: that Mandela and other figures of the resistance supported the Truth and Reconciliation Commission because they believed that the system of Apartheid was fundamentally corrupt and at fault, meaning the participants in that system were to some degree also victims. Most people just play the game based on the way it’s laid out for them, and generally pursue what’s in their self-interest. To radically change that, the system itself needs to be held to account and changed.
These thoughts were all in the back of my head when I was introduced recently to yet another bright young person who was interested in talking to me about sustainable investing. This time it was a Harvard Business School student in her second and final year. She was President of the Impact Investing Club and had just interned with BlackRock, focusing, of course, on impact investing. Her CV read like someone who was more into purpose than profits: social impact is referenced 16 times and poverty alleviation scores three mentions, whereas profit isn’t mentioned once. In many ways, she reminded me of Clara from the H&M Foundation. Both struck me as intelligent, capable, and passionate above all else about creating a more sustainable and just world. And both ended up connected to private sector initiatives that arguably only serve to delay overdue rule changes by encouraging a dangerous illusion; that the changes we need will be led voluntarily by businesses, all acting of their own accord based on a vague promise to be responsible and focused on a broader set of stakeholders.
Sweden’s H&M Foundation divides one million euros annually to the five winners of the Global Change Award. By contrast, I wonder how much H&M saves by not paying the negative environmental costs of their business activities? The comedian Hasan Minhaj gave a hint on an episode of his award-winning Netflix show Patriot Act, in which the comedian laid into Zara, H&M, and the rest of the fast fashion industry for the dubious sustainability claims they make in order to mask the growing environmental damage their business models cause. “In 2015, textile production created more greenhouse gases than international flights and maritime shipping combined. Do you understand what that means? The clothes in your suitcase are screwing up the planet more than the flight you put them on.” It turns out that not even the envied Swedes, who sometimes seem like they’ve got it all figured out, can escape the ill-effects of an economic system that currently rewards appearing sustainable more than it does actually being sustainable.
Every year, companies invest more and more in sustainability initiatives. The tools, such as ESG data and reporting standards, can be useful since they help us to start measuring the side effects we need to manage better, and the people, who bring sustainability expertise, are also critically needed. But the overarching narrative that these alone will matter without rule changes risks rendering all of these efforts meaningless or even counterproductive. Having coaches who teach clean play doesn’t do much if cheating and dirty play still wins games. Should we wait for profits and purpose to magically overlap on their own, or does an outside and rather visible hand need to enforce new rules of the game to make it happen faster?
The nine words we need to hear right now
The film Independence Day was released when I was 17. The 1996 summer blockbuster starred Will Smith as a fighter pilot and Bill Pullman as US President, depicting the two as leaders in the world’s fight back against ruthless alien invaders. A few friends and I eagerly took the bus to the local mall and got prime seats for one of the first showings. It was epic. One had to ignore the kinds of odd and implausible things that occurred regularly in 80s and 90s movies like this one and Back to the Future, particularly the ones that caught the attention of early computer geeks like us. Wait, how did they upload a virus to the alien mothership? Were the aliens using Microsoft Windows 95 too? How advanced could they possibly be?
The scene I remember most was when the US President, a former fighter pilot himself, gives a riveting speech just before leading a final aerial assault to bring down an alien vessel. People in the cinema cheered after his speech — it was electric. We instinctively knew that an alien invasion was a large-scale systemic problem, the kind that required an all-hands-on-deck coordinated response of the type that only an elected government can and should provide.
Global pandemics are a lot more like alien invasions than you might think. Both are macro, systemic risks that endanger all of society, and therefore ones against which you’d expect the US President to assume center stage in leading the response. All of which made President Trump’s press conference last March, as COVID-19 first hit American shores and at the height of uncertainty, all the more bizarre. Having to this point appeared largely in denial about the threat, the President now seemed to almost recognize a growing lack of public confidence, so he stepped aside to let big business speak. One by one, the CEOs of America’s largest corporations stepped to the podium and outlined how they would help in the response: Target, Walmart, Walgreens, CVS, and others. As the American people stared down the barrel of a crisis for which their government was thoroughly unprepared and whose death toll may double that of World War 2, the US President, himself a former high-profile CEO, made way for a group of corporate CEOs to outline their plans. “Celebrities in their own right!” he proclaimed.
We would definitely not have cheered if Independence Day had depicted a President who was unprepared or incapable of using the democratic legitimacy and special powers of their elected office to organize our collective efforts, public and private, to fight a grave systemic threat. And if anyone were to join him on stage at this critical moment, we’d have accepted Will Smith in air force fatigues. The CEO of Walgreens, not so much.
The press conference was in some ways the logical conclusion of a key line in Larry’s 2018 letter, in which he argues that because governments are “failing to prepare for the future… society increasingly is turning to the private sector and asking that companies respond to broader societal challenges.” He was right, that is indeed happening. But another line should have followed it: “However, for the most critical systemic challenges we face, corporate executives cannot and should not take the lead. The business community will necessarily have a critical role to play, given that the private sector accounts for most of the capital and jobs in our economy, but it cannot lead. It is neither structured to serve this role effectively nor does it have the democratic legitimacy required. Instead, we must work together to fix rather than bypass our public institutions and democratic processes.” That political deadlock makes this path difficult does not change the fact that it’s the most important route for the systemic solutions we need, nor does it absolve business leaders from the responsibility to make that point loud and clear, even if it feels uncomfortable and does not suit their own short-term interests. If not, what on earth do they mean when they talk about leadership and business ethics?
There’s no question there are many problems that governments cannot solve, and in which its involvement can muck things up and erode efficiency. But climate change, inequality, building a truly inclusive economy, and a wide range of other issues under the “sustainability” umbrella have something in common with alien invasions and global pandemics: they are broad, systemic problems for which we require shared, systemic solutions that must be decided through democratic processes.
In my role at BlackRock, I was helping to popularize an idea that the answer to a sustainable future runs through ESG and sustainability and green products, or in other words, that the answer to the market’s failure to serve the long-term public interest is, of course, more market. A bit like the NRA’s traditional answer to mass shootings and related concerns around public safety — the answer is more guns, of course — we were pushing solutions and products that would result in no real change, and only served to distract us from what actually does work. (Ironically, one of the first high-profile projects I worked on involved building new investment vehicles that helped investors divest of gun makers after the Parkland School shootings. In the end, practically no one bought them, there would have been no real-world impact if they had, and gun violence in the US reached the highest level in twenty years in 2020.)
I believe in the power of the market. But we’re not only allowed to act as active rulemakers, we’re supposed to. No rules, no market. Like professional basketball, every rule is intentional. And those rules, and the market economy that results, serve society, not the other way around. Asking the close to half of Americans who don’t have $400 in the bank for an emergency, or those most exposed to the effects of climate change, to indulge the market’s attempts to fix itself all by itself in 2021 is a bit like the wolves who have eaten half of the sheep over the last few decades proposing a plan to self-police themselves going forward. Exhortations to good sportsmanship won’t convince Exxon to voluntarily forgo the short-term profit potential of extracting fossil fuels, Facebook to stop using data and algorithms to create addictive behaviours that damage the mental health of youth in order to sell ads, or Walmart and McDonald’s to stop paying their employees so little that large numbers of them need government support to feed their families. If we really want results, it’s time we gave new marching orders to the referees who work for us.
The goal of this essay is to clearly communicate the dire need for urgent government action to address systemic problems, not to spell out the specific policies any government must enact: there’s no shortage of expert policy ideas to address these problems, and most will vary in the details from country to country. But our experience with COVID-19 provides a useful template for action with respect to the climate crisis: flatten the curve with one hand, assemble an escape plan with the other. To address the pandemic, governments followed expert advice, flattening the curve by restricting travel, closing high-risk venues, and making masks mandatory indoors. To bend down the greenhouse gas emissions curve, governments should immediately adjust system-wide market incentives, such as replacing fossil fuel subsidies with a price on carbon, and institute new performance standards to guide industry, such as vehicle emissions limits and energy efficiency standards for buildings. And while flattening the COVID-19 infections curve with one hand, governments aggressively spurred the pharma industry to rapidly produce safe vaccines through direct R&D funding, massive pre orders and emergency approval processes. Similarly, to help us avoid the more extreme and unpredictable warming scenarios, governments must implement a version of ‘Operation Warp Speed’ for new technologies that address the climate crisis, including investing in base research in key areas and creating the incentives for private industry to invest in renewable power and technologies that remove carbon from the atmosphere and store it underground.
For all of the scars that COVID-19 will leave on this decade, there is a brighter side, the Ghanaian view, if you will: it offers a blindingly obvious hands-on lesson of Benjamin Franklin’s aphorism that an ounce of prevention is worth a pound of cure. Now that we’ve seen that a laissez faire approach to individual behavior doesn’t effectively flatten the COVID-19 infections curve, we have no excuse to indulge in the fantasy that a similar approach will bend the greenhouse gas emissions curve downward. If we can see the wisdom of mandatory and systemic approaches in response to something that science tells us is spreading and kills quickly, then we can do the same for something that science tells us is spreading and kills slowly. As the history of the 21st century is written, COVID-19 may be the warning we needed, like stepping on a pinprick — extremely painful, yes, until you realize if it hadn’t happened you wouldn’t have looked down and noticed a landmine a few steps later.
But it wasn’t my place to say any of this when I represented BlackRock. There’s no doubt in my mind that organizing politically to enact aggressive climate legislation is a better route to fighting climate change than buying a low carbon ETF. But only one of those helped our next quarterly earnings report and would be the focus of our massive sales and marketing push, drowning out the boring experts and their repeated warnings. And for what it’s worth, I’m not sure any of that is surprising on the part of BlackRock or any other major financial institution, just as I’m not sure how much I could blame Winsom for the decisions he made. That’s just the game.
That’s why people desperately want the game fixed: in the United States, seven in ten people believe that the economic system is rigged to benefit the wealthy and powerful. (And that was before the pandemic.) And their views on who can help them solve that are evolving fast: our study found that nearly two-thirds of Americans were looking more to government to lead the fight against COVID-19 by August than they were six months earlier. Nearly half of Americans felt that government should be playing a “much larger” role. I have a hunch that this occurring concurrently with the Trump administration’s response to COVID-19 is less a reflection of the “great job” the former President claimed to have done and more a growing recognition of the unique powers of government to deal with a systemic crisis of this nature. In the face of a broad and shared risk, people want a leader who steps up and leads — that long-awaited Independence Day moment.
We need political leaders who are competent, evidence-based, and sufficiently non-partisan to focus primarily on how we can fix the rules of the game. Most politicians and business leaders would agree with this if they only first accepted a key prerequisite that many have been avoiding for many years now: creating the systemic change we claim to seek means shedding a love affair that has persisted for decades with the illusion that, left to its own devices, the market will magically serve the long-term public interest. The market will not solve rampant and rising inequality all by itself. Nor will the market somehow self-regulate to solve the problem of climate change — a ludicrous idea, given that climate change is widely considered the greatest market failure the world has ever seen. It’s time we all finally accept that only a supreme, overarching authority with democratic legitimacy can and should be leading the way in coordinating our efforts to solve these problems, beginning with uncomfortable rule changes — ones that don’t all have to be bad for business, but can certainly no longer remain business as usual.
Fortunately, we already have such an entity in place. Just as no professional basketball game would magically spawn from thin air without the league setting up rules and hiring referees to enforce them, we too have a structure in place that has enabled us to move from political philosopher Thomas Hobbes’ nasty and brutish “state of nature” to a carefully regulated system of competitive markets and free enterprise through a legal system, property rights, courts, and other structures to protect our shared interests. We all have an equal say in how these rules and enforcement mechanisms are devised, building trust and enabling millions to act primarily in their own self-interest yet collectively align around a shared public interest.
It’s time to accept that there are nine words that we need to hear, because we can only build a sustainable future once we’re no longer terrified to hear them.
I’m from the government and I’m here to help.
This is the third and final part of a three-part essay that 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.)
