Climate change and low-carbon solutions are affecting investors ’portfolios.
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LONDON – A former BlackRock executive has explained why he now thinks sustainable investment is a “dangerous placebo that harms the public interest,” after previously evangelizing the trend of the world’s largest asset management firm.
Environmental, social and governance (or ESG) investment has grown more and more in recent years, mainly as a result of the coronavirus pandemic.
A report released in July that looked at five of the world’s major markets said that this type of investment had $ 35.3 trillion in assets managed during 2020, which accounted for more than a third of all assets in these major markets. And the trend shows no signs of slowing down.
But Tariq Fancy, who was BlackRock’s first global investment director for sustainable investment between 2018 and 2019, warned that there were some fallacies associated with this area.
“Green bonds, where companies increase debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investment, with a market size that has now surpassed $ 1 trillion. In practice, it’s not entirely clear if they create much of an environmental impact that wouldn’t have occurred otherwise, ”Fancy said in an online essay published last week.
This is because “most companies have some green initiatives that can get green bonds to fund specifically without increasing or altering their overall plans. And nothing prevents them from carrying out decided non-green activities with their other sources of funding “. added.
BlackRock was not immediately available for comment when contacted by CNBC on Tuesday.
He also argued that financial institutions have an obvious motivation to drive ESG products as they have higher commissions, which enhances their profits.
According to data from FactSet and published by the Wall Street Journal, ESG funds had an average rate of 0.2% at the end of 2020, while other more standard stock baskets had commissions of 0.14%.
But there are other issues related to ESG’s investment, according to Fancy, including its subjectivity and the unreliability of the data and ratings.
Other industries have questioned the lack of clarity of such investments.
Sheila Patel, president of Goldman Sachs Asset Management, told CNBC last year, “When you think about the composition of ESG funds, it’s important to first remember that they’re still meant to be an invested fund to get a return on the portfolio Thus, they can be inclined based on industrial groups, depending on sectoral views and which may or may not be related to an ESG vision “.
The need to make a profit also leads market players to think about investing in ESG in the short term, according to Fancy. This could become a problem in trying to address climate change and governments ’plans to achieve carbon neutrality in the coming decades.
Fancy used an analogy with basketball to describe the situation in investing in ESG.
“Players have been collectively involved in forms of foul play for decades because they win points and win games. The rules have generally not changed: in most of these cases, foul play can still help maximize points and players continue under strict instructions to earn points and only participate in good sportsmanship insofar as they contribute (or do not subtract) to the scoreboard.In addition, they focus excessively on the short term (think: today’s game), a time horizon in which few believe that good sportsmanship has much to do with points, ”he said.