This Q & A was originally published on Climate & Capital Media and is reprinted with permission.
A few months ago, Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, rattled the finance world by saying that the ESG strategies he had evangelized posed a bigger problem solution to climate change. He called the products of the booming sustainable investing industry "dangerous placebos."
A new paper by Fancy is making the rounds of elite finance and goes one big step further: The private sector’s structural bias towards incentivizing short-term profits and returns makes it incapable of delivering the critical systemic solutions needed to mitigate climate change. Just as short-termism led to the Great Financial Crisis of 2008-2009, he argues, it is a driving force to the greatest market failure ever — climate change.
"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 interest," Fancy writes.
Unwilling to engage in deep structural change, the private sector, particularly the financial sector, he argued, has bluffed its way through the accelerating climate crisis. Fancy points to recent work published by two Harvard professors as part of a larger research project on stakeholder capitalism for Harvard Law School Corporate Governance. They firmly reject initiatives such as the much-ballyhooed Business Roundtable’s Statement on the Purpose of a Corporation as a "mere public-relations move rather than a signal of a significant shift in how business operates."
In a related paper they charge that the "illusory promise of stakeholderism should not be allowed to advance a managerialist agenda and to obscure the critical need for external interventions to protect stakeholders via legislation, regulation and policy design. Stakeholderism should be rejected, including and especially by those who take stakeholder interests seriously."
The emergence of corporate "stakeholderism" should not be surprising given the shrinking role of government in private market oversight. Since the early 1980s, the role of government oversight of markets and the private sector has been marginalized to little more than a lender of last resort. This must change, says Fancy. The days when popular politicians such as Ronald Reagan urged governments to step out of the way of private enterprise are over. And his old boss Larry Fink? "He’s dead wrong when he said, 'I prefer capitalists self-regulate.'" Going forward, the only way to make headway on real climate mitigation, Fancy says, is for governments to reassert their leadership and law-making powers and call the shots on future climate policy.
Intrigued, Climate & Capital checked in with Fancy on his latest cage-rattling efforts.
Peter McKillop: Tariq, you argue that in both the response to the COVID pandemic and climate change, there is a rough consensus on the science. There is also a growing consensus among economic and political experts on the key leadership role government needs to play in both crises. Few objected to governments leading the pandemic response. Yet when it comes to climate change, you believe the private sector thinks it is in charge.
Tariq Fancy: Like COVID, corporate leaders are saying "we believe the science" of climate change. But unlike COVID, they are not challenging a set of seemingly unquestioned assumptions that have persisted since the 1980s that somehow free markets will solve everything. Every single climate solution I’ve seen bandied about seems to almost assume that we live in a world where government does not exist. It’s like a sports field without a referee.
McKillop: You write that it is quite dangerous that corporate leaders are exaggerating the overlap between "purpose and profit."
Fancy: If you’re going to stand on the stage to talk about responsible business and social purpose and about business’ contribution to climate change, there has to be some accountability. If you are actually doing something that’s slowing us down under the guise of responsible business, you need to be held accountable.
McKillop: The idea that governments, not the private sector, should take the lead on systemic issues such as the climate crisis challenges decades of neoliberal, free market, political orthodoxy. Can President Joe Biden make this happen?
Fancy: I think that it’s going to be hard for the Biden administration to do this unless at least a few influential business leaders decide to be on the right side of history on this debate. They can do that by publicly supporting and helping lead a push for true systemic change led by government policy reforms, as recommended by our best economic minds.
Larry Fink? 'He’s dead wrong.'
McKillop: You also argue that large asset owners, such as pension funds, can and should play a critical role in pushing companies to take a longer-term view.
Fancy: Asset owners [pension funds] can step up because they are the clients of BlackRock and other large asset managers. As clients, they are also closer to their public interest and their constituents. Large pension funds have the ability to stand up and help lead a serious debate on these issues.
McKillop: But pension funds often seem split over a short-term need to fund monthly pension checks and how to prepare for the future.
Fancy: Pension funds will realize that if there is government action like a carbon tax, it may hit equity returns in the near term. But the flip side is it is also their fiduciary duty to think about their long-term interests. They presumably know that if you don’t do this now, your long-term equity returns are going to get a lot worse — an ounce of prevention is worth a pound of cure and we’re currently burning time unnecessarily.
McKillop: Isn’t the same true with BlackRock and other asset managers?
Fancy: The challenge for BlackRock is that all the incentives and all of the employees are personally aligned towards the short term. Their focus on BlackRock stock, and most of the [investment] strategies that they’re trying to push, are also very short-term focused. This is quite different from asset owners because they, in theory, should maintain overall a very long-term horizon.
McKillop: Your paper ends on a surprisingly hopeful note.
Fancy: We have the tools in place to regulate a system of competitive markets and free enterprise through a legal system, property rights 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. We should use those tried and tested systemic tools to create true systemic reforms, just as we quickly marshaled them to address the pandemic. We need those tools now to avoid being remembered as having burned years feeding ourselves convenient but highly dubious win-win fantasies — and all while we sleepwalked into a preventable disaster.