ESG and sustainability investing are deadly distractions in the climate crisis.

“No demonstrable impact” is a pretty big problem. How did you reach this conclusion?  

While leading the charge to incorporate environmental, social and governance considerations into all of our $8.7 trillion of investment activities at BlackRock, I started realizing that there’s not a lot of value at all in this data. It didn’t — and it does not — work in most [investment] strategies, since many are short-term and don’t care about long-term issues, and also because, frankly, acting irresponsibly is often profitable. I realized this data was not at all useful to invest in, or at least not nearly as much as [Fink] was implying. It was mainly marketing. Worse, I also started to realize that all the stuff on “stakeholder” capitalism was hollow marketing — it seemed almost intended to dupe the public into believing that we don’t need the overdue government regulation that we need immediately to address the climate crisis.

One concern you mentioned is that ESG performance incentives are not aligned to short-term business goals.

Yes. I looked at CEO tenure: It is the shortest it has been in decades. CEO pay is the highest it has been in decades. That was worrying. The system works according to incentives and self-interest. And if their incentives and self-interest are on the next five years, and there’s a problem whose impacts may become more acute 20 and 30 years away, then it’s unlikely they’ll act quickly enough or aggressively enough to address what is clearly in the long-term public interest.

So what is an alternative to ESG?

ESG as a measurement standard has value. But using vague ESG information alone as a mechanism of change is disastrous. It doesn’t work and creates a giant societal placebo where we think that we’re making progress even though we’re not.

As the old saying goes, what isn’t measured isn’t managed. Measurement is not enough. That data needs to be managed in a way that changes the underlying incentives of the system, correcting the market failure that is at the heart of our climate crisis. That has to be a systematic solution and can only come from government leadership. For climate, you need real regulation. If you don’t want Goldman Sachs to finance something, just make it illegal. Or far less profitable. But don’t ask them nicely or rely on them to suddenly be ethical. That’s not how the system works, and we’ve seen time and time again that relying on Wall Street and big business to “self-regulate” is a recipe for disaster. Experts have said for decades that we needed systemic solutions at the government policy level to address the climate crisis. That has to begin with a price on carbon. It is the only way to get the entire market to react.

Aren’t a lot of fund managers starting to think about divestment?

Divestment never made sense. I always found it odd that people go one by one, and they say, “Hey, we’ll divest from you. We’ll pressure J.P. Morgan to stop lending.” It’s like playing whack-a-mole. There are 10,000 more holes, and you’re just hitting them all day.  

Yes, you’ve said that strategies like divestment are a distraction from the needed focus on systemic solutions to the climate crisis.

Imagine if, in the 1960s, Dr. Martin Luther King Jr. decided to fight his fight for human rights through asking people to use their 401Ks to divest of companies that discriminated against Black people. It would have done nothing and been pretty ridiculous given the urgency and importance of the issue. Instead, he said these companies are based in our country, and we’re a democracy, so we can change the laws and compel them to do what is just and in the public interest. And they marched on Washington to demand that the government use its powers to ensure that human rights are respected across the country and enforced by law.

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