Do not get Dorian Deome started on the bureaucrats investing his life savings in this trendy, newfangled thing they call environmental, social, governance, or ESG, funds. He blows up. Which is dangerous. Deome suffered a massive heart attack in May 2020 at age 38.
“My heart literally skips a beat when I think about how my money is used to fund actual racism,” he told me.
He meant diversity, equity, and inclusion training programs; racially calibrated corporate boards; the obsession in human resources departments with elevating marginalized voices, often at the expense of white men like Deome—and all the other things that make for ESG compliance.
But he has zero pull when it comes to how his retirement funds are invested. He’s a cog in the machine: Deome lives in Olympia, Washington, and processes unemployment insurance claims for Washington State, for which he is paid about $43,000 yearly. The Department of Retirement Systems decides where to invest the $178 billion it oversees. And Washington, with its Democratic governor and state legislature, loves ESG.
In fact, in 2019, the Washington State Investment Board, which oversees state employees’ pension funds, hired a sustainability officer to “integrate ESG factors and metrics as part of the investment process,” WSIB spokesman Chris Phillips said.
And yes, the money is a big part of this too, at least for Deome. “I definitely am concerned that my retirement savings is never going to really grow,” he said.
Same for Cindy Williams, in Phoenix.
Williams was a lawyer with the Veterans Administration; now she does insurance coding for a private hospital, and she’s worried her federal pension and 401(k) are going to underperform, because both funds are big on ESG.
It’s not that she’s against the asset managers who handle her company’s pension fund investing in green energy. “I have no objection to saving the planet,” said Williams, who is 62 and lives with her mother in a retirement community. “I just don’t want to lose my money. They’re more concerned about their idea of improving the world than they are with whether it actually improves my life.”
In 2022, eight of the top ten actively managed ESG funds in the United States fared worse than the S&P 500’s 14.8% decline—compounding long-percolating fears that ESG is a ruse.
When those fears first emerged, there were just a few voices willing to stick their necks out: Chamath Palihapitiya, a prominent venture capitalist, took to CNBC in February 2020 to call it a “complete fraud”; Tariq Fancy, who used to oversee ESG investing at BlackRock, the powerful asset management firm, published a blog post in August 2021 arguing ESG was just a label the firm slapped on funds to charge higher fees. But they were outliers.
Over the past several months, however, the momentum has picked up. Now a growing cadre of executives, lawyers, and Republican officials has taken to lashing out against what it views as social justice parading as a serious investment strategy. The backlash reflects a growing sense that millions of Americans—those who do not subscribe to the new orthodoxy around DEI, the climate, and “stakeholder capitalism”—feel ignored by, and even at war with, the institutions charged with protecting their interests.
Former attorney general William Barr, who served under Donald Trump, told me ESG is “a form of extortion” that is forcing “companies to take particular actions whether or not those actions are in the financial interests of shareholders.”
What is most disturbing about ESG, Barr told me, is the way it’s being implemented. “It’s completely non-transparent,” he explained. “And that, to me—that’s the worst. That is affecting a lot of decisions in corporate America in a non-transparent way, because of the political predilections, or the policy predilections, of a small group of people who are not using their own money, but leveraging off other people’s money.”
It started in the early aughts.
“The actual birthdate of ESG investing will be hard to pin down,” Terrence Keeley, a former managing director at BlackRock, told me.
At the time, it was just some activist investors who wanted to talk about “long-term value investing,” Keeley said.
That meant thinking about rising sea levels, rising temperatures, disappearing species, and climate refugees to assess the financial risks—and opportunities—that came with all that.
The challenge was getting other people to pay attention.
Enter Paul Clements-Hunt.
Clements-Hunt had been a tabloid journalist in London before pivoting to environmental consulting in Bangkok, before making his way, in 2000, to the United Nations’ Environment Programme Finance Initiative in Geneva.
His goal was to spur big, wide-ranging action on climate change by incentivizing the people with the most money—the asset managers, the people in charge of the biggest pension funds, and the sovereign wealth funds and stock exchanges—to take seriously the dangers on our horizon.
“Our standpoint was this is not about ethics,” Clements-Hunt told me. “Our standpoint was investors should look at new risks, and while understanding those risks, they then begin to appreciate new market opportunities as well, whether that’s in clean energy or water or sanitation or biodiversity protection,” he said. “It was really a fundamental business approach, and it was removed from morals.”
In the early years—in 2001, 2002, 2003—the focus was on not just the environment but occupational safety. Eventually, that morphed into “governance”; later they threw in “social,” as in social issues. It was kind of a catchall.
The question was how to package it—make it stick in people’s minds.
One day in the spring of 2004, Clements-Hunt recalled in a Medium post, his colleagues and he were in his office when they coined the three-letter acronym that they hoped would click with investors. That would lend the movement a hint of cool.
In June 2004, the United Nations published a report called “Who Cares Wins” that introduced “ESG” to the world.
For years, no one in finance paid attention. Most people in New York, London, Shanghai, and Hong Kong had no idea what ESG meant.
Then came the 2008 financial crisis. The credibility of banks evaporated. Suddenly, so-called sustainable investing sounded like a good idea. “I think they saw that to regain trust, they had to be more active in what became the ESG space,” Clements-Hunt told me.
By 2012, asset managers had funneled $4 trillion into the ESG space. Over the next several years, that figure would jump at a clip of roughly $1 trillion per year.
Then, in June 2017, the new president, Donald Trump, pulled the United States out of the Paris Climate Accords, arguing it hurt American business. Believing Washington, DC, had turned its back on the environment, Democrats across the country picked up the baton. Suddenly, governors and controllers overseeing multibillion-dollar pension funds in blue states viewed themselves as the country’s last best hope to save the planet, and they made it clear to asset managers that they wanted their money invested only in pro-ESG companies.
“The mandate they gave them was basically, ‘We’re not going to do business with you unless you adopt a firm, wide commitment to events and goals like the Paris Climate Accord, and net-zero greenhouse gas emissions by 2050, and diversity, equity, and inclusion standards,” Vivek Ramaswamy, the head of Strive Asset Management in Columbus, Ohio, told me. Strive portrays itself as the anti-ESG asset manager—its website says the company seeks “to restore the voices of everyday citizens by leading companies to focus on excellence over politics.”
It was around this time—late 2017, early 2018—that “ESG” started to become a thing, with the number of Google searches for “ESG” starting to tick up.
The rise of ESG also coincided with a reassessment, at the highest echelons of corporate America, of the meaning of capitalism. In August 2019, the Business Roundtable, a group of the nation’s leading CEOs, issued a statement signaling a shift away from traditional “shareholder capitalism”—which focuses on the bottom line—to “stakeholder capitalism,” which takes into account the interests not only of investors but those of the wider world. The statement endorsed diversity and inclusion and called for “embracing sustainable practices.”
By 2021, asset managers around the globe had plowed $18.4 trillion into “ESG-related” investments. And by 2026, asset managers are expected to invest nearly $34 trillion in ESG funds globally.
As Paul Clements-Hunt told me, ESG is now “baked into the DNA” of the global financial services industry, and countless companies are scrambling to burnish their ESG scores.
Who has the best score? That’s complicated, given that there’s little consensus about how a company lands a good or bad ESG record, and as a result there are many conflicting ESG rankings.
Insider Monkey, a financial information website, says the best ESG company is Alphabet, the parent company of Google. Investor’s Business Daily insists Columbus, Ohio–based Worthington Industries, which builds the propane tanks in barbecues, is number one. Most ESG rankings have a thing for Apple, even though it’s been accused of relying on slave labor to build its iPhones in China.
Just as ESG was taking off, the skeptics started popping up—including Tariq Fancy.
For 15 years, Fancy ping-ponged around the world—from Merrill Lynch in New York, to Credit Suisse in Silicon Valley, to a social media marketing company in Shanghai. He made boatloads. After watching a friend die of cancer, he moved home to Toronto and launched a nonprofit that helps poor kids learn. That piqued the interest of BlackRock executives, who, in 2018, offered him a job: Chief Investment Officer for Sustainable Investing.
BlackRock, of course, is not just another Wall Street titan. Being one of the Big Three asset managers, along with Vanguard and State Street, it oversees more than $10 trillion in other people’s money. It is invested in thousands of companies around the world. (That includes major stakes in Apple, Microsoft, Wells Fargo, Deutsche Bank, Disney, and almost every major energy company.) It is more valuable than the economies of Germany and Japan—combined. When BlackRock says it cares about environmental, social, and governance issues—as CEO Larry Fink announced in his 2019 letter to the CEOs of every company BlackRock invests in—that is felt in boardrooms in every major city on Earth.
In the months leading up to Fink’s announcement, BlackRock built its ESG team—bringing on board, among others, Tariq Fancy.
But by the end of his first year at BlackRock, in 2019, Fancy was having doubts about ESG. That came to a head while he was on a BlackRock jet flying from Zurich to Madrid to attend a conference.
“I had a disagreement with some folks from the sales team, who, it was obvious to me, viewed the mechanics of how the funds work as irrelevant,” Fancy said. What they cared about, he said, was selling as many of these funds as possible. He called ESG “green paint on the existing system.”
He was not alone.
Carson Block, founder of San Francisco-based Muddy Waters Research, which conducts research into publicly held companies, said: “ESG investing, from the fund managers to the managements of the companies themselves, is almost entirely a giant grift.” All ESG does, Block said, is repackage existing funds. “ESG is just bullshit tweaks at the margins.”
Indeed, between 2019 and mid-2022, at least 65 funds were “repackaged” into ESG funds with an eye toward drawing more investors and charging higher fees.
It’s unclear what a company must do for it to be part of an ESG fund. Broadly, it should strive for decarbonization, especially if it’s in the energy and utilities sector. Its board should include at least one woman, one member of a racial minority, and one representative from the LGBTQ+ community. (ESG enthusiasts are at pains to show that diversity equals higher margins.) It should definitely not invest in Russia.
But there’s a lack of concrete proposals, benchmarks, and numbers.
“It’s important to understand the multiple ways that environmental, social, and governmental factors can create value, but when it comes to inspiring those around you, what will you really be talking about?” a 2019 McKinsey report asked unironically. “Surprisingly, that depends.”
Aswath Damodaran, a finance professor at NYU’s Stern School of Business, said in an email: “ESG is a scam, an idea that was born in sanctimony, nurtured in hypocrisy and sold with sophistry. The inhabitants of this space are either useful idiots, who think that they are making a difference to society when they are, in fact, just pushing problems behind curtains, or feckless knaves, who use it to make money. The only healthy endgame for ESG is another acronym: RIP. And it will not be a moment too soon.”
The big question looming over ESG is whether it’s legal, given that asset managers like BlackRock have a fiduciary duty to maximize investment return.
Tariq Fancy has his doubts. So does Dorian Deome, in Olympia.
“Pension funds hold $40 trillion in assets across the United States,” Jed Rubenfeld, a former Yale Law School professor who now advises Vivek Ramaswamy’s Strive Asset Management, told me. “And they’re very important. They’re people’s retirement money. That’s what they’re going to live off when they get older and can’t work anymore. And pension funds are under a special legal duty to not do anything with pensioners’ and retirees’ money other than use it to try to increase financial benefits.”
Now, red states are pushing back.
In an August 2022 letter from 19 Republican state attorneys general to BlackRock CEO Larry Fink, the attorneys general hinted they might sue BlackRock: “The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda.”
Last week, congressional Republicans passed a resolution that would overturn a Department of Labor rule allowing pension funds to consider climate change and other factors when choosing companies to invest in. President Biden has promised to veto the resolution. Republicans lack the votes to overturn a veto, but they promise this is just the beginning.
They are fueled, in no small part, by a growing chorus of critics who insist ESG funds make for bad investing.
Nor do those funds generally achieve their goals. On the contrary, a 2021 Columbia University and London School of Economics study showed that 147 American companies that were part of ESG funds had worse compliance records when it came to labor and environmental rules than companies in 2,428 non-ESG portfolios.
“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,” Fancy said in his August 2021 blog post. “We will eventually come to regret this decision.”
So far, none of the state attorneys general have sued anyone. For starters, many Republicans oppose state governments mucking around in their business. And it’s unclear whether there are any grounds for a lawsuit.
Which hints at the real problem, Fancy and Terrence Keeley say: ESG doesn’t do much.
If state attorneys general could point to investments or policies that combat climate change at the expense of investor returns, they’d have a case. But how do you show that?
Better to create the impression of sweeping change—and burnish your brand—than do anything that might change the world and get you in legal trouble.
In October, BlackRock issued a statement clarifying its position on ESG. “We do not dictate how clients should invest,” the statement informed readers. “[W]e offer a wide array of choice.”
Vivek Ramaswamy, for his part, is riding the anti-ESG wave. In February, the self-styled anti-woke investor launched his long-shot bid for the 2024 GOP presidential nomination.
Dorian Deome likes Ramaswamy but sees his White House bid as a way to hawk books. He’s into Joe Rogan. He’s an observant Catholic. The politicians—he thinks they’re mostly a joke. Like ESG.
Understand he’s all for saving the Earth from the climate apocalypse and correcting historical wrongs.
But this didn’t feel like that, he said.
After his heart attack, he spent several weeks in the hospital. He watched the George Floyd protests from his hospital bed, and he scrolled through all the tweets and retweets and videos about America’s racial reckoning, and it felt angry and vindictive.
His doctor diagnosed him with permanent advanced heart failure. He had his doubts Deome would make it to 50. He definitely didn’t think he’d live to 65, when Deome would normally collect his retirement savings. Deome could cash in now—Washington State offers “medical retirement”—but he’d get a lot less. The big thing for him was ESG, and what the state was doing with his money.
So he was going to fight it the only way he could—tweet angrily, be a voice in the wilderness.
“There are other people in the agency who have mortgages, ambitions, careers,” he said, referring to the Employment Security Department, where he worked. He didn’t have those goals. Nor did he have a family, or a girlfriend or kids. His father died in 2021 after a brief battle with Lewy body dementia, and his mother lived nearby, but really it was Deome versus the world, and the world was pushing in on him.
“I also have a bit of ‘damn the torpedoes’ in me,” he said. “In China, they call them nail houses. You can bulldoze all the houses around it but you can’t get the owner to sell it. I’m one of those nail houses.”
Rupa Subramanya is a reporter for The Free Press. Her last story, What the Hell Happened to PayPal?, explored our emerging credit system.
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