Tariq Fancy on Stuart Kirk, the Republicans and what’s next for ESG

Greetings from New York where Mike Pence, the former vice-president, has been all over the airwaves due to the investigation into last January’s insurrection at the US Capitol. He is also haunting the minds of many corporate executives right now — but for a very different reason.

Last month, Pence lashed out at ESG, accusing its proponents of imposing “woke” values on companies. This might seem mere political posturing. But several rightwing state leaders are considering legislation to penalise companies that, they claim, chase environmental, social and governance values at the expense of investors.

This is unlikely to deter the companies which are already adopting ESG principles, least of all given the mounting legal and accounting momentum behind this. But the political backlash is forcing mainstream investors exposed to America to ponder how they can dance between the competing pro-ESG demands of states such as California, and seemingly anti-ESG places such as Texas — not to mention Europe’s regulatory realm.

Should companies and financial groups keep quiet about their efforts to implement net zero targets? Use different language? How does the crashing stock market affect what investors do (or do not) expect? As ever, please tell us what you think.

Meanwhile, the debate about the anti-green finance comments made at last month’s Moral Money summit by Stuart Kirk, HSBC‘s (suspended) head of responsible investing, continues to spark reaction: below you’ll see why Tariq Fancy, the former BlackRock official, is (partly) cheering Kirk — but dislikes Pence’s stance. We also have an analysis about the impact of the Spac implosion on ESG investing. Read on. (Gillian Tett)

One year on, Tariq Fancy has newfound allies

When he broke ranks with his former industry in August 2021, Tariq Fancy was considered a heretic by the ESG investing community. Fancy, previously BlackRock’s chief investment officer for sustainable investing, was a lonely voice bad-mouthing ESG just weeks after Engine No. 1’s victory at ExxonMobil. And his comments were about to be ploughed under as the world turned to Glasgow for one of the most significant climate conferences to date.

But then Desiree Fixler went public about her concerns with DWS’s ESG investing strategy. War broke out, vaulting fossil fuel companies to the top of the stock market and humbling the ESG champions who had danced on abandoned oil rigs.

Now, HSBC’s Stuart Kirk has joined Fancy and Fixler to question the financial industry’s love affair with ESG. With hindsight, Fancy looks less like a heretic and more like ESG’s Cassandra.

Still living in Toronto and working at the education non-profit he started, Fancy has published a new essay — an epilogue on his initial sustainable investing blitz. Fancy didn’t agree with all of Kirk’s points, but still sees him as “a hero of some sort” for pointing out (while still employed in the financial industry) that “the solution to lowering emissions does not lie in his area”.

To Fancy, Kirk’s speech is best viewed much like his own intervention last year: as an argument for government regulation, and against “a model of stakeholder capitalism based on voluntary rather than mandatory compliance”. And the response to the speech from many at HSBC and beyond — “sanctimonious and contrived PR-speak” — is, in Fancy’s eyes, further evidence of their refusal to engage with the serious flaws in the current ESG paradigm.

Yet, as the anti-ESG backlash gathers momentum, Fancy expressed unease at how some on the US right have tried to co-opt his arguments, and distanced himself from Republican politicians who, in his eyes, are set on a vision of narrowly profit-focused business.

“What’s happened now is this largely vacuous, culture wars nonsense. US politics looks like professional wrestling,” Fancy said. “My question to Mike Pence is: What part of the latest [Intergovernmental Panel on Climate Change] report did you see that made you think this is woke?” 

Still, just as those who danced on the oil industry’s grave have been chastened in recent months, Fancy isn’t forecasting the demise of ESG — but rather the birth of “ESG 2.0”, with more rigorous regulation, and products that will “need to be more honest about what they do and don’t do”.

The main area where increased honesty is needed, he reckons, is around “additionality” — that is, greater transparency on which investment strategies are achieving positive impact, and which simply amount to “moving money around”, dodging controversial assets without achieving any ultimate environmental or social benefit.

“Part of what motivates me [is], who is going to lose out the most from us delaying on climate change?” Fancy said. “Those costs are being transferred to the youngest, the poorest and darkest-skinned people on the planet.” (Patrick Temple-West, Simon Mundy and Andrew Edgecliffe-Johnson)

Green Spacs: where are they now?

In 2020, Moral Money wrote about the marriage of sustainable investing and the booming market for blank cheque companies (or special purpose acquisition companies). Spacs raise money on stock exchanges to acquire businesses in the future, and they were one of Wall Street’s hottest products in 2020 and 2021.

But rising interest rates and the cooling stock market have cooked Spacs. Additionally, the Securities and Exchange Commission has put pressure on sustainable Spacs. In December, Lucid Motors, an electric-car company that went public in one of the largest Spac deals, disclosed an SEC investigation. In May, EOS Energy, a zinc-battery maker that merged with a Spac, also disclosed an SEC investigation. The company said it was working with the SEC “to move the investigation along as quickly as possible”.

Electric Last Mile Solutions, an electric vehicle company, filed for bankruptcy this month a year after its Spac merger.

Only two Spacs with a sustainability or clean tech focus are trading above $10, the price at which a Spac and its acquisition start trading, according to Cameron Stanfill, at PitchBook. These two companies are Lucid Motors and ChargePoint, which runs EV charging stations in North America and Europe.

But the trouble does not mean everyone will go bankrupt. There are hundreds of Spacs that have not yet found a target company to buy. This represents a large pool of capital that is eager to invest just as company valuations are coming down. So green investors conceivably should be able to buy firms at better prices and use the investments to charge up the businesses. It looks too early to write off Spacs’ potential role in the clean energy revolution. (Patrick Temple-West)

Mixed messages on changing the mix on US boards

Efforts to diversify US boardrooms have not run smoothly of late: judges in California have overruled two laws in recent months that would have required companies headquartered in the state to have a minimum number of female, ethnically or racially diverse or LGBT directors.

Now a report from headhunter Spencer Stuart offers mixed messages about the momentum behind the drive for companies’ boardrooms to look more like their customers and employees.

The percentage of new independent directors in the S&P 500 who are female has advanced from 43 per cent to 46 per cent in the past year. There was a slight decline in the number of racially or ethnically diverse new board members, however, largely because the percentage identified as black or African American dropped from one-third in 2021 to 26 per cent this year.

That is still far above the hiring levels seen before George Floyd’s murder transformed the debate about representation throughout corporate America, and means that 11 per cent of all S&P directors are black, compared with 13.4 per cent of the population.

While that gap is narrowing, Spencer Stuart’s survey highlights another disparity that has attracted less comment: Latino or Hispanic Americans make up 18.5 per cent of the US population, but still occupy just 8 per cent of the top 500 companies’ board seats. (Andrew Edgecliffe-Johnson)

Smart read

One common theme of ESG activists in recent months is that very large global companies need to monitor their far-flung and opaque supply chains. However, businesses vary widely in this respect — and the FT reports that mighty Volkswagen is now under pressure due to its failure to monitor allegations of human rights abuses in Xinjiang, China. A cynic might say that the German car giant should be highly practised in coping with such scrutiny, given all the other scandals it has dealt with in recent years around emissions; but it seems that these past embarrassments did not prompt the Volkswagen board to do enough proactive audits of other ESG risks that might hit it. Other giants should take note.