Larry Fink’s annual letter to CEOs has become something of a cult event. In recent years these documents, ostensibly written by the Chief Executive of BlackRock – the world’s largest investment management firm with more than $8 trillion in assets – have emphasized the existential risk of climate change and the importance of ‘investing with purpose’: rhetoric that has met with solemn agreement from the press and even cautious optimism from some of the major environmental NGOs. In his 2021 letter, Fink championed the virtues of so-called ‘ESG’ (Environmental, Social, Governance) investing: a once cottage industry in which financial products are designed according to certain ‘ethical’ criteria, including environmental sustainability, social impact and corporate governance factors. ESG investors and financial products buy shares in companies (or their bonds) based on metrics purporting to measure their carbon emissions intensity, equitable labour practices, transparency, the diversity of their executive boards and so on.

Fink is not alone in his enthusiasm. In November, Rishi Sunak touted the prospect of a booming ‘green finance’ industry which could remake the UK after Brexit, while Davos heavy-hitters from Mark Carney to Kristalina Georgieva have been stressing the need to leverage private finance to drive the green transition. Given these changing tides, the ESG industry has enjoyed an incredible surge over the course of the pandemic, with record inflows and soaring asset prices. To some, the sector’s remarkable growth suggests that Covid-19 has driven home the danger of ‘systemic risks’, such as political crises or climate change, for asset-holders. Commentators have also noted the cultural shift among younger investors, for whom it is no longer enough to simply make returns; the industry must also contend with the latter’s growing expectation that investments should align with their values and contribute to sustainable initiatives.

For Fink and his followers this is cause for optimism. The financial system, they assert, is adapting to provide much-needed investment in rapid decarbonisation. But the reality is somewhat different. To date, the ESG industry has established no rules for what counts as ‘sustainable’ or ‘ethical’. The EU has taken some steps towards creating a ‘taxonomy’ of green corporate activities, but its current guidelines contain countless loopholes – the result of disagreement between member states and effective industry lobbying. In recent research I undertook for Common Wealth thinktank, I found that of the UK’s ‘climate-themed’ ESG funds, a third hold stakes in fossil fuel companies, with several invested in Exxon. The ‘social’ practices of companies lauded by the ESG hierarchy are no better. Fashion retailer Boohoo received one of the highest possible ESG ratings from the American multinational MSCI, just weeks before it emerged that its supply-chain workers were paid only £3.50 per hour.

ESG funds also funnel millions into big financial firms, pharmaceutical conglomerates and the tech giants. For the flagship ESG fund of the prominent US investment advisor Vanguard, the top five holdings are Apple, Amazon, Microsoft, Facebook and Google, with Tesla eking out the sixth spot. One study found that, among a large sample of ESG funds, the single strongest variable which differentiated their portfolios from mainstream funds was companies with no employees – the implication being: no labour equals no labour disputes, which equals ethical value for money. If this is ESG’s idea of socially conscious investing, it is a uniquely dystopian one.

These findings are a reminder that finance will invariably approach environmental crises as a ‘risk factor’, rather than a consequence of investment decisions. In other words: ‘Ask not what finance can do for the climate, but what the climate will do to finance’. This framework ensures that returns remain the ultimate horizon of eco-consciousness; the latter must be flexible enough to serve the former. This understanding also casts a new light on the impressive returns of ESG funds during the pandemic. Rather than reflecting a market-driven and enduring decline of unsustainable firms, the returns on ESG products tended to derive from their tendency to overweight the pandemic’s biggest winners, from Facebook to Pfizer, who aren’t excluded by the often narrowly defined ESG criteria, while underweighting the pandemic’s losers, like fracking firms hit by the lockdown-induced slump in fossil fuel demand. Thus, the criteria by which ESG distinguishes virtue from vice are consistent not necessarily with social or environmental impact, but with profitability.

Between greenwashing and gorging on Big Tech, then, it seems sustainable investing has little time left for the initiatives required to build a sustainable society. But even if ESG funds were interested in financing green industries, their capacity for productive investment is questionable. Indeed, ESG is less an opportunity to invest in the construction of a sustainable future than to bet on its likelihood. As Doug Henwood noted regarding the recent GameStop controversy, very little productive capital is raised on the stock market. The value of share issuance and IPOs is dwarfed by that of stock buybacks, underscoring the fact that stock exchange activity is, by definition, secondary, with cash and stock largely changing hands between those placing the bets, while the companies who issue the stock spend much of their time on the side-lines.

Moving investors away from the most egregiously destructive (or ‘risky’) firms may still have a modest impact on companies’ share prices and capital allocation decisions; and as such, clear regulation of what does and does not constitute a ‘sustainable asset’ remains necessary to eliminate greenwashing. The issuance of ‘green bonds’ and other instruments tied to green projects could also, in theory, overcome the issue of ‘additionality’ raised above, but to date these instruments have been plagued by questions of inconsistency and inefficacy, and stocks remain the primary fodder of ESG investors. More fundamentally, the emerging political consensus around the merits of a private finance-led approach to decarbonisation must be resisted. The widespread praise for ‘sustainable’ finance risks simulating a green transition where one is not occurring – an illusion that could undermine our ability to enact the large-scale transformation necessary to confront environmental breakdown.

The climate and ecological crises are fundamentally problems of inequality, in both their origins and consequences. Yawning wealth disparities within and between countries, along with ongoing colonial legacies, have created a global economy in which the affluent consume and emit on a scale that dwarfs the environmental impact of the majority. Meanwhile, the uneven distribution of political power prevents those on the frontline of the climate catastrophe from taking measures to slow its advance. This entrenches the self-reinforcing impression that climate politics is an elite preserve, best dealt with by experts at multilateral summits or BlackRock board meetings.  

The rise of ESG promises to exacerbate this issue, swelling the portfolios of asset-owners and concentrating political influence among technocrats at investment firms. As governments forecast a green recovery from the Covid-19 downturn, ‘ethical finance’ will be among its key components. But the transition to a sustainable economy should not be seen as an investment opportunity for the asset-rich; rather, it should be understood as an urgent opportunity to rectify the forces of inequality and injustice driving environmental crisis.

Read on: Nancy Fraser, Climates of Capital, NLR 127.