Tariq Fancy, Rumie founder and former head of sustainability at Black Rock, joins Yahoo Finance Live to discuss the state of ESG investing, greenwashing, and how companies and investors can address the issue of climate change.

Video Transcript

AKIKO FUJITA: Debate over the merits of ESG are heating up from West Virginia to Texas. Some resource rich states are penalizing major financial corporations over their sustainable goals. Texas, for one, has released a list of 350 financial groups, including BlackRock and UBS, banned from doing business with the state for allegedly boycotting energy companies. Now BlackRock denies the charge. Some funds have been accused of greenwashing or overstating climate friendly credentials. The SEC has already proposed disclosure standards for ESG funds.

Joining us now is Tariq Fancy. He was BlackRock's first CIO for sustainable investing between 2018 and 2019. And Tariq, of course, you've been very vocal in your criticism about the guardrails that were set up for ESG. So let's start by talking about ESG itself. How do you think it should be defined?

TARIQ FANCY: I think it's actually really difficult. I mean, I would separate the G, first of all, because corporate governance is something that people have known for a long time is important. And I don't think the reason we're talking about ESG is because people suddenly figured that out. It's because society is demanding more done on environmental and social issues than has been done recently. And that has given, I think, rise to a set of products that purport to address these challenges and policies, but in actual fact, don't really do a whole lot.

BRIAN CHEUNG: Tariq, it's Brian Cheung here. So, you know, it's interesting because you have such a good perspective on this, as having been someone inside BlackRock to put these together. You have this secret diary of a sustainable investor that you posted online, where you noted that BlackRock funds, quote, "made matters worse by leading the world into a dangerous mirage." What do you mean by that? What exactly was behind that that incentivized you to, first of all, leave the firm, but then also kind of speak out about it as well?

TARIQ FANCY: Well, I think when I first was there, I didn't come to the conclusion that green investing is harmless or is harmful. I mean, it certainly seems a bit counterintuitive to say, how can it be hurtful? The fact of the matter is when you dig into what it is today, it's primarily marketing policies that are non-binding, and they can't be binding because we have legal duties to focus only on sort of maximizing return. And it's a set of products that really just shuffle around things that already exist so that you can give baskets of already traded publicly shares to socially conscious investors and get a fee bump.

For the most part, it's not doing anything to help at all. And I likened it to giving wheatgrass juice to a cancer patient. Cancer's still spreading. The wheatgrass juice is not going to help. And I only went out and made an argument publicly when, after working on a study with the university, we found that it's actually delaying government regulation that would actually address these issues.

So it's actually wheatgrass to a cancer patient that is so misleading that the cancer patient, meaning the public, is lulled into complacency and delays chemo. And I think that's what I would call a dangerous placebo that harms the public interest.

AKIKO FUJITA: Certainly, many others have followed your lead and coming out and speaking out against how funds decided what exactly that ESG makeup should look like. The concern has always been about lack of accountability and measurability, but there's also this core question, which is what we've heard from the SEC, what we've heard from others who've been advocating ESG, which is to say that climate change is a financial risk. I mean, is that-- do you think that core argument still holds?

TARIQ FANCY: I do believe the climate-- I mean, climate risk is an important risk. I don't think it's as monumental for most companies as people say. That's not to say that climate change isn't real. Obviously, I believe it is, and I believe it allows economic damage. But the reality is the financial markets don't necessarily focus on that if it's something that's very far out and/or may not cause direct damage to them.

But climate risks are real, and there's work to be done as fiduciaries to figure out what that is and protect portfolios. But I would stress that protecting climate-- protecting portfolios against the risk of climate change is not the same thing as stopping climate change from occurring in the first place. I mean, climate risk is just basic risk mitigation that people should already be doing.

AKIKO FUJITA: But Tariq, let me just say that it's not necessarily-- and you're right. Probably investors have conflated the two things together. But you've also got the issue of whether, in fact, there's going to be billions in stranded assets for oil companies. If you are a tech company, for example, should investors be notified of the exposure of some of their supply chains that could be hit significantly if there were floods, if there were storms? I mean, how much disclosure should investors have?

TARIQ FANCY: Well, I think-- I mean, you've touched on the really important question is that the real question at the bottom of ESG that's never really been answered satisfactorily is, are we doing this to make the world a better place or to improve investment returns? And the promise by ESG is arguably three things, right? You get better returns, you make the world a better place, and asset managers get more in fees.

In reality, I can tell you only the third thing is happening because there's definitely very little clear analysis of this matters for companies on the level people say. And it can affect returns. And it definitely isn't clear that it impacts the world. But are these issues important? I think they are. In specific industries and specific geographies, ESG areas constitute risks, particularly if you have a consumer facing brand and you face certain controversies.

But again, ESG has become mainly a marketing thing because for the most part, I mean, if you were to tell an investor 20 years ago that there might be the risk of regulation or there could be a backlash from society and customers, everyone would have already known these things, right? I mean, these were things that every investor who had half a brain should already be focused on, even if it wasn't called ESG.

The only thing that's occurred in the last two decades is that a bunch of these that seem to align with where the public angst is around climate change and other things have been surfaced and are being marketed to the world as, hey, here are these things we look at. But again, you're a fiduciary. You have to focus on returns. You would have been looking at it before. You should still be looking at it now. Not that much has changed.

AKIKO FUJITA: Really quickly, the SEC has put out this proposal for standardizing funds ESG, disclosures. Is that the right template to follow? I guess the next question here is, also, what you're doing now going from BlackRock to founding this company.

TARIQ FANCY: Well, so let me answer the first one first. I think the disclosures and the rules around them do move in the right direction because there's two levels of disclosures. First of all, they're saying that if this is material to a company, so certainly ESG is where this is not just something that is important for the world or that people sort of say, but it's actually relevant to the bottom line. And frankly, a reasonable investor should want to have that information. So that disclosure is important.

There's also a push to categorize funds correctly. And the commissioner Gensler uses the example of looking at a carton of milk and you're able to read the ingredients and you can rely on them. And ESG funds today are not as good as they should be at that. I mean, you buy one thing, and you think you're buying an ESG fund. You think you're funding climate change. You're a millennial. You're really excited. Then you look at the portfolio, and you realize it still owns fossil fuel companies, just a little bit less than it did before. And I think that is causing a lot of issues for people because they think it's one thing, and then it ends up actually being another.

AKIKO FUJITA: Rumie founder Tariq Fancy, appreciate the time today. Really great to have you on the show.