Before Republican tirades over the politics of sustainable finance became commonplace, one salient criticism of the movement was a different charge: that focusing on climate solutions through investment products distracts from the political engagement and regulatory changes necessary to tackle climate change.
This sentiment is perhaps best embodied by the writings of Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, in his “Secret Diary of a ‘Sustainable Investor’” articles.
The ex-insider characterizes investment funds marketed as sustainable as a “dangerous placebo.” He argues that the “warm glow” an investor feels from investing in these products or portfolios can negatively affect their decision to also engage politically on climate policy.
A complement or a substitute?
It’s a criticism with merit. Economically speaking, addressing climate change demands that the costs of environmental externalities get internalized into the price of business activity, full stop.
If activities that cause environmental degradation — such as rising greenhouse gas emissions, poor waste management or destruction of natural habitats — are both legal and cheap in the short term, there is no economic incentive to change course over the long term (despite a moral one).
Policy fixes to these market failures have, unfortunately, proven difficult. Carbon taxes, for example, cover just 13 percent of annual global greenhouse gas emissions.
Thus, the question of whether market opportunities for financial institutions or individuals to invest in line with climate concerns erodes the sort of engagement needed to pass effective climate policy is worth investigating.
An MIT Sloan School of Management working paper published in December claims to be the first to look into the causal relationship between individuals’ option to invest in climate-oriented funds and their attitudes toward climate policy. It found that this “opportunity to invest climate-consciously does not erode individual political support for climate regulation.”
The paper uses a popular vote on a climate law in Switzerland in 2023 to explore how the option to invest in a climate-conscious fund does or does not affect participants’ support for climate laws. The authors were Florian Heeb, postdoctoral associate at the Sloan School; and Julian Kölbel, assistant professor of sustainable finance at the University of St. Gallen, a research affiliate at the Sloan School and co-founder of the Aggregate Confusion Project. The contributing authors included Stefano Ramelli, assistant professor at University of St. Gallen, and Anna Vasileva, PhD candidate at the University of Zurich.
The study measured how individual political engagement was affected by participants’ choice to invest in climate-focused funds. This was measured by examining the change in their net donations made to the pro-climate law campaign.
A key takeaway: The authors observed that the more positively the Swiss investors felt about their climate-conscious investment — the aforementioned “warm glow” — the more they donated to the pro-climate political campaign.
That finding runs counter to the idea that investors think of sustainable investment decisions as a substitute for, rather than a complement to, political engagement on climate policies. In the case of this study, at least, the opposite was true: The better the investors felt about their climate fund investments, the more likely they were to be engaged politically.
Progress will take a multipronged approach
Switzerland is not the United States, and this is a working paper.
As Kölbel told me in regards to the United States context, “ESG funds for the liberal person are similar to what a gun is for the conservative … if you own guns, you likely don’t say defund the police. And if you buy a climate fund, you likely don’t say let’s not sign the Paris Agreement. It’s more likely the opposite.”
The paper’s authors underscore the need for a multipronged approach to advance climate action — one that includes both private-sector investment in ESG-designated funds and meaningful climate policy.
“This paper shows that yes, it may be a placebo, as not just any ESG approach is going to save the world,” said Kölbel. “But we think there’s limited validity to the claim that the work is actually politically counterproductive.”