Why should institutional investors at pension funds, endowments and foundations read Terrence Keeley's new book?
To hear out Mr. Keeley's revolutionary idea: If asset owners reallocate just 1.6%, or about $3.5 trillion, of $220 trillion in capital annually, the United Nations Sustainable Development Goals could be achieved easily. That is the total amount of investible assets, whether private or public, equities or fixed income, held by institutions and ultra-high-net-worth investors.
By scrapping traditional ESG index funds, pensions and other institutional funds could invest in impact strategies that truly earn a profit and do good. The former BlackRock Inc. executive said in an interview that he has officially "moved on from the ESG industrial complex." Instead, he advocates investing directly in waste reduction, helping the underserved, skills training, health care, affordable housing, renewable energy and education.
"Even thoughtful investors are questioning what impact current ESG offerings are actually having. It's leading to cynicism," he said.
He points to another way: the 1.6% solution (more on that below).
Mr. Keeley's views carry weight after years of working with BlackRock's institutional investors as a managing director until 2021; he worked closely with founder Larry Fink, who penned the foreword to "Sustainable: Moving Beyond ESG to Impact Investing."
ESG-integrated investments already encompass more than $120 trillion in financial assets, based on United Nations Principles for Responsible Investment figures. But those assets "aren't doing well or doing good," Mr. Keeley said.
Essentially, ESG is fatally flawed, he said. For one thing, he opposes divesting from or excluding oil and gas and other emitters from portfolios. "Investments have consequences. And to the extent you want to have a positive impact on the environment, that means investing, not divesting," Mr. Keeley said. "The divestment argument needs to go away. Let's examine ESG more deeply."
Second, he said, ESG in its current form "is not living up to its promise. The understanding people have when they buy an ESG product is that it will perform at or in excess of the market, while simultaneously doing some kind of good."
Instead, MSCI Inc., S&P and Bloomberg ESG indexes "have underperformed the broader indexes," over the past five years, he said. And "we need more rigorous ways of measuring impact and risk-adjusted returns."
Moreover, "your temperature-aligned funds (in institutional plans) aren't helping to lower the earth's temperature. Those invest only in companies in accordance with the Paris 2050 objective, like Amazon or Google. There's no causality in buying those funds and the world becoming temperature aligned."
Moreover, "I don't recommend buying dirty companies. But divesting from oil and gas isn't going to cut it. We don't have an oil and gas crisis, we have a net emissions crisis."
He points to Occidental Petroleum Corp. as a leader in the oil and gas industry, which has built one of the largest carbon capture facilities currently operating under CEO Vicki Holub.
"We have to start over. We need more inclusive, sustainable growth strategies," like those of Jim Sorensen of the Sorenson Impact Foundation in Salt Lake City, he said.