Terrence Keeley worked at BlackRock for 13 years. During that time, the veteran investor recalled, employees were told not to engage with activists who would regularly occupy the lobby of the office building where he worked. These individuals were protesting the ideology and perceived impact of capitalism, of which BlackRock was an obvious figurehead. Keeley, however, would engage anyway.

“I usually brought them lunch and sat down to talk to them,” he explained in a talk at Columbia Business School’s inaugural Think Bigger Innovation Summit, supported by The Hub, a CBS think tank. “What was interesting is that you never knew who was going to show up,” he said. “It could be coal miners protesting the fact that we were supporting coal, and the next day it could be Greenpeace. You just never knew which protestor you were going to bump into in the lobby.”

But what all protestors had in common is that they were deeply concerned — "as we all should be,” Keeley asserted — about the future of the planet. And they all thought — erroneously — that as long as people stopped buying the shares of oil producers or depositing money in the accounts of big banks, we would be able to solve the climate crisis.

It’s a narrative that is not only facile but dangerous. Indeed, it's “horrible,” Keeley said. And it is misunderstandings like these that are curtailing our efforts to stop the climate crisis from becoming entirely irreversible. “We don’t only need to think bigger; we need to think better and more accurately,” he added. “We need to help ‘brown’ companies become more ‘green,’ not divest their shares and walk away.”

Keeley, who last year published Sustainable: Moving Beyond ESG to Impact Investing, posits in his book that our approach so far to ESG is “fundamentally flawed.” By making huge allocations to purportedly ESG-friendly indices, we may feel virtuous, but we’re not saving the world, he argues. And the way in which multiple purveyors calculate ESG scores or ratings to inform asset allocation decisions has been based on contradictory methodologies. 

“You can’t produce reliable results based on inconsistent, flawed data,” he said.

“On top of all this, if you’ve been [invested] in an ESG index for the last five years, you have underperformed broader indices. Has all your foregone income made the world a better place?” Keeley asked. Nope. ”It’s just not working.”

Shivaram Rajgopal, the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School, who joined Keeley for the session, agreed with the premise that our approach to ESG is, in many ways, broken and that ESG ratings — as they currently exist — are to a large extent “a waste of time.”

His verdict on ESG ETFs and indices is perhaps less radical, however. “It’s wrong, for example, to claim that billions of dollars of capital is misallocated,” Rajgopal said. But he agreed that when it comes to ESG, reform and a reassessment are profoundly overdue.

So what is to be done? Keeley contends we should begin by moving away from the narrative that those protestors seem to ascribe to: Starving the oil and gas industry by divesting will solve the problem. In fact, he said, it solves nothing and could actually make everything worse. “If we're going to strangle our domestic oil and gas industry while we're still highly reliant on the products, we are merely empowering the Putins and Maduros of the world,” Keeley explained.

Instead, he said, “there are an extraordinary number of double-bottom-line investment opportunities” where investors can do well while doing good.

“Away from meaningless index investments, there are any number of environmental and social investment opportunities with tangible impact. They can be found in an array of industry sectors and different asset classes,” Keeley said.

He pointed to the debt markets as one example. The green bond market — in which companies raise debt to finance climate-related or environmental projects — is likely having a greater impact than anything that’s given an ESG label in the public equity market, Keeley said.

More broadly, Rajgopal argued, we need a Marshall Plan for measuring ESG and impact in a meaningful way, an approach that is as comprehensive as when Simon Kuznets introduced the world to gross domestic product, or GDP, which would become the dominant gauge of a nation’s economic strength. The ESG puzzle is quite frankly too important not to solve. As Keeley and Rajgopal agreed, our future quite literally depends on it.


Takeaways from this event:

1. We need to be scrupulous in our self-criticism: Are we actually changing the world, or do we just like to think we are?

2. True impact must be quantified and validated. If we’re measuring implied impact, we’re most likely wasting time, money, energy, and resources.


Learn more about The Hub at Columbia Business School.