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Amy Scott: I want to confess something kind of embarrassing, which is, when I first read Larry Fink's letter, I thought, Oh, wow. You know, are the big money firms going to save us? Do you think I was naive? 

Kelly Mitchell: I think a lot of people found a glimmer of hope in Larry Fink's letter addressing climate risk. 

Amy Scott: I'm talking to Kelly Mitchell. She runs an oil and gas watchdog group called Fieldnotes. And that letter we're talking about was a big deal. It was January 2020, and Larry Fink, the co-founder and head of BlackRock, a big investment firm, put out his annual letter to corporate CEOs. 

News clip: …this morning and the world's largest asset manager announcing the firm will make climate change a focus of all of its investment strategy. Fink’s annual letter to CEOs…

Amy Scott: These letters always made a splash. BlackRock invests trillions of dollars globally on behalf of individuals saving for retirement or their kids’ college as well as corporations and governments. So companies that want some of that money pay attention to what he says. And for several years, Kelly says, Fink had been increasingly raising the profile of so called ESG issues.

Kelly Mitchell: ESG stands for environment, social and governance, and at its heart, it's a series of tools that companies and investors can use to analyze risk. 

Amy Scott: I know it sounds wonky, but the idea is simple, that issues like climate change or labor conditions or boardroom diversity can have a material impact on a company's bottom line. That January five years ago, Fink's letter focused on the E in ESG, environment. He said climate change had become a defining factor in companies’ long-term prospects, and that BlackRock would invest its clients’ money and use its shareholder power to push for changes, accordingly. Here's how he described it on CNBC. 

Larry Fink: We believe a portfolio that focuses on sustainability and climate change will be a portfolio that outperforms. So the main component of the letter is saying this is going to be a great investment over the next 10 years, and it will also help the planet.

Amy Scott: Kelly says I wasn't wrong to feel hopeful that the world's largest asset manager, and by the way, one of the largest investors in fossil fuels, was taking climate change seriously.

Kelly Mitchell: It matters that a company that controls more than $9 trillion is able to see that climate change is real. I don't think any of us should be looking to bankers or the financial class to save us from any number of issues. They're just as self-interested as any other corporate actor. But it was a heartening moment.

Amy Scott: And now it seems like so long ago.

Kelly Mitchell: Like so many other things right now.

Amy Scott: That heartening moment was soon met with a fierce backlash. 

News clip: Go woke, go broke. More companies are turning their backs on DEI and ESG initiatives. 

News clip: This morning Governor Ron DeSantis was in Jacksonville, where he signed a bill making ESG illegal in Florida.

Andy Puzder: The challenge of your generation is ESG investing, and it's more insidious than communism or the Nazis.

Amy Scott: Five years later, ESG seems all but dead. The letters have been wiped from corporate messaging. 21 states have passed anti ESG laws, and Larry Fink, well, he's backed away from it too. 

News clip: That's ESG, environmental, social and governance. We can say those words, right? I don't say them anymore.

Amy Scott: I'm Amy Scott, welcome to How We Survive, a podcast from Marketplace about just that, how we survive the climate crisis, and one key to that survival is money, whether we continue to invest in fossil fuels or fund climate solutions instead. On this season, we're looking at the rise, fall and reincarnation of ESG. Over three episodes, we’ll follow the trillions of dollars invested on behalf of public retirees, central banks, maybe your kid’s college fund, to trace how climate conscious investing, the E in ESG, evolved from a small corner of the market to a mainstream strategy to a boogeyman of the right. And we ask, can we invest our way out of the climate crisis? In this episode, the rise of ESG. And we're going to start at its unofficial birthplace, about as far from Wall Street as you can get. Spiritually anyway. This is episode one, The God Box. 

We're actually just a long subway ride from Wall Street at the Interchurch Center in New York City. It's affectionately called the God Box for its imposing building on Manhattan's Upper West Side. Fun fact, it was built with funds from the Rockefeller oil fortune. With its bright fluorescent lights and squeaky floors, it feels like some kind of municipal building, except for the chapel down the hall or the large quote on the wall behind the front desk from Corinthians, “whatever you do, do all to the glory of God.” Not the typical environment for a shareholder meeting, but that's why I'm here, for a gathering of institutional investors to discuss their strategy in the new political environment. Rachel Kahn-Troster kicks off the day's session with a song popular with young Jewish climate activists. It's about leaning on each other when fighting for change. 

Rachel Kahn-Troster: Loosen, loosen, baby, you don't have to carry the weight of the world in your muscles and bones, let go, let go, let go. And now we'll continue with our panel.

Amy Scott: Long before ESG was a concept adopted by Wall Street, there were smaller investors advocating to consider environmental and social issues when making investments, albeit for different reasons: faith-based investors, like the ones meeting today at the God Box.

Tim Smith: I'm Tim Smith, and I'm a senior policy advisor of the Interfaith Center on Corporate Responsibility.

Amy Scott: Tim has white hair and glasses. He's wearing a yellow tie with a pocket square to match, and he's one of the founders of the Interfaith Center on Corporate Responsibility, or ICCR. Its members include Jewish, Catholic, Protestant, Methodist, even some secular institutions like unions and socially conscious asset managers. And collectively, their portfolios are huge, more than $4 trillion in assets, and in many ways, the story of what has come to be known as ESG started with them. 

Tim Smith: Going back 100 years, some religious organizations felt that their faith and values had to be reflected in their investments too. So they, for example, United Methodists wouldn't have invested in tobacco and alcohol. But in 1971 we entered a new chapter. 

Amy Scott: That new chapter was sparked by the atrocities of apartheid in South Africa, when the Episcopal Church, which had been outspoken in opposing apartheid, took a hard look at its investments.

Tim Smith: Suddenly recognizing, gee, we're invested in banks and companies that are doing business as usual in South Africa.

Amy Scott: One of those companies was General Motors, and the church decided to put its money where its mouth was, so to speak. In 1971 it filed a shareholder resolution calling on GM to close its factories in South Africa. 

Tim Smith: It was on the front page of The New York Times. The presiding bishop of the Episcopal Church, the head of the church, went to the General Motors stockholders meeting and spoke, dressed in his Episcopal finery, and challenged General Motors on the moral justification for staying there.

Amy Scott: A shareholder resolution, by the way, typically isn't binding, but it can put pressure on a company to take action. The church didn't just make a moral case. Leaders also argued that the turmoil in the country would hurt profits.

Tim Smith: And that was both a pivotal moment in church history, if you will, but in business history too, because that kind of appeal to a company through the shareholder resolution process, especially by a church group, had not been happening.

Amy Scott: It took 15 years of growing public pressure and a declining business climate, but in 1986, finally, GM relented.

News clip: After 60 years of doing business in South Africa, America's number one car maker said today it is pulling out. 

Tim Smith: Roger Smith, who is the CEO, held a press conference, and it was covered widely in the press, as you can imagine.

News clip: Along with a slow pace of progress, economic recession in South Africa has made operating there increasingly difficult. 

Tim Smith: And that was a rather dramatic announcement by a CEO of a company, who acknowledged both the social responsibility of the company and also, of course, their financial responsibility to make a profit where they did business.

Amy Scott: After the Episcopal Church filed that shareholder resolution at GM, ICCR members started pressing companies in their portfolios on other social issues, labor rights, discrimination, pollution, and eventually, Tim says, climate change.

Tim Smith: I think in the late 1980s and early 1990s we started raising questions with companies about climate change. That was a difficult conversation, because many companies felt the science wasn't established, it wasn't a sure thing, and therefore, talking about taking steps to address climate change was not something that they felt comfortable in taking a lead on, but we were sort of the canary in the coal mine right, giving a warning and raising the issue.

Amy Scott: And this is where I have to tell you about Sister Pat Daly, a Dominican nun from Caldwell, New Jersey, who won the hearts of many while striking the fear of God in corporate executives. 

Sister Pat Daly: We were not at all welcome. They did not like these nuns and priests and ministers and rabbis showing up at annual meetings. 

Amy Scott: This is Sister Pat in 2014 accepting an award for her work in sustainable investing.

Sister Pat Daly: Today, I'm honored to call so many of my colleagues and corporations true friends and partners in this.

Amy Scott: Sister Pat died in 2022, but for decades, she pushed huge corporations like GE, Ford and Exxon Mobil to take steps to address their environmental impact. Sister Pat, by all accounts, was a force. She wore her hair short, always dressing modestly, not in a traditional habit, which made her approachable. Her former colleagues always talk about her ability to form meaningful relationships with the very people she butted heads with in the boardroom.

Tracy Rembert: Sister Pat would show up to deaths and births and marriages, and she would oversee, I mean, of companies that she fought for 20 or 30 years.

Amy Scott: Tracy Rembert is on the climate and environmental justice team at ICCR. She's been with the organization for 25 years and worked with Sister Pat on several initiatives. 

Tracy Rembert: She was friends with some folks inside those companies that fought good fights to try to change, I mean, Bill Ford Jr, at Ford, she could just dial him straight up on her cell phone if she wanted.

Amy Scott: In 1999, that relationship helped her persuade Ford to leave the ironically named Global Climate Coalition, a lobbying group which actively worked to oppose efforts to reduce greenhouse gas emissions. Later, she and her friend, sister Barbara Aires, with the Sisters of Charity, pushed Southern Company, the big gas and electric company, to move away from fossil fuels, working closely with then CEO Tom Fanning. 

Sister Barabra Aires: He became very fond of Pat, and he welcomed her critiques. We got them to get rid of a number of coal fired plants, for example. We also worked very hard to get him finally to acknowledge climate change was a serious issue.

Tracy Rembert: She just went head to head with so many powerful CEOs. It was such a modest chiding, in a way, but incredibly powerful to actually witness it. You were literally in an auditorium looking at a David and Goliath scene where it is one person up at a microphone talking to like huge sources of power in the United States and saying, This isn't good enough.

Amy Scott: One of those David and Goliath moments came in May 2000 at the first shareholder meeting of the newly merged ExxonMobil Corporation, a group of religious investors, with support from Sister Pat, filed a resolution calling on the company to reduce its reliance on fossil fuels and promote renewable energy sources. 

News clip: Pat Daly is not a tree hugger. She's a shareholder and a nun who represents clergy based pension funds.

Amy Scott: A CBS reporter interviewed Sister Pat at the time. 

News clip: Is ExxonMobil any different on the issue of global warming than any other of the big oil companies? 

Sister Pat Daly: They're incredibly different. They have absolutely isolated themselves on this.

Amy Scott: Exxon's own scientists had known about the dangers of climate change since the 70s, but publicly, the company continued to sow doubt. Sister Pat and the faith-based investors were some of the only voices calling the company out.

Sister Pat Daly: They're saying that there's not enough science. They will tell you, we're concerned about global warming, but they're not going to admit that it's actually happening.

Amy Scott: The thing about shareholder resolutions, they're rarely successful. That 2000 proposal at Exxon was soundly defeated, but Pat and other faith based and socially conscious investors persisted, and as the scientific consensus grew, they attracted more and more shareholder support. In 2017 Exxon agreed to shareholder demands to improve its disclosure of climate risks, and in a big shake up in 2021, an activist hedge fund called Engine Number One, with a small stake in the company, installed three board members to push Exxon to transition to cleaner energy sources. These things take time, and for decades, Sister Pat and others had patiently laid the groundwork. Here she is in an interview from 2016.

Sister Pat Daly: I think the legacy is that we really have started the ESG movement, the environmental, social and governance movement in the United States, and we've set it in play, and it's taking off.

Amy Scott: How that movement went mainstream, coming up.

I was looking around at your your artwork, there are some definite climate themes here. Earth, your oasis in space, where the air is free and breathing is easy. I love that, it’s like in the style of those old WPA, National Parks posters.

Bruce Usher: Exactly, and anytime I do a Zoom, it’s the background. I happen to be very fond of that poster.

Amy Scott: Bruce Usher is a professor at Columbia Business School in New York. I'm sitting in his office, which is actually just a short walk from the God Box. Bruce is the guy you want to talk to about ESG, because in 2004 he helped introduce the concept to the world. 

And what have you got here on the desk in front of us?

Bruce Usher: So I have a report titled Who Cares Wins, and that was issued by the UN Global Compact after a meeting in Switzerland to discuss what became ESG. It was the first time that term ESG had ever been used before. 

Amy Scott: While nuns and clergy members had spent decades sounding the alarm on environmental and social issues for moral reasons, by the early 2000s, Wall Street was paying attention to these issues too, but for a very different reason: the bottom line. At the time, Bruce was teaching a course on finance and sustainability, and he got a call from the UN to fly to Switzerland and take part in a working group with other finance experts. 

Bruce Usher: This was before Zoom. It was in person. Yeah, we all flew there. Yeah. We all had our big carbon footprints, which we didn't even know about at that time. It was hosted by the Swiss government. It was almost all financial analysts. I was the only academic.

Amy Scott: All men?

Bruce Usher: Probably.

Amy Scott: Just guessing.

Bruce Usher: Having worked in the financial services industry in Tokyo and New York in the 80s and 90s leading up to this report, that would be a good guess.

Amy Scott: What came from that meeting was the report now sitting on Bruce's desk called Who Cares Wins, a play on the British Special Air Service motto, Who Dares Wins. At the heart of this wonky report was the idea that investors who paid attention to environmental, social and governance factors would make more money.

Bruce Usher: And why that was unusual and new was that it simply hadn’t been done by the industry before. Those factors were not considered important. They just just were never evaluated before. And that was the idea, a simple idea, really. An idea that is actually, in many ways, stunningly obvious when you think about it.

Amy Scott: To explain this stunningly obvious idea, Bruce, like any good college professor, likes to use a metaphor.

Bruce Usher: Think about an individual buying a home. So when your parents bought their home, my parents bought their home. What did they think about in terms of the value of that home? Was it a fair price? How many square feet is it? And they’d probably bring in an engineer just to say, well, structurally, is this house sound? And then looking at those factors, they'd say, Okay, this price seems about right, or it's too high or too low. That was our parents. 

Amy Scott: But if you buy a home today in California, for example, if you only focused on square footage or the condition of the roof, you'd be overlooking a lot of potential risk that could hurt your investment.

Bruce Usher: You'd also want to think about wildfires. Is wildfire a risk to your neighborhood, to your home? How high is that risk? How would you think about that? Can you get insurance on it? This is something we didn't have to think about in the past, and we have to think about again. It's not just California. If you're buying a home, say, in Florida, you want to think about flood risk and so on. These are just environmental factors and so on. 

Amy Scott: So if you wouldn't invest your savings in a home that has serious risk of fire or flooding, maybe you wouldn't want your retirement portfolio invested in companies that aren't mitigating their own exposure to climate risks, as well as other societal issues like labor conditions or corruption. In the finance world, it was a simple but new way of looking at investing. After that meeting in Switzerland, Bruce didn't think much about it, but a group of asset managers started looking at ESG factors when they analyzed stocks and other investments.

Bruce Usher: And they started to attract more assets because investors liked the concept. It made good sense. It sounds it is a more sophisticated, more advanced, more clever way of investing. Why wouldn't I put my money with with an asset manager who follows those ESG principles?

Amy Scott: And as those asset managers attracted more assets, companies who wanted more investors took notice. 

Bruce Usher: So the analysts at these big funds call up these companies and say, Look, I'm interested in buying your stock, but I'd like to know more about how you're dealing with climate change. How are you dealing with human rights issues, if you're, say, operating in emerging countries, how are you thinking about these issues? And I'd like some data. Give me some information, and the companies start to provide that information, and what they find is they provide this information, and those asset managers buy their stock.

Amy Scott: Wall Street got the message. ESG is good for business. By 2020, Morning Star estimated more than $51 billion poured into US ESG related funds just that year.

News clip: ESG ETFs, well they’re on a roll, taking in billions of dollars last year.

News clip: ESG is everywhere. Momentum is in place. 

News clip: ESG continues to be a red-hot engine for ETF investing this year.

Bruce Usher: Everything's going really well. So far so good.

Amy Scott: Dun dun dun.

Bruce Usher: Exactly. Background music, dun dun dun, right?

Amy Scott: The tension is building. 

Bruce Usher: The tension is building. Big problems emerge as ESG investing as a strategy and the first is around expectations.

Amy Scott: Remember ESG as it was coined by that UN report was just an analytical tool, a way to evaluate long term risks in service of making more money.

Bruce Usher: If I buy an ESG fund, am I helping solve climate change? And the answer is no, you're reducing risk from climate change, but you're not solving climate change.

Amy Scott: But as ESG grew in popularity, the meaning started to shift.

Bruce Usher: The narrative around ESG changed from ESG is a way of reducing risk as an investor, to ESG is a way to make the world a better place, to solve environmental and social and governance problems. 

Amy Scott: It was around that time in 2020 when Larry Fink released that annual corporate letter that gave me a glimmer of hope.

Larry Fink: We believe a portfolio that focuses on sustainability and climate change will be a great investment over the next 10 years.

Amy Scott: Here's that clip from CNBC again.

Larry Fink: And it will also help the planet.

Amy Scott: And this is where, for a brief moment, it felt like Wall Street's notion of ESG was converging with the goals of faith based and other socially responsible investors. That year, BlackRock joined Climate Action 100+, a coalition of investment managers pushing companies to disclose and reduce their greenhouse gas emissions. And the next year, it voted in support of that board shake up at ExxonMobil, led by Engine Number One. It seemed like Larry Fink was saying that ESG could do both protect the bottom line and help drive solutions, and if he got some good PR along the way, that wouldn't hurt either. But the good PR didn't last long.

Kelly Mitchell: I think for a lot of folks in the oil and gas space, it was starting to feel like maybe the walls were closing in.

Amy Scott: Again, Kelly Mitchell from Fieldnotes. She says, by the time Larry Fink wrote his letter, the oil and gas industry had had a rough decade. 

Kelly Mitchell: There were hundreds of oil company bankruptcies, and so Wall Street was already starting to sour on oil investments. 

Amy Scott: So when the world's largest investor said it was moving some money away from fossil fuels, despite still being heavily invested, it gave the industry and its political allies on the right a heart attack and triggered a deadly backlash. 

Voice 1: I essentially just said, If you boycott fossil fuels, you can't do business with the state of Texas.

Amy Scott: Next episode, we put on our detective hats and follow the money to Texas to uncover a plot to kill ESG. Thanks for listening, and if you like what you hear, please rate and review. It really helps. 

I'm Amy Scott. Hayley Hershman produced this episode, with help from producers Katie Reuther and Sophia Paliza-Carre. Caitlin Esch is our Supervising Senior Producer. Editing by Paddy Hirsch. Scoring and sound design by Chris Julin, mixing by Brian Allison. Special thanks this week to John Gordon, Amelia Miazad, Elizabeth Pollman and Peter Swanson. Our theme music is by Wonderly. Bridget Bodnar is Director of Podcasts. Francesca Levy is the Executive Director, and Neal Scarbrough is the Vice President and General Manager of Marketplace.