Investing

ESG investing is a 'complete fraud,' Chamath Palihapitiya says

Key Points
  • Social Capital founder and CEO Chamath Palihapitiya called ESG investing a "complete fraud."
  • "These are useful statements. It's great marketing. But again it's a lot of sizzle, no steak," Palihapitiya said Wednesday on CNBC's "Squawk Box."
  • ESG investing — or strategies that take a company’s environmental, social and governance factors into consideration — is growing in popularity, with investors increasingly prioritizing these metrics.
VIDEO2:1702:17
ESG investing is 'a complete fraud,' says venture capitalist Chamath Palihapitiya

"Complete fraud," "joke," "jargon," "so ridiculous," were among the choice words Social Capital founder and CEO Chamath Palihapitiya used to describe the growing ESG movement.

"These are useful statements. It's great marketing. But again it's a lot of sizzle, no steak," he said Wednesday on CNBC's "Squawk Box."

The increasingly popular ESG investing style evaluates a company's environmental, social and governance factors alongside traditional financial metrics. It's become a buzzword on the Street as companies face growing pressure from governing bodies and investors alike to provide more transparency around their operations.

But as ESG's popularity grows so, too, do its critics, not least because scoring a company on these metrics is inherently subjective.

Chamath Palihapitiya
Cameron Costa | CNBC

Palihapitiya said that while certain elements of the movement have been helpful, such as companies taking a sharper look at their governing practices, it does not necessarily encourage best practices, nor does it move the ball forward on things like the climate crisis.

The Social Capital chief said that in some cases it can be used as a marketing ploy and a way for companies to get free money. "If you paint yourself as ESG in Europe, you can essentially borrow money from the ECB at negative rates," he said.

On Tuesday, JPMorgan announced a number of new climate-change-related policies, such as restricting financing for companies drilling in the Arctic, joining other financial giants like Goldman Sachs and BlackRock, both of which have recently announced new initiatives.

"JPMorgan, by saying what they said, will be able to borrow billions of dollars from the ECB at negative rates ... it doesn't have to work, they don't need to do anything, they are now getting free money from Europe for basically being able to say this," he said.

Palihapitiya said that not only do ESG ratings not, in the end, inspire meaningful change, they can cloud a company's true environmental impact.

"If you really believe in climate change you need to do a lot of work now," he contended. "It's going to be very important for you to really be able to diligence the supply chain, all the way down to the supplier and supplier's supplier, and that's a very hard thing," he said.

"I think what we need to do is invest in actual companies that can go and count, and can legitimize the actual impact that companies have, so that you can do the right amount of carbon offsets. And then you have to have a legitimate exchange where you can actually trade them."

– CNBC's Michael Sheetz contributed to this report.

Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.