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The opinions expressed
on this program represent
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the viewpoints of individual
authors or contributors,
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and do not necessarily reflect
those of Troy University.
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This is E Conversations,
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a joint production of Joy Trojan
Vision and the Manual. A.H.
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Johnson Center
for Political Economy.
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Now here's your host, Dr.
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Dan Sutter.
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Hello
and welcome to Conversations.
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I'm your host, Dr.
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Dan Sutter of the Johnson Center
for Political Economy on Wall
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Street has long served
as the embodiment of greed
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in our economy, represented
perhaps most visibly
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and memorably,
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by the character Gordon
Gekko in Oliver Stone's movie.
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Many have long called
for investors
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to consider the good for society
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as opposed to their own profits
in investing their money.
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The ESG movement is a modern
version of socially responsible
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investing, embodying
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this idea that of considering
societal impact.
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Perhaps ironically, finance
is attempts to change the world
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instead of making money
have proven
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even more controversial
than greed ever arise.
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How is an investment
strategy managed to become
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a contentious political issue,
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even being discussed
by presidential candidates?
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And is ESG
truly a threat to a prosperous
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and thriving market economy?
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Joining me in conversations
today to discuss ESG is Dr.
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Element at Hall.
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He's the Grady Rogier professor
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and executive director
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of the Johnson Center
here at Troy University.
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Dr. Mendenhall has a bachelor's
degree from Furman University,
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a law degree and master's
degrees
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from West Virginia University
and a Ph.D.
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in English from Auburn.
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Prior to joining Troy, Dr.
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Martin Hall
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worked in the Alabama
Supreme Court, and he was also
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the director of the Blackstone
and Burke Center
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at Faulkner
University's Law School.
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Welcome back to the show, Alan.
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Dan Thanks for having me
as always.
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I am always
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very happy to be here
and very grateful to you
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for having so many episodes
and being a tireless
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defender of market education.
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Well, well, thanks.
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Thanks so much.
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And we'll have you on more times
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giving your opinion of our host.
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So before we get started, just
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explain for our viewers
what exactly ESG is.
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I use the initials there,
but they have the
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they are an initials.
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So explain for everybody
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before we get started here
exactly what ESG is.
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So ESG is
the acronym that stands
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for environmental,
Social and Governance.
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And that acronym involves
the financial non-free
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natural factors and metrics
that central banks,
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institutional investors,
investors in general,
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all sorts of financial
institutions take into account
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when they allocate capital
or assess risk.
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So we're principally talking
about investment criteria.
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When people say we're going
to invest in ESG funds.
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What they typically
are referring to are,
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more than anything else,
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mutual funds
and exchange traded funds.
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So a mutual fund is different
from an exchange traded
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fund in that
they both pool securities,
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but a mutual fund is traded
once a day.
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The value of it is calculated
at the end of the day,
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whereas an exchange traded fund
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can be bought
and sold all throughout the day.
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Mutual funds
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are typically actively
managed by a manager.
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You pay fees,
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whereas an exchange traded fund
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is a passive investment vehicle,
and an exchange traded fund
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will typically track
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an index
something like the S&P 500.
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And therefore, as a passive
investment vehicle, it
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typically outperforms the market
because you're not dealing
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with human intelligence.
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Tell it.
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It's having to pick this company
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or that company or this field
or that field.
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Mutual funds are much older
ETFs are
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a more
of a newer form of investment,
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but they are typically
where we see
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ESG investments occurring.
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So explain a little bit like so
U.S., ESG, environmental,
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social
and governance components.
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What would be some of the things
that would fit
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under those headings? Yes.
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So under the EA, for example,
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you might have companies
included within an E
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if they have committed
to net zero emissions by 2050,
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all sorts
of environmental factors,
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whether they are pertaining
to biodiversity
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or just in general pollution
or other initiatives
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that those companies
might undertake that are green.
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The s would refer to social
and that can be
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a wide variety of things.
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I think in Europe
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the social tends to involve
more workers, right?
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Right.
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Whereas in
the United States, the social
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tends toward,
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you know, diversity, equity,
inclusion in the workplace
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or commitments
to different social causes,
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whether companies are investing
money in Black Lives Matter or
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of one one
sort of controversial area
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in which we're seeing
it is after the Dobbs
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opinion is whether a company
will pay for employees
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to go across the state to get
an abortion in another state
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where abortion is legal.
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So these all are factors
that fall into the. Yes,
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the the G refers to governance,
as you mentioned earlier.
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And this is sort of board
level diversity
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or executive compensation,
those types of matters.
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But I actually like to think of
the G in the bigger picture
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in terms of the shift
from the shareholder
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to the stakeholder
model of governments.
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The traditional Milton Friedman
line that corporations exist
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for the maximization of profits
falls under the traditional
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shareholder model,
whereas the stakeholder model
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is different, the stakeholders
that are obvious would be
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customers, would be employees,
would be suppliers,
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but stakeholders are broadly
defined these days to be society
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writ large
or even the environment
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categories that are so broad
that they're almost undefinable.
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Right.
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And that is the shift
that we're principally seeing
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in this ESG trend.
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And then the explicit idea
would be to use your money
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to advance these causes
as opposed to trying to
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make money for yourself
or make the most money you can
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or make whatever return you want
with a degree of safety.
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So is really explicitly
not trying to do what
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to maximize your own return,
but rather to try to
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advance these causes
through your actions
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or through your investments,
right?
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That's right.
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And so there are sort of
two sides to that.
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The first side
is on the investor side.
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So people are investing
in, let's say it's an ETF
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that's ESG weighted well,
they put their money in an ESG
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portfolio to
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to to try to realize
some returns in social values.
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And that is perfectly okay.
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And retail investor
as a household investor,
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as an individual,
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you can put your money
wherever you want to put it.
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Where ESG becomes
problematic is where we have
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in particular government
money being invested.
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So municipal bonds,
pension money,
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sovereign wealth funds,
these are all invested
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and they're invested by
institutional investors that
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then take their
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their profits and buy shares
of publicly traded companies
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and then try to push
those publicly traded companies
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into some of this ESG space
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where otherwise these companies
would not a participant of ESG.
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Now they've got their
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shareholders telling them, hey,
you need to
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move into this space on this
particular issue or you need to
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diversify your board,
or we need to get rid of your,
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you know, this committee chair,
because this committee chair
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doesn't represent a particular
ethnic group or,
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you know, doesn't
have you don't have enough,
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you know, diversity
in terms of sexuality
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on on on the board
and all kinds of things.
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But these are all pressures
that get exerted sort of
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upon companies sometimes against
the company's best interests.
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And so whether it be
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through investors or pressure
on like, say, the Fortune 500
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companies to change their ways
is still sort of this idea
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that these businesses need
to pursue these changed society.
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That's right.
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As opposed to either
maximizing their own profit.
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If you're talking about
like Ford
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or Exxon or investors
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going out there trying
to allocate their money to
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make the best returns,
the biggest returns they can.
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Well, that's absolutely right.
And it's important
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to realize how powerful
these companies are.
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So the big three are BlackRock,
State Street and Vanguard,
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and they together have around
23 to $26 trillion of assets
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under management.
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That's larger than the entire
United States GDP.
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Well, there are just under
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$100 trillion of assets
under management globally.
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Well, how in the world
do you get to those figures
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when you only have
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a little over 300 billionaires
in the United States
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excuse me, 700,
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a little over 700 billionaires
in United States, a little over
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3000 globally.
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There's just not enough
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private wealth in the world
to get to those astounding
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figures
in the trillions of dollars.
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So where do they come from?
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I already mentioned it's
government money.
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The sovereign wealth
funds are big ones.
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No, explain. Explain. Yeah.
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Explain what a sovereign wealth
fund is, because. Sure, sure.
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Everybody's
going to know what that is.
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Yeah, well, Sovereign Wealth
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Fund is basically just a state
owned investment fund.
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And so Norway is very oil
rich country
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and it has about
$1,000,000,000,000
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worth of assets under management
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and it's its sovereign
wealth fund.
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China has.
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And so like
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what Norway's done there is
they've taken some of that
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royalties or some of the money
that would have come in
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from their oil,
their their oil development.
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And they've put it
in this savings,
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in fact,
a savings account, right?
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That's right.
And they've invested that money.
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And so China has over
a trillion United Arab Emirates
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and Kuwait have somewhere around
a trillion each.
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Hong Kong has about 500 billion.
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Qatar has about 500 billion.
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So these are
these are astronomical amounts
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of of of government money
that are getting invested.
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And this is notwithstanding
the pension money
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that gets invested,
the top 100 pension
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funds in the world
amount to around $18 trillion.
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So now you're starting to see
where the money comes from.
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This is how the big three
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have that much money
under management,
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that many assets
under management.
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That's how globally we have
almost $100 trillion of assets
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under management
is through these
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these
these government investments.
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And I haven't even mentioned
bonds among all those.
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And the other thing
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that's a sort of a newer
trend is
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these are all institutional
investors.
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So 100 years ago, you know,
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most investors were just
household retail investors.
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They were wealthy individuals.
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They weren't these
big institutional investors
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In 1981, institutional investors
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amounted to about 35% of owners
in the stock market.
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That went to 58% in 2002.
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And now it's over 80%.
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00:11:26,452 --> 00:11:30,389
So the stock market is
is become dominated
255
00:11:30,389 --> 00:11:33,459
by these institutional investors
and not by just
256
00:11:33,592 --> 00:11:35,428
wealthy individuals.
257
00:11:35,428 --> 00:11:38,631
And and they're the ones
that manage
258
00:11:38,731 --> 00:11:40,066
all this government money. Now.
259
00:11:40,066 --> 00:11:41,701
They're other forms
of private money.
260
00:11:41,701 --> 00:11:44,437
Their insurance money
gets invested,
261
00:11:44,437 --> 00:11:46,939
endowments from foundations,
those, you know,
262
00:11:46,939 --> 00:11:49,008
university endowments
that are privately managed
263
00:11:49,008 --> 00:11:51,544
those those those
make it in there, too.
264
00:11:51,544 --> 00:11:53,612
But these are all different
mechanisms
265
00:11:53,612 --> 00:11:55,681
for how these asset managers
266
00:11:55,681 --> 00:11:59,351
get so much money
under management.
267
00:11:59,452 --> 00:12:03,489
There's this idea, though,
that ESG is a privately driven
268
00:12:03,489 --> 00:12:07,059
thing, and I really would
challenge that.
269
00:12:07,126 --> 00:12:09,829
The interesting thing about ESG
is it starts to blur
270
00:12:09,829 --> 00:12:13,365
the distinction
between public and private.
271
00:12:13,466 --> 00:12:16,035
So let's
just take BlackRock as the big
272
00:12:16,035 --> 00:12:18,571
so let's let's let's think
about this for a sec. Yeah.
273
00:12:18,571 --> 00:12:21,073
So when you say privately
274
00:12:21,073 --> 00:12:23,776
any investor today,
just as any investor in the past
275
00:12:23,776 --> 00:12:25,010
could, always
276
00:12:25,010 --> 00:12:26,445
is free to invest their money
277
00:12:26,445 --> 00:12:28,380
however they want
and if they want to,
278
00:12:28,380 --> 00:12:28,581
you know,
279
00:12:28,581 --> 00:12:29,381
for instance,
280
00:12:29,381 --> 00:12:31,083
during the Vietnam War,
some people wouldn't
281
00:12:31,083 --> 00:12:32,685
want to invest in Dow Chemical.
282
00:12:32,685 --> 00:12:34,620
They were making the napalm
that was being dropped
283
00:12:34,620 --> 00:12:35,688
on villages
284
00:12:35,688 --> 00:12:38,357
and people thought like, okay,
even if that's profitable,
285
00:12:38,357 --> 00:12:39,992
you're
that's sort of like blood money.
286
00:12:39,992 --> 00:12:41,327
You've got blood on your hands.
287
00:12:41,327 --> 00:12:45,297
You're making money from making
this product that's harmful.
288
00:12:45,364 --> 00:12:47,800
And there's nothing you do.
289
00:12:47,800 --> 00:12:48,434
To be clear,
290
00:12:48,434 --> 00:12:49,802
there's
nothing wrong with investors
291
00:12:49,802 --> 00:12:52,471
choosing to invest
only in businesses
292
00:12:52,471 --> 00:12:54,540
that even if they're legal,
they think like,
293
00:12:54,540 --> 00:12:56,642
that's not something
I want to be part of.
294
00:12:56,642 --> 00:12:58,711
That's not something
I approve of. Absolutely.
295
00:12:58,711 --> 00:13:01,180
And that could go on the left
or go on the right
296
00:13:01,180 --> 00:13:03,649
if you are an investor
and you don't want your money
297
00:13:03,649 --> 00:13:05,851
going toward the firearms
industry,
298
00:13:05,851 --> 00:13:06,819
then don't put it there.
299
00:13:06,819 --> 00:13:08,554
If you're an investor
and you don't want
300
00:13:08,554 --> 00:13:12,725
your money going to
to pornographic companies or,
301
00:13:12,892 --> 00:13:16,729
you know, or whatever it is,
alcohol, tobacco, you name it,
302
00:13:16,829 --> 00:13:17,563
that's fine.
303
00:13:17,563 --> 00:13:21,133
You can invest your money
to maximize social value
304
00:13:21,367 --> 00:13:23,102
if that's what you want to do.
305
00:13:23,102 --> 00:13:25,137
You can also hire a money
manager.
306
00:13:25,137 --> 00:13:27,173
You can hire an asset management
307
00:13:27,173 --> 00:13:29,975
asset manager to invest
your money in those ways.
308
00:13:29,975 --> 00:13:31,710
If you put controls on
309
00:13:31,710 --> 00:13:33,913
how your investment is,
and that's perfectly fine.
310
00:13:33,913 --> 00:13:35,581
Where the problem is is
when asset
311
00:13:35,581 --> 00:13:37,349
managers are investing
government money,
312
00:13:37,349 --> 00:13:39,585
you think about where all that
government money comes from.
313
00:13:39,585 --> 00:13:42,955
It comes from all these people
who really lack agency
314
00:13:43,022 --> 00:13:46,392
in determining how
that money gets invested because
315
00:13:46,492 --> 00:13:47,593
they're investing for
316
00:13:47,593 --> 00:13:49,662
on behalf of,
let's say, just as he's doing
317
00:13:49,662 --> 00:13:51,730
example, let's say
it's the state of Alabama.
318
00:13:51,730 --> 00:13:54,366
Well, the state of Alabama
becomes the client,
319
00:13:54,366 --> 00:13:57,336
notwithstanding the maybe,
you know, thousands
320
00:13:57,336 --> 00:13:58,470
and thousands of people
321
00:13:58,470 --> 00:14:01,473
whose money
is contributing to that fund.
322
00:14:01,607 --> 00:14:06,212
And so then you have a situation
where these individuals
323
00:14:06,212 --> 00:14:09,915
whose money has become
government money through
324
00:14:10,015 --> 00:14:14,186
pension tax, whatever it is now,
they don't get to choose
325
00:14:14,253 --> 00:14:15,788
where the money that that
326
00:14:15,788 --> 00:14:17,756
that they earned in that
they gave to their government.
327
00:14:17,756 --> 00:14:19,325
Now the government's investing.
328
00:14:19,325 --> 00:14:21,126
They have no agency
in determining where
329
00:14:21,126 --> 00:14:22,595
where
that money is getting invested.
330
00:14:22,595 --> 00:14:24,930
So when that happens,
331
00:14:24,930 --> 00:14:28,334
the investor is acting
as a fiduciary.
332
00:14:28,434 --> 00:14:32,004
And for for all these
purportedly numerous
333
00:14:32,004 --> 00:14:33,706
beneficiaries.
334
00:14:33,706 --> 00:14:35,140
And the problem comes
335
00:14:35,140 --> 00:14:37,076
when those investments
are not based
336
00:14:37,076 --> 00:14:40,446
on the maximization
of financial value, because now
337
00:14:40,446 --> 00:14:43,449
you're investing on perceived
social value,
338
00:14:43,682 --> 00:14:47,186
there's no way
to actually assess that.
339
00:14:47,186 --> 00:14:49,255
Like what are what are
the people of Alabama want?
340
00:14:49,255 --> 00:14:50,856
What does Joe want, Larry want?
341
00:14:50,856 --> 00:14:51,991
And all these people,
342
00:14:51,991 --> 00:14:54,593
you can't determine what they
want in terms of social value,
343
00:14:54,593 --> 00:14:58,197
but it's clear that they want
returns on financial investment.
344
00:14:58,197 --> 00:15:00,466
That's an obvious thing, right?
Yeah.
345
00:15:00,466 --> 00:15:03,035
With the pension,
one thing you can clearly say,
346
00:15:03,035 --> 00:15:06,038
you know, obviously you don't
simply have enough money
347
00:15:06,138 --> 00:15:09,141
taken out of your pay
to pay the benefits.
348
00:15:09,341 --> 00:15:12,878
The expected is that that money
is going to be invested
349
00:15:12,945 --> 00:15:14,680
and it's going to earn returns.
350
00:15:14,680 --> 00:15:15,781
And then it's
351
00:15:15,781 --> 00:15:19,151
not just what you saved,
but the the primarily
352
00:15:19,151 --> 00:15:20,719
the earnings on those returns,
353
00:15:20,719 --> 00:15:22,121
especially if you start young
354
00:15:22,121 --> 00:15:23,656
in your twenties
trying to save from that.
355
00:15:23,656 --> 00:15:27,726
There's like 40 years
for that compound interest
356
00:15:27,726 --> 00:15:31,830
or the compounding returns to
to build up a lot of money.
357
00:15:31,830 --> 00:15:36,635
So clearly people have it with
they're counting on that money.
358
00:15:36,635 --> 00:15:40,005
Earning a return
is sufficient to return to
359
00:15:40,105 --> 00:15:41,173
fund their retirement.
360
00:15:41,173 --> 00:15:42,241
So that's exactly right.
361
00:15:42,241 --> 00:15:45,911
And just to add to that,
I mean, ESG
362
00:15:45,978 --> 00:15:49,982
violates a fundamental
principle of investment.
363
00:15:50,049 --> 00:15:53,786
I mean, the traditional wisdom
behind investment was that
364
00:15:53,852 --> 00:15:55,487
you were doing two things
365
00:15:55,487 --> 00:15:59,224
mitigating
risk and maximizing returns.
366
00:15:59,291 --> 00:16:01,860
And that required
diversification,
367
00:16:01,860 --> 00:16:05,297
diversification across
fields, across industries.
368
00:16:05,397 --> 00:16:07,766
Because if there's a downturn
in one area,
369
00:16:07,766 --> 00:16:09,802
well, there might be an uptick
in another area.
370
00:16:09,802 --> 00:16:13,038
So to mitigate risk,
you needed to diversify.
371
00:16:13,138 --> 00:16:17,242
Well, ESG narrows
the range of possibilities
372
00:16:17,242 --> 00:16:18,277
for diversification.
373
00:16:18,277 --> 00:16:21,313
It automatically takes off
the table entire
374
00:16:21,313 --> 00:16:24,717
fields,
entire industries, companies
375
00:16:24,783 --> 00:16:28,787
that are deemed unacceptable
by ESG criteria.
376
00:16:28,887 --> 00:16:31,290
So as you narrow
the range of investment
377
00:16:31,290 --> 00:16:33,993
possibilities,
you narrow the possibility
378
00:16:33,993 --> 00:16:36,362
and you narrowed
the diversification options.
379
00:16:36,362 --> 00:16:40,899
And that just by conventional
investing wisdom, just by sheer
380
00:16:40,899 --> 00:16:45,671
math, means that you cannot
realize the same returns.
381
00:16:45,771 --> 00:16:50,142
And in fact, we've seen that ESG
had a couple of popular years
382
00:16:50,242 --> 00:16:51,110
during the pandemic.
383
00:16:51,110 --> 00:16:54,780
2019, 2020
were more popular for ESG,
384
00:16:54,847 --> 00:16:57,016
but ESG has really plummeted.
385
00:16:57,016 --> 00:17:02,488
ESG investments have really
tanked lately and are performing
386
00:17:02,554 --> 00:17:03,288
very poorly.
387
00:17:03,288 --> 00:17:03,756
I was listening
388
00:17:03,756 --> 00:17:06,058
to NPR of all stations,
and they had
389
00:17:06,058 --> 00:17:07,726
someone from Mercer,
not the university,
390
00:17:07,726 --> 00:17:08,961
but the financial institution
391
00:17:08,961 --> 00:17:12,331
on the other day
and was talking about
392
00:17:12,331 --> 00:17:16,702
how ESG weighted portfolios
cannot outperform the market.
393
00:17:16,702 --> 00:17:18,737
They're just
it's just not possible.
394
00:17:18,737 --> 00:17:21,740
Investors can put money in ESG
portfolios if they wish,
395
00:17:21,940 --> 00:17:24,209
if they have other motives
for investing.
396
00:17:24,209 --> 00:17:27,046
But if their motive
is to generate returns,
397
00:17:27,046 --> 00:17:29,848
that's not the best place
to put your money.
398
00:17:29,848 --> 00:17:32,851
No, you use the term
fiduciary duty.
399
00:17:32,851 --> 00:17:34,186
So let's explain this,
400
00:17:34,186 --> 00:17:37,322
because this really gets back
to the people running.
401
00:17:37,556 --> 00:17:41,293
Are pension fund
or if they are, you know,
402
00:17:41,360 --> 00:17:45,798
running a mutual fund,
they they have a fiduciary duty.
403
00:17:45,798 --> 00:17:50,002
Explain what
what that legal concept is. Yes.
404
00:17:50,002 --> 00:17:53,005
So a fiduciary is someone who
acts on the behalf of another.
405
00:17:53,038 --> 00:17:58,644
So if if you give me money
to invest on your behalf
406
00:17:58,677 --> 00:18:02,281
with clear instructions
to generate
407
00:18:02,347 --> 00:18:04,616
as many returns
as possible with that money,
408
00:18:04,616 --> 00:18:05,717
then my fiduciary
409
00:18:05,717 --> 00:18:09,588
obligation with your money
is to do that very thing.
410
00:18:09,688 --> 00:18:11,390
There are other forms of this
jury duty.
411
00:18:11,390 --> 00:18:13,092
If you serve on the board
412
00:18:13,092 --> 00:18:15,427
of directors of a company,
your fiduciary duty
413
00:18:15,427 --> 00:18:17,930
is to that company,
not to the president,
414
00:18:17,930 --> 00:18:20,332
not to any officer
in the organization,
415
00:18:20,332 --> 00:18:23,569
but to the entity
that is the organization itself,
416
00:18:23,569 --> 00:18:25,971
which means you have to have
a heightened duty
417
00:18:25,971 --> 00:18:28,974
to act in the best interests
of that organization.
418
00:18:29,141 --> 00:18:30,609
And anyone who's investing
419
00:18:30,609 --> 00:18:32,778
someone else's
money has a heightened duty
420
00:18:32,778 --> 00:18:34,012
to that person
421
00:18:34,012 --> 00:18:38,117
to invest that money in keeping
with that person's intents.
422
00:18:38,217 --> 00:18:43,322
And most people still want
to invest to maximize returns.
423
00:18:43,322 --> 00:18:45,357
That's what
the point of investment is.
424
00:18:45,357 --> 00:18:48,293
If you want to put your money
toward social causes,
425
00:18:48,293 --> 00:18:50,062
well,
there are charities for that.
426
00:18:50,062 --> 00:18:53,065
You can donate money for that
you can pay people.
427
00:18:53,265 --> 00:18:56,268
There are many other ways
besides investment.
428
00:18:56,401 --> 00:18:58,403
Realize those goals.
429
00:18:58,403 --> 00:19:02,508
But if you did want to do that
and they had the there was
430
00:19:02,508 --> 00:19:06,512
an ESG theme, the sun is like,
this is ESG investing.
431
00:19:06,512 --> 00:19:08,147
The S&P 500.
432
00:19:08,147 --> 00:19:13,318
This is not trying energy
stocks or are there a theme
433
00:19:13,385 --> 00:19:14,453
and people put their money
434
00:19:14,453 --> 00:19:17,523
into that, then that then
in one sense that would be fine.
435
00:19:17,523 --> 00:19:20,592
And also, whoever is running
that ESG fund would have a duty
436
00:19:20,592 --> 00:19:24,863
to the investors to truly invest
in ESG and s causes.
437
00:19:24,863 --> 00:19:26,999
Well, and this isn't this raises
another issue
438
00:19:26,999 --> 00:19:30,736
of why I think ESG portfolios
are starting to tank.
439
00:19:30,836 --> 00:19:32,638
And that's because the SEC
440
00:19:32,638 --> 00:19:36,275
has this new name rule,
which requires that it requires
441
00:19:36,441 --> 00:19:39,578
any fund that pools securities
442
00:19:39,578 --> 00:19:42,581
allegedly for ESG
443
00:19:42,681 --> 00:19:47,186
to, in fact, have 80% of
those assets actually be ESG.
444
00:19:47,252 --> 00:19:48,754
Because what was happening is
445
00:19:48,754 --> 00:19:50,055
you've heard
the term greenwashing,
446
00:19:50,055 --> 00:19:53,058
which is when ESG funds
447
00:19:53,192 --> 00:19:56,895
purported to be very green, are
very environmentally friendly.
448
00:19:56,895 --> 00:19:59,198
But in fact,
they had a bunch of non-U.S.
449
00:19:59,198 --> 00:19:59,898
stuff in it.
450
00:19:59,898 --> 00:20:02,668
So those years, 20, 19, 2020,
451
00:20:02,668 --> 00:20:06,004
when ESG securities were doing
really, really well.
452
00:20:06,071 --> 00:20:07,172
Well, it turns out
453
00:20:07,172 --> 00:20:10,042
one reason is because
they weren't actually ESG.
454
00:20:10,042 --> 00:20:13,512
So now the FCC, in cracking down
against greenwashing,
455
00:20:13,579 --> 00:20:17,182
is trying to to say, look,
if you're going to advertise
456
00:20:17,282 --> 00:20:20,652
your fund as ESG,
it better have in it
457
00:20:20,652 --> 00:20:22,688
what you say is on it.
458
00:20:22,688 --> 00:20:25,991
And another thing with
you'll you'll see with with
459
00:20:26,058 --> 00:20:28,961
with some of these activity,
in particular mutual funds
460
00:20:28,961 --> 00:20:33,465
that are ESG that are very
actively managed as that,
461
00:20:33,565 --> 00:20:35,067
you know, they're
probably not the best way
462
00:20:35,067 --> 00:20:36,301
to realize
your environmental goals
463
00:20:36,301 --> 00:20:38,203
because of the amount of money,
the amount of money
464
00:20:38,203 --> 00:20:39,538
you're paying in fees
465
00:20:39,538 --> 00:20:41,306
for these people
to invest your money
466
00:20:41,306 --> 00:20:43,675
when you could skip all that
and just give it directly
467
00:20:43,675 --> 00:20:46,678
to some activist organization
468
00:20:46,678 --> 00:20:49,181
that's out there
doing something green.
469
00:20:49,181 --> 00:20:52,417
And the one issue that
that would arise with a pension
470
00:20:52,417 --> 00:20:54,019
fund, particularly
since you've got
471
00:20:54,019 --> 00:20:57,322
all these thousands of
of people, is a schoolteacher,
472
00:20:57,422 --> 00:21:00,592
is in a state
where are members of this thing
473
00:21:00,692 --> 00:21:04,930
Even if they all sort of wanted
to invest in social causes,
474
00:21:04,930 --> 00:21:06,732
they wouldn't agree
on the same social causes.
475
00:21:06,732 --> 00:21:06,965
And so,
476
00:21:06,965 --> 00:21:08,800
I mean, that's
one of the big issues
477
00:21:08,800 --> 00:21:12,304
you see with any business,
certainly a historical one
478
00:21:12,571 --> 00:21:14,373
with any corporation,
if they say
479
00:21:14,373 --> 00:21:18,577
we want a corporation
to pursue a good cause as well,
480
00:21:18,644 --> 00:21:20,312
you know, amongst
all the stockholders,
481
00:21:20,312 --> 00:21:22,214
they're not going to agree
on the same good causes.
482
00:21:22,214 --> 00:21:25,050
And so that's a cause of
conflict there.
483
00:21:25,050 --> 00:21:27,319
Absolutely. So
484
00:21:27,419 --> 00:21:29,021
but just to be clear,
485
00:21:29,021 --> 00:21:31,923
with pensions
is pretty particularly clear
486
00:21:31,923 --> 00:21:33,892
that even though
somebody is, say,
487
00:21:33,892 --> 00:21:36,962
running the state pension
plan, it's not their money.
488
00:21:37,062 --> 00:21:41,800
It really it really that
is money that belongs to the
489
00:21:41,867 --> 00:21:44,069
beneficiaries,
the members of that,
490
00:21:44,069 --> 00:21:47,306
that is there is money that was
taken out of their paychecks
491
00:21:47,372 --> 00:21:50,175
to be invested on their behalf,
to make money
492
00:21:50,175 --> 00:21:52,678
to pay for their retirement
benefits. That's correct.
493
00:21:52,678 --> 00:21:53,445
And there's really not
494
00:21:53,445 --> 00:21:57,482
a sufficient mechanism yet
to determine how
495
00:21:57,549 --> 00:22:01,253
to assess the wants and desires
of all those managers.
496
00:22:01,353 --> 00:22:02,454
When it comes to investment,
497
00:22:02,454 --> 00:22:06,158
How do you invest money if it's
not on the basis of returns?
498
00:22:06,224 --> 00:22:07,225
What is it really?
499
00:22:07,225 --> 00:22:10,262
The only criterion is returns on
investment
500
00:22:10,262 --> 00:22:11,763
is maximizing returns.
501
00:22:11,763 --> 00:22:14,733
And once you start getting into
anything else, social value,
502
00:22:14,733 --> 00:22:18,070
there's no way you can find
something that's representative.
503
00:22:18,136 --> 00:22:20,605
Know all of those many, many,
many people,
504
00:22:20,605 --> 00:22:23,942
you know all the arguments
about why companies
505
00:22:24,009 --> 00:22:24,609
should be trying
506
00:22:24,609 --> 00:22:27,546
to maximize their profits
because you maximize profit,
507
00:22:27,546 --> 00:22:29,448
then everybody can take
their larger profits
508
00:22:29,448 --> 00:22:33,485
and contribute them to their own
favorite causes. That's right.
509
00:22:33,552 --> 00:22:36,388
So over the last couple of
years, there is a beginning to
510
00:22:36,388 --> 00:22:40,192
what's now being labeled
an anti ESG movement.
511
00:22:40,192 --> 00:22:43,962
So tell us a little bit amongst
people who feel that
512
00:22:43,962 --> 00:22:46,965
this is a bad
way for our economy to proceed.
513
00:22:47,132 --> 00:22:49,835
What does
what were they doing in response
514
00:22:49,835 --> 00:22:52,838
and what is this
anti ESG movement?
515
00:22:53,038 --> 00:22:56,441
Well, there is both a public
and a private side.
516
00:22:56,508 --> 00:22:59,644
First of all, ESG is getting
criticized by big name figures.
517
00:22:59,644 --> 00:23:01,813
People like Elon Musk calling it
the devil.
518
00:23:01,813 --> 00:23:05,350
And Donald Trump
calling it something or other.
519
00:23:05,350 --> 00:23:09,087
But you had an 18 governor
coalition led by Ron DeSantis
520
00:23:09,087 --> 00:23:11,456
that was going to be
an anti ESG coalition
521
00:23:11,456 --> 00:23:11,823
in which
522
00:23:11,823 --> 00:23:13,759
these governors of mostly
red states
523
00:23:13,759 --> 00:23:16,561
were going to encourage
their state legislatures
524
00:23:16,561 --> 00:23:19,731
to oppose ESG by either
divesting or taking
525
00:23:19,731 --> 00:23:22,901
whatever action was necessary
to combat ESG.
526
00:23:22,901 --> 00:23:25,570
Every single Republican
in the United States
527
00:23:25,570 --> 00:23:27,572
senator has come out
against ESG.
528
00:23:27,572 --> 00:23:30,542
Joe Manchin of West Virginia
has come out against ESG.
529
00:23:30,642 --> 00:23:32,978
There's a lot of political
pushback against ESG.
530
00:23:32,978 --> 00:23:36,548
You had 26 state Republicans,
531
00:23:36,548 --> 00:23:40,719
attorney
general sued to try to block
532
00:23:40,786 --> 00:23:42,187
a new
533
00:23:42,187 --> 00:23:45,824
Department of Labor rule
that would permit
534
00:23:45,924 --> 00:23:48,593
investors to consider
535
00:23:48,593 --> 00:23:53,465
ESG non-financial criteria
for full on one K investments.
536
00:23:53,532 --> 00:23:57,235
And the Republicans, in fact,
537
00:23:57,302 --> 00:24:00,572
lost the attorneys
general lost that that lawsuit
538
00:24:00,572 --> 00:24:02,107
at the trial level
539
00:24:02,107 --> 00:24:04,843
and on the basis
that the Department
540
00:24:04,843 --> 00:24:07,946
Labor did not act arbitrarily
or capriciously in
541
00:24:07,946 --> 00:24:08,814
enacting that rule.
542
00:24:08,814 --> 00:24:11,149
Now, there's a big rule
that's coming down
543
00:24:11,149 --> 00:24:14,152
with the Securities and Exchange
Commission, the S.E.C..
544
00:24:14,286 --> 00:24:16,421
I expect that to drop in
November.
545
00:24:16,421 --> 00:24:18,356
That's an unrelated issue.
546
00:24:18,356 --> 00:24:21,326
That's for ESG,
mandatory disclosures.
547
00:24:21,326 --> 00:24:24,796
But you're seeing a lot of of
legislation at the state level
548
00:24:24,796 --> 00:24:27,499
pushing back.
And that takes two forms.
549
00:24:27,499 --> 00:24:30,435
One is what they're calling
a well, one
550
00:24:30,435 --> 00:24:34,272
basically prevents
the investment of public money,
551
00:24:34,339 --> 00:24:39,177
the public contracts, the use of
public money for ESG causes.
552
00:24:39,244 --> 00:24:43,248
So you
you would say that if there's
553
00:24:43,348 --> 00:24:44,449
if there's
554
00:24:44,449 --> 00:24:45,417
any public money
555
00:24:45,417 --> 00:24:48,720
being used to discriminate
against a local industry,
556
00:24:48,720 --> 00:24:52,057
whether it's agriculture,
timber, tobacco, fires,
557
00:24:52,057 --> 00:24:55,160
whatever, public money
cannot be used in that way.
558
00:24:55,160 --> 00:24:56,394
The other one restricts
559
00:24:56,394 --> 00:24:57,762
the investment of pension money,
560
00:24:57,762 --> 00:25:03,702
in particular state
pension money in nonfinancial
561
00:25:03,768 --> 00:25:08,607
portfolios, non-financial funds
for any purpose other than
562
00:25:08,673 --> 00:25:11,676
financial return, so that you're
not using state pension money.
563
00:25:11,710 --> 00:25:13,945
And that's that's going on.
564
00:25:13,945 --> 00:25:17,983
And I think 22, 22 states
so far have adopted that.
565
00:25:18,049 --> 00:25:20,852
So we're getting close
to about half the states
566
00:25:20,852 --> 00:25:23,188
that have addressed it
at at least some level.
567
00:25:23,188 --> 00:25:25,924
Alabama had SB 261 that passed
568
00:25:25,924 --> 00:25:27,759
last legislative session
that fell into the
569
00:25:27,759 --> 00:25:29,761
first category
about the use of public money.
570
00:25:29,761 --> 00:25:30,128
Okay.
571
00:25:30,128 --> 00:25:31,997
They have not tackled
572
00:25:31,997 --> 00:25:37,269
the pension side of things, but
those are all examples of how
573
00:25:37,335 --> 00:25:39,771
sort of publicly
people are pushing back.
574
00:25:39,771 --> 00:25:40,639
But on the private sector,
575
00:25:40,639 --> 00:25:44,242
people are divesting from ESG
because it's underperforming.
576
00:25:44,442 --> 00:25:47,178
There's a new study out
by somebody named Christos
577
00:25:47,178 --> 00:25:48,947
McCready's and Dr.
578
00:25:48,947 --> 00:25:53,051
Marsh Margie Simon,
and they're finding
579
00:25:53,118 --> 00:25:56,354
is that investment portfolios
that ignore ESG metrics
580
00:25:56,555 --> 00:25:56,988
and rely
581
00:25:56,988 --> 00:26:01,226
period purely on returns
in fact generate higher returns
582
00:26:01,293 --> 00:26:05,697
that ESG portfolios are more
volatile than non ESG portfolios
583
00:26:05,697 --> 00:26:08,266
and higher risk in that
they underperform the market.
584
00:26:08,266 --> 00:26:09,935
This is a study
that just came out.
585
00:26:09,935 --> 00:26:12,938
According to an article
in Forbes last week,
586
00:26:13,071 --> 00:26:18,009
assets under management
in ESG declined by 339 billion.
587
00:26:18,009 --> 00:26:21,212
And just the second
quarter of 2023.
588
00:26:21,279 --> 00:26:24,816
So investors are starting
to realize, this ESG
589
00:26:24,816 --> 00:26:25,951
is not worth it.
590
00:26:25,951 --> 00:26:27,852
Like we want
returns on investment.
591
00:26:27,852 --> 00:26:31,623
We need to divest from from ESG
because it's
592
00:26:31,623 --> 00:26:32,891
not generating returns.
593
00:26:32,891 --> 00:26:37,362
It was faddish in 2019, 2020,
but now people have
594
00:26:37,462 --> 00:26:40,632
woken up to the reality of it
and they've realized that over
595
00:26:40,632 --> 00:26:43,768
time,
limiting the range of investment
596
00:26:43,768 --> 00:26:47,839
possibility is not a long term
wise strategy
597
00:26:47,939 --> 00:26:52,644
of prudent investment. And so
598
00:26:52,711 --> 00:26:53,845
ESG is dropping.
599
00:26:53,845 --> 00:26:56,281
Even in the last proxy season,
600
00:26:56,281 --> 00:26:59,985
we saw fewer shareholder
proposals dealing with ESG,
601
00:27:00,018 --> 00:27:02,654
even just on that level,
even the shareholders,
602
00:27:02,654 --> 00:27:03,722
those have dropped a lot.
603
00:27:03,722 --> 00:27:05,924
And I think that has to do
with sort of the pushback
604
00:27:05,924 --> 00:27:09,160
against Anheuser-Busch
and Target for taking
605
00:27:09,227 --> 00:27:12,631
very controversial political
stances in their advertising
606
00:27:12,797 --> 00:27:14,466
and suffering
607
00:27:14,466 --> 00:27:15,767
based on consumer
608
00:27:15,767 --> 00:27:16,735
demand plummeting
609
00:27:16,735 --> 00:27:18,203
for their products and saying,
610
00:27:18,203 --> 00:27:19,838
we're not going to shop
at Target
611
00:27:19,838 --> 00:27:22,440
because these products
are putting the children section
612
00:27:22,440 --> 00:27:24,442
or we're not going to buy
Bud Light
613
00:27:24,442 --> 00:27:26,978
because we don't like the way
it's being marketed
614
00:27:26,978 --> 00:27:29,814
and because of the hits
that those companies took,
615
00:27:29,814 --> 00:27:32,817
I think we saw as shareholders
saying, well, wait a second, we
616
00:27:32,817 --> 00:27:35,253
we need to take a step
a step back here.
617
00:27:35,253 --> 00:27:38,423
And we can't just
we can't just sabotage
618
00:27:38,423 --> 00:27:40,625
the companies that were that
we own.
619
00:27:40,625 --> 00:27:42,560
Otherwise, what are
why are we owning these?
620
00:27:42,560 --> 00:27:43,662
All right.
621
00:27:43,662 --> 00:27:46,231
And just so one thing to sort of
ramp up here,
622
00:27:46,231 --> 00:27:48,433
I think the point is like
623
00:27:48,433 --> 00:27:50,769
there's somehow that thought
that you could either
624
00:27:50,769 --> 00:27:54,072
pursue returns or profits
or do something
625
00:27:54,072 --> 00:27:57,108
that is good for society,
but profit is actually good
626
00:27:57,108 --> 00:27:58,710
for society, too, isn't it?
627
00:27:58,710 --> 00:28:00,078
That is such a good point.
628
00:28:00,078 --> 00:28:02,180
Dan. Profits are great
for society
629
00:28:02,180 --> 00:28:05,183
because what,
what what do businesses do?
630
00:28:05,283 --> 00:28:06,751
They employ people.
631
00:28:06,751 --> 00:28:10,388
They add value to society
by giving us goods and services
632
00:28:10,388 --> 00:28:13,825
at cheaper prices
under a state of competition.
633
00:28:13,892 --> 00:28:17,862
And they just they add value
to our everyday lives.
634
00:28:17,862 --> 00:28:20,865
And that is a wonderful thing.
635
00:28:21,032 --> 00:28:23,268
Jobs, opportunities.
636
00:28:23,268 --> 00:28:25,103
And they invest
in their communities
637
00:28:25,103 --> 00:28:27,072
in many different ways as well.
638
00:28:27,072 --> 00:28:30,608
What company
wants to headquarter in a place
639
00:28:30,608 --> 00:28:33,611
and see that place doing poorly?
640
00:28:33,611 --> 00:28:34,345
Not none.
641
00:28:34,345 --> 00:28:37,315
Then they all invest in their
communities in different ways.
642
00:28:37,315 --> 00:28:40,819
Corporations are astounding
and what they do to
643
00:28:40,819 --> 00:28:43,455
improve the quality of life
644
00:28:43,555 --> 00:28:47,258
and every dollar and
profit they get is is ultimately
645
00:28:47,258 --> 00:28:48,893
because
somebody purchased their profit
646
00:28:48,893 --> 00:28:51,529
and then showed that they wanted
to buy that good value.
647
00:28:51,529 --> 00:28:53,198
Sign of value
is a sign of value.
648
00:28:53,198 --> 00:28:55,100
Well, thanks so much
for coming on and joining us.
649
00:28:55,100 --> 00:28:56,735
And thank you
all for joining us.
650
00:28:56,735 --> 00:29:03,007
Join us again next time
for another E Conversations.
651
00:29:03,074 --> 00:29:05,243
This has been e conversations,
652
00:29:05,243 --> 00:29:08,580
a joint production of Troy
Church Vision and the Manuel H.
653
00:29:08,613 --> 00:29:11,716
Johnson Center for Political
Economy at Troy University.
00:00:01,668 --> 00:00:03,970
The opinions expressed
on this program represent
2
00:00:03,970 --> 00:00:06,873
the viewpoints of individual
authors or contributors,
3
00:00:06,873 --> 00:00:13,680
and do not necessarily reflect
those of Troy University.
4
00:00:13,747 --> 00:00:15,982
This is E Conversations,
5
00:00:15,982 --> 00:00:19,452
a joint production of Joy Trojan
Vision and the Manual. A.H.
6
00:00:19,452 --> 00:00:22,122
Johnson Center
for Political Economy.
7
00:00:22,122 --> 00:00:24,057
Now here's your host, Dr.
8
00:00:24,057 --> 00:00:27,827
Dan Sutter.
9
00:00:27,927 --> 00:00:29,929
Hello
and welcome to Conversations.
10
00:00:29,929 --> 00:00:30,864
I'm your host, Dr.
11
00:00:30,864 --> 00:00:34,067
Dan Sutter of the Johnson Center
for Political Economy on Wall
12
00:00:34,067 --> 00:00:36,369
Street has long served
as the embodiment of greed
13
00:00:36,369 --> 00:00:38,972
in our economy, represented
perhaps most visibly
14
00:00:38,972 --> 00:00:39,572
and memorably,
15
00:00:39,572 --> 00:00:43,343
by the character Gordon
Gekko in Oliver Stone's movie.
16
00:00:43,443 --> 00:00:44,978
Many have long called
for investors
17
00:00:44,978 --> 00:00:46,980
to consider the good for society
18
00:00:46,980 --> 00:00:49,983
as opposed to their own profits
in investing their money.
19
00:00:50,083 --> 00:00:53,486
The ESG movement is a modern
version of socially responsible
20
00:00:53,486 --> 00:00:54,921
investing, embodying
21
00:00:54,921 --> 00:00:58,224
this idea that of considering
societal impact.
22
00:00:58,291 --> 00:01:01,928
Perhaps ironically, finance
is attempts to change the world
23
00:01:01,928 --> 00:01:03,763
instead of making money
have proven
24
00:01:03,763 --> 00:01:07,167
even more controversial
than greed ever arise.
25
00:01:07,233 --> 00:01:09,702
How is an investment
strategy managed to become
26
00:01:09,702 --> 00:01:11,071
a contentious political issue,
27
00:01:11,071 --> 00:01:13,840
even being discussed
by presidential candidates?
28
00:01:13,840 --> 00:01:16,342
And is ESG
truly a threat to a prosperous
29
00:01:16,342 --> 00:01:18,478
and thriving market economy?
30
00:01:18,478 --> 00:01:22,215
Joining me in conversations
today to discuss ESG is Dr.
31
00:01:22,215 --> 00:01:23,083
Element at Hall.
32
00:01:23,083 --> 00:01:24,951
He's the Grady Rogier professor
33
00:01:24,951 --> 00:01:26,019
and executive director
34
00:01:26,019 --> 00:01:28,588
of the Johnson Center
here at Troy University.
35
00:01:28,588 --> 00:01:31,724
Dr. Mendenhall has a bachelor's
degree from Furman University,
36
00:01:31,958 --> 00:01:33,526
a law degree and master's
degrees
37
00:01:33,526 --> 00:01:35,995
from West Virginia University
and a Ph.D.
38
00:01:35,995 --> 00:01:37,931
in English from Auburn.
39
00:01:37,931 --> 00:01:39,799
Prior to joining Troy, Dr.
40
00:01:39,799 --> 00:01:40,100
Martin Hall
41
00:01:40,100 --> 00:01:42,836
worked in the Alabama
Supreme Court, and he was also
42
00:01:42,836 --> 00:01:44,971
the director of the Blackstone
and Burke Center
43
00:01:44,971 --> 00:01:47,140
at Faulkner
University's Law School.
44
00:01:47,140 --> 00:01:48,708
Welcome back to the show, Alan.
45
00:01:48,708 --> 00:01:50,844
Dan Thanks for having me
as always.
46
00:01:50,844 --> 00:01:52,679
I am always
47
00:01:52,679 --> 00:01:55,248
very happy to be here
and very grateful to you
48
00:01:55,248 --> 00:01:58,518
for having so many episodes
and being a tireless
49
00:01:58,618 --> 00:02:01,621
defender of market education.
50
00:02:01,721 --> 00:02:02,689
Well, well, thanks.
51
00:02:02,689 --> 00:02:03,623
Thanks so much.
52
00:02:03,623 --> 00:02:05,758
And we'll have you on more times
53
00:02:05,758 --> 00:02:09,329
giving your opinion of our host.
54
00:02:09,395 --> 00:02:11,865
So before we get started, just
55
00:02:11,865 --> 00:02:14,534
explain for our viewers
what exactly ESG is.
56
00:02:14,534 --> 00:02:16,736
I use the initials there,
but they have the
57
00:02:16,736 --> 00:02:18,404
they are an initials.
58
00:02:18,404 --> 00:02:19,772
So explain for everybody
59
00:02:19,772 --> 00:02:22,876
before we get started here
exactly what ESG is.
60
00:02:23,109 --> 00:02:26,179
So ESG is
the acronym that stands
61
00:02:26,179 --> 00:02:29,182
for environmental,
Social and Governance.
62
00:02:29,415 --> 00:02:34,454
And that acronym involves
the financial non-free
63
00:02:34,454 --> 00:02:37,891
natural factors and metrics
that central banks,
64
00:02:37,891 --> 00:02:41,728
institutional investors,
investors in general,
65
00:02:41,794 --> 00:02:45,565
all sorts of financial
institutions take into account
66
00:02:45,565 --> 00:02:48,535
when they allocate capital
or assess risk.
67
00:02:48,535 --> 00:02:52,071
So we're principally talking
about investment criteria.
68
00:02:52,272 --> 00:02:56,976
When people say we're going
to invest in ESG funds.
69
00:02:57,043 --> 00:02:59,312
What they typically
are referring to are,
70
00:02:59,312 --> 00:03:00,713
more than anything else,
71
00:03:00,713 --> 00:03:02,882
mutual funds
and exchange traded funds.
72
00:03:02,882 --> 00:03:06,653
So a mutual fund is different
from an exchange traded
73
00:03:06,653 --> 00:03:09,255
fund in that
they both pool securities,
74
00:03:09,255 --> 00:03:11,891
but a mutual fund is traded
once a day.
75
00:03:11,891 --> 00:03:14,127
The value of it is calculated
at the end of the day,
76
00:03:14,127 --> 00:03:16,129
whereas an exchange traded fund
77
00:03:16,129 --> 00:03:19,566
can be bought
and sold all throughout the day.
78
00:03:19,632 --> 00:03:20,333
Mutual funds
79
00:03:20,333 --> 00:03:24,037
are typically actively
managed by a manager.
80
00:03:24,103 --> 00:03:25,405
You pay fees,
81
00:03:25,405 --> 00:03:26,906
whereas an exchange traded fund
82
00:03:26,906 --> 00:03:30,944
is a passive investment vehicle,
and an exchange traded fund
83
00:03:31,177 --> 00:03:34,080
will typically track
84
00:03:34,080 --> 00:03:37,016
an index
something like the S&P 500.
85
00:03:37,016 --> 00:03:41,487
And therefore, as a passive
investment vehicle, it
86
00:03:41,554 --> 00:03:44,624
typically outperforms the market
because you're not dealing
87
00:03:44,624 --> 00:03:45,858
with human intelligence.
88
00:03:45,858 --> 00:03:46,125
Tell it.
89
00:03:46,125 --> 00:03:47,560
It's having to pick this company
90
00:03:47,560 --> 00:03:51,264
or that company or this field
or that field.
91
00:03:51,331 --> 00:03:53,933
Mutual funds are much older
ETFs are
92
00:03:53,933 --> 00:03:56,069
a more
of a newer form of investment,
93
00:03:56,069 --> 00:03:59,005
but they are typically
where we see
94
00:03:59,005 --> 00:04:01,874
ESG investments occurring.
95
00:04:01,874 --> 00:04:06,346
So explain a little bit like so
U.S., ESG, environmental,
96
00:04:06,446 --> 00:04:09,182
social
and governance components.
97
00:04:09,182 --> 00:04:11,351
What would be some of the things
that would fit
98
00:04:11,351 --> 00:04:12,986
under those headings? Yes.
99
00:04:12,986 --> 00:04:15,521
So under the EA, for example,
100
00:04:15,521 --> 00:04:19,092
you might have companies
included within an E
101
00:04:19,225 --> 00:04:23,162
if they have committed
to net zero emissions by 2050,
102
00:04:23,229 --> 00:04:26,132
all sorts
of environmental factors,
103
00:04:26,132 --> 00:04:28,801
whether they are pertaining
to biodiversity
104
00:04:28,801 --> 00:04:33,539
or just in general pollution
or other initiatives
105
00:04:33,539 --> 00:04:37,010
that those companies
might undertake that are green.
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The s would refer to social
and that can be
107
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a wide variety of things.
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I think in Europe
109
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the social tends to involve
more workers, right?
110
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Right.
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00:04:47,820 --> 00:04:52,058
Whereas in
the United States, the social
112
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tends toward,
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00:04:53,526 --> 00:04:56,763
you know, diversity, equity,
inclusion in the workplace
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00:04:56,829 --> 00:05:00,466
or commitments
to different social causes,
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whether companies are investing
money in Black Lives Matter or
116
00:05:04,771 --> 00:05:08,241
of one one
sort of controversial area
117
00:05:08,241 --> 00:05:09,809
in which we're seeing
it is after the Dobbs
118
00:05:09,809 --> 00:05:12,845
opinion is whether a company
will pay for employees
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00:05:13,079 --> 00:05:16,749
to go across the state to get
an abortion in another state
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where abortion is legal.
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So these all are factors
that fall into the. Yes,
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the the G refers to governance,
as you mentioned earlier.
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And this is sort of board
level diversity
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or executive compensation,
those types of matters.
125
00:05:31,230 --> 00:05:34,701
But I actually like to think of
the G in the bigger picture
126
00:05:34,701 --> 00:05:37,904
in terms of the shift
from the shareholder
127
00:05:37,904 --> 00:05:39,906
to the stakeholder
model of governments.
128
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The traditional Milton Friedman
line that corporations exist
129
00:05:43,609 --> 00:05:48,214
for the maximization of profits
falls under the traditional
130
00:05:48,281 --> 00:05:51,284
shareholder model,
whereas the stakeholder model
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00:05:51,451 --> 00:05:54,821
is different, the stakeholders
that are obvious would be
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customers, would be employees,
would be suppliers,
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00:05:58,791 --> 00:06:03,062
but stakeholders are broadly
defined these days to be society
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writ large
or even the environment
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00:06:04,997 --> 00:06:08,201
categories that are so broad
that they're almost undefinable.
136
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Right.
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00:06:08,601 --> 00:06:11,804
And that is the shift
that we're principally seeing
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in this ESG trend.
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00:06:16,242 --> 00:06:20,613
And then the explicit idea
would be to use your money
140
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to advance these causes
as opposed to trying to
141
00:06:24,784 --> 00:06:27,420
make money for yourself
or make the most money you can
142
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or make whatever return you want
with a degree of safety.
143
00:06:30,990 --> 00:06:35,161
So is really explicitly
not trying to do what
144
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to maximize your own return,
but rather to try to
145
00:06:38,231 --> 00:06:41,601
advance these causes
through your actions
146
00:06:41,601 --> 00:06:43,536
or through your investments,
right?
147
00:06:43,536 --> 00:06:44,137
That's right.
148
00:06:44,137 --> 00:06:46,105
And so there are sort of
two sides to that.
149
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The first side
is on the investor side.
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00:06:48,541 --> 00:06:52,311
So people are investing
in, let's say it's an ETF
151
00:06:52,311 --> 00:06:55,882
that's ESG weighted well,
they put their money in an ESG
152
00:06:55,982 --> 00:06:57,984
portfolio to
153
00:06:57,984 --> 00:07:01,754
to to try to realize
some returns in social values.
154
00:07:01,754 --> 00:07:03,089
And that is perfectly okay.
155
00:07:03,089 --> 00:07:05,658
And retail investor
as a household investor,
156
00:07:05,658 --> 00:07:06,959
as an individual,
157
00:07:06,959 --> 00:07:09,929
you can put your money
wherever you want to put it.
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00:07:09,929 --> 00:07:14,300
Where ESG becomes
problematic is where we have
159
00:07:14,400 --> 00:07:17,603
in particular government
money being invested.
160
00:07:17,603 --> 00:07:20,673
So municipal bonds,
pension money,
161
00:07:20,840 --> 00:07:24,911
sovereign wealth funds,
these are all invested
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00:07:25,011 --> 00:07:29,982
and they're invested by
institutional investors that
163
00:07:30,082 --> 00:07:32,752
then take their
164
00:07:32,752 --> 00:07:36,656
their profits and buy shares
of publicly traded companies
165
00:07:36,889 --> 00:07:39,759
and then try to push
those publicly traded companies
166
00:07:39,759 --> 00:07:42,695
into some of this ESG space
167
00:07:42,695 --> 00:07:45,932
where otherwise these companies
would not a participant of ESG.
168
00:07:45,932 --> 00:07:46,833
Now they've got their
169
00:07:46,833 --> 00:07:50,503
shareholders telling them, hey,
you need to
170
00:07:50,570 --> 00:07:54,474
move into this space on this
particular issue or you need to
171
00:07:54,540 --> 00:07:57,977
diversify your board,
or we need to get rid of your,
172
00:07:58,077 --> 00:08:01,314
you know, this committee chair,
because this committee chair
173
00:08:01,314 --> 00:08:05,117
doesn't represent a particular
ethnic group or,
174
00:08:05,218 --> 00:08:07,987
you know, doesn't
have you don't have enough,
175
00:08:07,987 --> 00:08:10,623
you know, diversity
in terms of sexuality
176
00:08:10,623 --> 00:08:14,927
on on on the board
and all kinds of things.
177
00:08:15,027 --> 00:08:18,464
But these are all pressures
that get exerted sort of
178
00:08:18,564 --> 00:08:23,769
upon companies sometimes against
the company's best interests.
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00:08:23,836 --> 00:08:25,705
And so whether it be
180
00:08:25,705 --> 00:08:30,843
through investors or pressure
on like, say, the Fortune 500
181
00:08:30,910 --> 00:08:35,147
companies to change their ways
is still sort of this idea
182
00:08:35,147 --> 00:08:39,018
that these businesses need
to pursue these changed society.
183
00:08:39,118 --> 00:08:39,952
That's right.
184
00:08:39,952 --> 00:08:42,421
As opposed to either
maximizing their own profit.
185
00:08:42,421 --> 00:08:43,956
If you're talking about
like Ford
186
00:08:43,956 --> 00:08:45,725
or Exxon or investors
187
00:08:45,725 --> 00:08:48,728
going out there trying
to allocate their money to
188
00:08:48,961 --> 00:08:51,330
make the best returns,
the biggest returns they can.
189
00:08:51,330 --> 00:08:53,199
Well, that's absolutely right.
And it's important
190
00:08:53,199 --> 00:08:55,434
to realize how powerful
these companies are.
191
00:08:55,434 --> 00:08:58,771
So the big three are BlackRock,
State Street and Vanguard,
192
00:08:58,771 --> 00:09:03,643
and they together have around
23 to $26 trillion of assets
193
00:09:03,643 --> 00:09:04,477
under management.
194
00:09:04,477 --> 00:09:07,947
That's larger than the entire
United States GDP.
195
00:09:08,014 --> 00:09:10,783
Well, there are just under
196
00:09:10,783 --> 00:09:13,986
$100 trillion of assets
under management globally.
197
00:09:14,053 --> 00:09:16,188
Well, how in the world
do you get to those figures
198
00:09:16,188 --> 00:09:17,156
when you only have
199
00:09:17,156 --> 00:09:20,393
a little over 300 billionaires
in the United States
200
00:09:20,493 --> 00:09:21,494
excuse me, 700,
201
00:09:21,494 --> 00:09:24,196
a little over 700 billionaires
in United States, a little over
202
00:09:24,196 --> 00:09:25,731
3000 globally.
203
00:09:25,731 --> 00:09:26,432
There's just not enough
204
00:09:26,432 --> 00:09:29,335
private wealth in the world
to get to those astounding
205
00:09:29,335 --> 00:09:30,603
figures
in the trillions of dollars.
206
00:09:30,603 --> 00:09:31,404
So where do they come from?
207
00:09:31,404 --> 00:09:33,973
I already mentioned it's
government money.
208
00:09:33,973 --> 00:09:36,342
The sovereign wealth
funds are big ones.
209
00:09:36,342 --> 00:09:37,543
No, explain. Explain. Yeah.
210
00:09:37,543 --> 00:09:39,779
Explain what a sovereign wealth
fund is, because. Sure, sure.
211
00:09:39,779 --> 00:09:42,048
Everybody's
going to know what that is.
212
00:09:42,048 --> 00:09:42,915
Yeah, well, Sovereign Wealth
213
00:09:42,915 --> 00:09:46,452
Fund is basically just a state
owned investment fund.
214
00:09:46,552 --> 00:09:49,255
And so Norway is very oil
rich country
215
00:09:49,255 --> 00:09:51,457
and it has about
$1,000,000,000,000
216
00:09:51,457 --> 00:09:53,192
worth of assets under management
217
00:09:53,192 --> 00:09:55,361
and it's its sovereign
wealth fund.
218
00:09:55,361 --> 00:09:56,395
China has.
219
00:09:56,395 --> 00:09:57,129
And so like
220
00:09:57,129 --> 00:09:59,966
what Norway's done there is
they've taken some of that
221
00:09:59,966 --> 00:10:02,969
royalties or some of the money
that would have come in
222
00:10:03,169 --> 00:10:05,671
from their oil,
their their oil development.
223
00:10:05,671 --> 00:10:07,773
And they've put it
in this savings,
224
00:10:07,773 --> 00:10:08,975
in fact,
a savings account, right?
225
00:10:08,975 --> 00:10:10,810
That's right.
And they've invested that money.
226
00:10:10,810 --> 00:10:15,648
And so China has over
a trillion United Arab Emirates
227
00:10:15,648 --> 00:10:19,418
and Kuwait have somewhere around
a trillion each.
228
00:10:19,485 --> 00:10:21,754
Hong Kong has about 500 billion.
229
00:10:21,754 --> 00:10:23,422
Qatar has about 500 billion.
230
00:10:23,422 --> 00:10:26,425
So these are
these are astronomical amounts
231
00:10:26,425 --> 00:10:28,928
of of of government money
that are getting invested.
232
00:10:28,928 --> 00:10:31,631
And this is notwithstanding
the pension money
233
00:10:31,631 --> 00:10:33,833
that gets invested,
the top 100 pension
234
00:10:33,833 --> 00:10:38,638
funds in the world
amount to around $18 trillion.
235
00:10:38,704 --> 00:10:42,375
So now you're starting to see
where the money comes from.
236
00:10:42,375 --> 00:10:44,610
This is how the big three
237
00:10:44,610 --> 00:10:47,113
have that much money
under management,
238
00:10:47,113 --> 00:10:48,280
that many assets
under management.
239
00:10:48,280 --> 00:10:51,584
That's how globally we have
almost $100 trillion of assets
240
00:10:51,584 --> 00:10:54,053
under management
is through these
241
00:10:54,053 --> 00:10:55,554
these
these government investments.
242
00:10:55,554 --> 00:10:58,557
And I haven't even mentioned
bonds among all those.
243
00:10:58,557 --> 00:10:59,325
And the other thing
244
00:10:59,325 --> 00:11:01,560
that's a sort of a newer
trend is
245
00:11:01,560 --> 00:11:03,295
these are all institutional
investors.
246
00:11:03,295 --> 00:11:05,865
So 100 years ago, you know,
247
00:11:05,865 --> 00:11:08,567
most investors were just
household retail investors.
248
00:11:08,567 --> 00:11:10,069
They were wealthy individuals.
249
00:11:10,069 --> 00:11:13,506
They weren't these
big institutional investors
250
00:11:13,572 --> 00:11:17,343
In 1981, institutional investors
251
00:11:17,343 --> 00:11:21,380
amounted to about 35% of owners
in the stock market.
252
00:11:21,480 --> 00:11:23,916
That went to 58% in 2002.
253
00:11:23,916 --> 00:11:26,452
And now it's over 80%.
254
00:11:26,452 --> 00:11:30,389
So the stock market is
is become dominated
255
00:11:30,389 --> 00:11:33,459
by these institutional investors
and not by just
256
00:11:33,592 --> 00:11:35,428
wealthy individuals.
257
00:11:35,428 --> 00:11:38,631
And and they're the ones
that manage
258
00:11:38,731 --> 00:11:40,066
all this government money. Now.
259
00:11:40,066 --> 00:11:41,701
They're other forms
of private money.
260
00:11:41,701 --> 00:11:44,437
Their insurance money
gets invested,
261
00:11:44,437 --> 00:11:46,939
endowments from foundations,
those, you know,
262
00:11:46,939 --> 00:11:49,008
university endowments
that are privately managed
263
00:11:49,008 --> 00:11:51,544
those those those
make it in there, too.
264
00:11:51,544 --> 00:11:53,612
But these are all different
mechanisms
265
00:11:53,612 --> 00:11:55,681
for how these asset managers
266
00:11:55,681 --> 00:11:59,351
get so much money
under management.
267
00:11:59,452 --> 00:12:03,489
There's this idea, though,
that ESG is a privately driven
268
00:12:03,489 --> 00:12:07,059
thing, and I really would
challenge that.
269
00:12:07,126 --> 00:12:09,829
The interesting thing about ESG
is it starts to blur
270
00:12:09,829 --> 00:12:13,365
the distinction
between public and private.
271
00:12:13,466 --> 00:12:16,035
So let's
just take BlackRock as the big
272
00:12:16,035 --> 00:12:18,571
so let's let's let's think
about this for a sec. Yeah.
273
00:12:18,571 --> 00:12:21,073
So when you say privately
274
00:12:21,073 --> 00:12:23,776
any investor today,
just as any investor in the past
275
00:12:23,776 --> 00:12:25,010
could, always
276
00:12:25,010 --> 00:12:26,445
is free to invest their money
277
00:12:26,445 --> 00:12:28,380
however they want
and if they want to,
278
00:12:28,380 --> 00:12:28,581
you know,
279
00:12:28,581 --> 00:12:29,381
for instance,
280
00:12:29,381 --> 00:12:31,083
during the Vietnam War,
some people wouldn't
281
00:12:31,083 --> 00:12:32,685
want to invest in Dow Chemical.
282
00:12:32,685 --> 00:12:34,620
They were making the napalm
that was being dropped
283
00:12:34,620 --> 00:12:35,688
on villages
284
00:12:35,688 --> 00:12:38,357
and people thought like, okay,
even if that's profitable,
285
00:12:38,357 --> 00:12:39,992
you're
that's sort of like blood money.
286
00:12:39,992 --> 00:12:41,327
You've got blood on your hands.
287
00:12:41,327 --> 00:12:45,297
You're making money from making
this product that's harmful.
288
00:12:45,364 --> 00:12:47,800
And there's nothing you do.
289
00:12:47,800 --> 00:12:48,434
To be clear,
290
00:12:48,434 --> 00:12:49,802
there's
nothing wrong with investors
291
00:12:49,802 --> 00:12:52,471
choosing to invest
only in businesses
292
00:12:52,471 --> 00:12:54,540
that even if they're legal,
they think like,
293
00:12:54,540 --> 00:12:56,642
that's not something
I want to be part of.
294
00:12:56,642 --> 00:12:58,711
That's not something
I approve of. Absolutely.
295
00:12:58,711 --> 00:13:01,180
And that could go on the left
or go on the right
296
00:13:01,180 --> 00:13:03,649
if you are an investor
and you don't want your money
297
00:13:03,649 --> 00:13:05,851
going toward the firearms
industry,
298
00:13:05,851 --> 00:13:06,819
then don't put it there.
299
00:13:06,819 --> 00:13:08,554
If you're an investor
and you don't want
300
00:13:08,554 --> 00:13:12,725
your money going to
to pornographic companies or,
301
00:13:12,892 --> 00:13:16,729
you know, or whatever it is,
alcohol, tobacco, you name it,
302
00:13:16,829 --> 00:13:17,563
that's fine.
303
00:13:17,563 --> 00:13:21,133
You can invest your money
to maximize social value
304
00:13:21,367 --> 00:13:23,102
if that's what you want to do.
305
00:13:23,102 --> 00:13:25,137
You can also hire a money
manager.
306
00:13:25,137 --> 00:13:27,173
You can hire an asset management
307
00:13:27,173 --> 00:13:29,975
asset manager to invest
your money in those ways.
308
00:13:29,975 --> 00:13:31,710
If you put controls on
309
00:13:31,710 --> 00:13:33,913
how your investment is,
and that's perfectly fine.
310
00:13:33,913 --> 00:13:35,581
Where the problem is is
when asset
311
00:13:35,581 --> 00:13:37,349
managers are investing
government money,
312
00:13:37,349 --> 00:13:39,585
you think about where all that
government money comes from.
313
00:13:39,585 --> 00:13:42,955
It comes from all these people
who really lack agency
314
00:13:43,022 --> 00:13:46,392
in determining how
that money gets invested because
315
00:13:46,492 --> 00:13:47,593
they're investing for
316
00:13:47,593 --> 00:13:49,662
on behalf of,
let's say, just as he's doing
317
00:13:49,662 --> 00:13:51,730
example, let's say
it's the state of Alabama.
318
00:13:51,730 --> 00:13:54,366
Well, the state of Alabama
becomes the client,
319
00:13:54,366 --> 00:13:57,336
notwithstanding the maybe,
you know, thousands
320
00:13:57,336 --> 00:13:58,470
and thousands of people
321
00:13:58,470 --> 00:14:01,473
whose money
is contributing to that fund.
322
00:14:01,607 --> 00:14:06,212
And so then you have a situation
where these individuals
323
00:14:06,212 --> 00:14:09,915
whose money has become
government money through
324
00:14:10,015 --> 00:14:14,186
pension tax, whatever it is now,
they don't get to choose
325
00:14:14,253 --> 00:14:15,788
where the money that that
326
00:14:15,788 --> 00:14:17,756
that they earned in that
they gave to their government.
327
00:14:17,756 --> 00:14:19,325
Now the government's investing.
328
00:14:19,325 --> 00:14:21,126
They have no agency
in determining where
329
00:14:21,126 --> 00:14:22,595
where
that money is getting invested.
330
00:14:22,595 --> 00:14:24,930
So when that happens,
331
00:14:24,930 --> 00:14:28,334
the investor is acting
as a fiduciary.
332
00:14:28,434 --> 00:14:32,004
And for for all these
purportedly numerous
333
00:14:32,004 --> 00:14:33,706
beneficiaries.
334
00:14:33,706 --> 00:14:35,140
And the problem comes
335
00:14:35,140 --> 00:14:37,076
when those investments
are not based
336
00:14:37,076 --> 00:14:40,446
on the maximization
of financial value, because now
337
00:14:40,446 --> 00:14:43,449
you're investing on perceived
social value,
338
00:14:43,682 --> 00:14:47,186
there's no way
to actually assess that.
339
00:14:47,186 --> 00:14:49,255
Like what are what are
the people of Alabama want?
340
00:14:49,255 --> 00:14:50,856
What does Joe want, Larry want?
341
00:14:50,856 --> 00:14:51,991
And all these people,
342
00:14:51,991 --> 00:14:54,593
you can't determine what they
want in terms of social value,
343
00:14:54,593 --> 00:14:58,197
but it's clear that they want
returns on financial investment.
344
00:14:58,197 --> 00:15:00,466
That's an obvious thing, right?
Yeah.
345
00:15:00,466 --> 00:15:03,035
With the pension,
one thing you can clearly say,
346
00:15:03,035 --> 00:15:06,038
you know, obviously you don't
simply have enough money
347
00:15:06,138 --> 00:15:09,141
taken out of your pay
to pay the benefits.
348
00:15:09,341 --> 00:15:12,878
The expected is that that money
is going to be invested
349
00:15:12,945 --> 00:15:14,680
and it's going to earn returns.
350
00:15:14,680 --> 00:15:15,781
And then it's
351
00:15:15,781 --> 00:15:19,151
not just what you saved,
but the the primarily
352
00:15:19,151 --> 00:15:20,719
the earnings on those returns,
353
00:15:20,719 --> 00:15:22,121
especially if you start young
354
00:15:22,121 --> 00:15:23,656
in your twenties
trying to save from that.
355
00:15:23,656 --> 00:15:27,726
There's like 40 years
for that compound interest
356
00:15:27,726 --> 00:15:31,830
or the compounding returns to
to build up a lot of money.
357
00:15:31,830 --> 00:15:36,635
So clearly people have it with
they're counting on that money.
358
00:15:36,635 --> 00:15:40,005
Earning a return
is sufficient to return to
359
00:15:40,105 --> 00:15:41,173
fund their retirement.
360
00:15:41,173 --> 00:15:42,241
So that's exactly right.
361
00:15:42,241 --> 00:15:45,911
And just to add to that,
I mean, ESG
362
00:15:45,978 --> 00:15:49,982
violates a fundamental
principle of investment.
363
00:15:50,049 --> 00:15:53,786
I mean, the traditional wisdom
behind investment was that
364
00:15:53,852 --> 00:15:55,487
you were doing two things
365
00:15:55,487 --> 00:15:59,224
mitigating
risk and maximizing returns.
366
00:15:59,291 --> 00:16:01,860
And that required
diversification,
367
00:16:01,860 --> 00:16:05,297
diversification across
fields, across industries.
368
00:16:05,397 --> 00:16:07,766
Because if there's a downturn
in one area,
369
00:16:07,766 --> 00:16:09,802
well, there might be an uptick
in another area.
370
00:16:09,802 --> 00:16:13,038
So to mitigate risk,
you needed to diversify.
371
00:16:13,138 --> 00:16:17,242
Well, ESG narrows
the range of possibilities
372
00:16:17,242 --> 00:16:18,277
for diversification.
373
00:16:18,277 --> 00:16:21,313
It automatically takes off
the table entire
374
00:16:21,313 --> 00:16:24,717
fields,
entire industries, companies
375
00:16:24,783 --> 00:16:28,787
that are deemed unacceptable
by ESG criteria.
376
00:16:28,887 --> 00:16:31,290
So as you narrow
the range of investment
377
00:16:31,290 --> 00:16:33,993
possibilities,
you narrow the possibility
378
00:16:33,993 --> 00:16:36,362
and you narrowed
the diversification options.
379
00:16:36,362 --> 00:16:40,899
And that just by conventional
investing wisdom, just by sheer
380
00:16:40,899 --> 00:16:45,671
math, means that you cannot
realize the same returns.
381
00:16:45,771 --> 00:16:50,142
And in fact, we've seen that ESG
had a couple of popular years
382
00:16:50,242 --> 00:16:51,110
during the pandemic.
383
00:16:51,110 --> 00:16:54,780
2019, 2020
were more popular for ESG,
384
00:16:54,847 --> 00:16:57,016
but ESG has really plummeted.
385
00:16:57,016 --> 00:17:02,488
ESG investments have really
tanked lately and are performing
386
00:17:02,554 --> 00:17:03,288
very poorly.
387
00:17:03,288 --> 00:17:03,756
I was listening
388
00:17:03,756 --> 00:17:06,058
to NPR of all stations,
and they had
389
00:17:06,058 --> 00:17:07,726
someone from Mercer,
not the university,
390
00:17:07,726 --> 00:17:08,961
but the financial institution
391
00:17:08,961 --> 00:17:12,331
on the other day
and was talking about
392
00:17:12,331 --> 00:17:16,702
how ESG weighted portfolios
cannot outperform the market.
393
00:17:16,702 --> 00:17:18,737
They're just
it's just not possible.
394
00:17:18,737 --> 00:17:21,740
Investors can put money in ESG
portfolios if they wish,
395
00:17:21,940 --> 00:17:24,209
if they have other motives
for investing.
396
00:17:24,209 --> 00:17:27,046
But if their motive
is to generate returns,
397
00:17:27,046 --> 00:17:29,848
that's not the best place
to put your money.
398
00:17:29,848 --> 00:17:32,851
No, you use the term
fiduciary duty.
399
00:17:32,851 --> 00:17:34,186
So let's explain this,
400
00:17:34,186 --> 00:17:37,322
because this really gets back
to the people running.
401
00:17:37,556 --> 00:17:41,293
Are pension fund
or if they are, you know,
402
00:17:41,360 --> 00:17:45,798
running a mutual fund,
they they have a fiduciary duty.
403
00:17:45,798 --> 00:17:50,002
Explain what
what that legal concept is. Yes.
404
00:17:50,002 --> 00:17:53,005
So a fiduciary is someone who
acts on the behalf of another.
405
00:17:53,038 --> 00:17:58,644
So if if you give me money
to invest on your behalf
406
00:17:58,677 --> 00:18:02,281
with clear instructions
to generate
407
00:18:02,347 --> 00:18:04,616
as many returns
as possible with that money,
408
00:18:04,616 --> 00:18:05,717
then my fiduciary
409
00:18:05,717 --> 00:18:09,588
obligation with your money
is to do that very thing.
410
00:18:09,688 --> 00:18:11,390
There are other forms of this
jury duty.
411
00:18:11,390 --> 00:18:13,092
If you serve on the board
412
00:18:13,092 --> 00:18:15,427
of directors of a company,
your fiduciary duty
413
00:18:15,427 --> 00:18:17,930
is to that company,
not to the president,
414
00:18:17,930 --> 00:18:20,332
not to any officer
in the organization,
415
00:18:20,332 --> 00:18:23,569
but to the entity
that is the organization itself,
416
00:18:23,569 --> 00:18:25,971
which means you have to have
a heightened duty
417
00:18:25,971 --> 00:18:28,974
to act in the best interests
of that organization.
418
00:18:29,141 --> 00:18:30,609
And anyone who's investing
419
00:18:30,609 --> 00:18:32,778
someone else's
money has a heightened duty
420
00:18:32,778 --> 00:18:34,012
to that person
421
00:18:34,012 --> 00:18:38,117
to invest that money in keeping
with that person's intents.
422
00:18:38,217 --> 00:18:43,322
And most people still want
to invest to maximize returns.
423
00:18:43,322 --> 00:18:45,357
That's what
the point of investment is.
424
00:18:45,357 --> 00:18:48,293
If you want to put your money
toward social causes,
425
00:18:48,293 --> 00:18:50,062
well,
there are charities for that.
426
00:18:50,062 --> 00:18:53,065
You can donate money for that
you can pay people.
427
00:18:53,265 --> 00:18:56,268
There are many other ways
besides investment.
428
00:18:56,401 --> 00:18:58,403
Realize those goals.
429
00:18:58,403 --> 00:19:02,508
But if you did want to do that
and they had the there was
430
00:19:02,508 --> 00:19:06,512
an ESG theme, the sun is like,
this is ESG investing.
431
00:19:06,512 --> 00:19:08,147
The S&P 500.
432
00:19:08,147 --> 00:19:13,318
This is not trying energy
stocks or are there a theme
433
00:19:13,385 --> 00:19:14,453
and people put their money
434
00:19:14,453 --> 00:19:17,523
into that, then that then
in one sense that would be fine.
435
00:19:17,523 --> 00:19:20,592
And also, whoever is running
that ESG fund would have a duty
436
00:19:20,592 --> 00:19:24,863
to the investors to truly invest
in ESG and s causes.
437
00:19:24,863 --> 00:19:26,999
Well, and this isn't this raises
another issue
438
00:19:26,999 --> 00:19:30,736
of why I think ESG portfolios
are starting to tank.
439
00:19:30,836 --> 00:19:32,638
And that's because the SEC
440
00:19:32,638 --> 00:19:36,275
has this new name rule,
which requires that it requires
441
00:19:36,441 --> 00:19:39,578
any fund that pools securities
442
00:19:39,578 --> 00:19:42,581
allegedly for ESG
443
00:19:42,681 --> 00:19:47,186
to, in fact, have 80% of
those assets actually be ESG.
444
00:19:47,252 --> 00:19:48,754
Because what was happening is
445
00:19:48,754 --> 00:19:50,055
you've heard
the term greenwashing,
446
00:19:50,055 --> 00:19:53,058
which is when ESG funds
447
00:19:53,192 --> 00:19:56,895
purported to be very green, are
very environmentally friendly.
448
00:19:56,895 --> 00:19:59,198
But in fact,
they had a bunch of non-U.S.
449
00:19:59,198 --> 00:19:59,898
stuff in it.
450
00:19:59,898 --> 00:20:02,668
So those years, 20, 19, 2020,
451
00:20:02,668 --> 00:20:06,004
when ESG securities were doing
really, really well.
452
00:20:06,071 --> 00:20:07,172
Well, it turns out
453
00:20:07,172 --> 00:20:10,042
one reason is because
they weren't actually ESG.
454
00:20:10,042 --> 00:20:13,512
So now the FCC, in cracking down
against greenwashing,
455
00:20:13,579 --> 00:20:17,182
is trying to to say, look,
if you're going to advertise
456
00:20:17,282 --> 00:20:20,652
your fund as ESG,
it better have in it
457
00:20:20,652 --> 00:20:22,688
what you say is on it.
458
00:20:22,688 --> 00:20:25,991
And another thing with
you'll you'll see with with
459
00:20:26,058 --> 00:20:28,961
with some of these activity,
in particular mutual funds
460
00:20:28,961 --> 00:20:33,465
that are ESG that are very
actively managed as that,
461
00:20:33,565 --> 00:20:35,067
you know, they're
probably not the best way
462
00:20:35,067 --> 00:20:36,301
to realize
your environmental goals
463
00:20:36,301 --> 00:20:38,203
because of the amount of money,
the amount of money
464
00:20:38,203 --> 00:20:39,538
you're paying in fees
465
00:20:39,538 --> 00:20:41,306
for these people
to invest your money
466
00:20:41,306 --> 00:20:43,675
when you could skip all that
and just give it directly
467
00:20:43,675 --> 00:20:46,678
to some activist organization
468
00:20:46,678 --> 00:20:49,181
that's out there
doing something green.
469
00:20:49,181 --> 00:20:52,417
And the one issue that
that would arise with a pension
470
00:20:52,417 --> 00:20:54,019
fund, particularly
since you've got
471
00:20:54,019 --> 00:20:57,322
all these thousands of
of people, is a schoolteacher,
472
00:20:57,422 --> 00:21:00,592
is in a state
where are members of this thing
473
00:21:00,692 --> 00:21:04,930
Even if they all sort of wanted
to invest in social causes,
474
00:21:04,930 --> 00:21:06,732
they wouldn't agree
on the same social causes.
475
00:21:06,732 --> 00:21:06,965
And so,
476
00:21:06,965 --> 00:21:08,800
I mean, that's
one of the big issues
477
00:21:08,800 --> 00:21:12,304
you see with any business,
certainly a historical one
478
00:21:12,571 --> 00:21:14,373
with any corporation,
if they say
479
00:21:14,373 --> 00:21:18,577
we want a corporation
to pursue a good cause as well,
480
00:21:18,644 --> 00:21:20,312
you know, amongst
all the stockholders,
481
00:21:20,312 --> 00:21:22,214
they're not going to agree
on the same good causes.
482
00:21:22,214 --> 00:21:25,050
And so that's a cause of
conflict there.
483
00:21:25,050 --> 00:21:27,319
Absolutely. So
484
00:21:27,419 --> 00:21:29,021
but just to be clear,
485
00:21:29,021 --> 00:21:31,923
with pensions
is pretty particularly clear
486
00:21:31,923 --> 00:21:33,892
that even though
somebody is, say,
487
00:21:33,892 --> 00:21:36,962
running the state pension
plan, it's not their money.
488
00:21:37,062 --> 00:21:41,800
It really it really that
is money that belongs to the
489
00:21:41,867 --> 00:21:44,069
beneficiaries,
the members of that,
490
00:21:44,069 --> 00:21:47,306
that is there is money that was
taken out of their paychecks
491
00:21:47,372 --> 00:21:50,175
to be invested on their behalf,
to make money
492
00:21:50,175 --> 00:21:52,678
to pay for their retirement
benefits. That's correct.
493
00:21:52,678 --> 00:21:53,445
And there's really not
494
00:21:53,445 --> 00:21:57,482
a sufficient mechanism yet
to determine how
495
00:21:57,549 --> 00:22:01,253
to assess the wants and desires
of all those managers.
496
00:22:01,353 --> 00:22:02,454
When it comes to investment,
497
00:22:02,454 --> 00:22:06,158
How do you invest money if it's
not on the basis of returns?
498
00:22:06,224 --> 00:22:07,225
What is it really?
499
00:22:07,225 --> 00:22:10,262
The only criterion is returns on
investment
500
00:22:10,262 --> 00:22:11,763
is maximizing returns.
501
00:22:11,763 --> 00:22:14,733
And once you start getting into
anything else, social value,
502
00:22:14,733 --> 00:22:18,070
there's no way you can find
something that's representative.
503
00:22:18,136 --> 00:22:20,605
Know all of those many, many,
many people,
504
00:22:20,605 --> 00:22:23,942
you know all the arguments
about why companies
505
00:22:24,009 --> 00:22:24,609
should be trying
506
00:22:24,609 --> 00:22:27,546
to maximize their profits
because you maximize profit,
507
00:22:27,546 --> 00:22:29,448
then everybody can take
their larger profits
508
00:22:29,448 --> 00:22:33,485
and contribute them to their own
favorite causes. That's right.
509
00:22:33,552 --> 00:22:36,388
So over the last couple of
years, there is a beginning to
510
00:22:36,388 --> 00:22:40,192
what's now being labeled
an anti ESG movement.
511
00:22:40,192 --> 00:22:43,962
So tell us a little bit amongst
people who feel that
512
00:22:43,962 --> 00:22:46,965
this is a bad
way for our economy to proceed.
513
00:22:47,132 --> 00:22:49,835
What does
what were they doing in response
514
00:22:49,835 --> 00:22:52,838
and what is this
anti ESG movement?
515
00:22:53,038 --> 00:22:56,441
Well, there is both a public
and a private side.
516
00:22:56,508 --> 00:22:59,644
First of all, ESG is getting
criticized by big name figures.
517
00:22:59,644 --> 00:23:01,813
People like Elon Musk calling it
the devil.
518
00:23:01,813 --> 00:23:05,350
And Donald Trump
calling it something or other.
519
00:23:05,350 --> 00:23:09,087
But you had an 18 governor
coalition led by Ron DeSantis
520
00:23:09,087 --> 00:23:11,456
that was going to be
an anti ESG coalition
521
00:23:11,456 --> 00:23:11,823
in which
522
00:23:11,823 --> 00:23:13,759
these governors of mostly
red states
523
00:23:13,759 --> 00:23:16,561
were going to encourage
their state legislatures
524
00:23:16,561 --> 00:23:19,731
to oppose ESG by either
divesting or taking
525
00:23:19,731 --> 00:23:22,901
whatever action was necessary
to combat ESG.
526
00:23:22,901 --> 00:23:25,570
Every single Republican
in the United States
527
00:23:25,570 --> 00:23:27,572
senator has come out
against ESG.
528
00:23:27,572 --> 00:23:30,542
Joe Manchin of West Virginia
has come out against ESG.
529
00:23:30,642 --> 00:23:32,978
There's a lot of political
pushback against ESG.
530
00:23:32,978 --> 00:23:36,548
You had 26 state Republicans,
531
00:23:36,548 --> 00:23:40,719
attorney
general sued to try to block
532
00:23:40,786 --> 00:23:42,187
a new
533
00:23:42,187 --> 00:23:45,824
Department of Labor rule
that would permit
534
00:23:45,924 --> 00:23:48,593
investors to consider
535
00:23:48,593 --> 00:23:53,465
ESG non-financial criteria
for full on one K investments.
536
00:23:53,532 --> 00:23:57,235
And the Republicans, in fact,
537
00:23:57,302 --> 00:24:00,572
lost the attorneys
general lost that that lawsuit
538
00:24:00,572 --> 00:24:02,107
at the trial level
539
00:24:02,107 --> 00:24:04,843
and on the basis
that the Department
540
00:24:04,843 --> 00:24:07,946
Labor did not act arbitrarily
or capriciously in
541
00:24:07,946 --> 00:24:08,814
enacting that rule.
542
00:24:08,814 --> 00:24:11,149
Now, there's a big rule
that's coming down
543
00:24:11,149 --> 00:24:14,152
with the Securities and Exchange
Commission, the S.E.C..
544
00:24:14,286 --> 00:24:16,421
I expect that to drop in
November.
545
00:24:16,421 --> 00:24:18,356
That's an unrelated issue.
546
00:24:18,356 --> 00:24:21,326
That's for ESG,
mandatory disclosures.
547
00:24:21,326 --> 00:24:24,796
But you're seeing a lot of of
legislation at the state level
548
00:24:24,796 --> 00:24:27,499
pushing back.
And that takes two forms.
549
00:24:27,499 --> 00:24:30,435
One is what they're calling
a well, one
550
00:24:30,435 --> 00:24:34,272
basically prevents
the investment of public money,
551
00:24:34,339 --> 00:24:39,177
the public contracts, the use of
public money for ESG causes.
552
00:24:39,244 --> 00:24:43,248
So you
you would say that if there's
553
00:24:43,348 --> 00:24:44,449
if there's
554
00:24:44,449 --> 00:24:45,417
any public money
555
00:24:45,417 --> 00:24:48,720
being used to discriminate
against a local industry,
556
00:24:48,720 --> 00:24:52,057
whether it's agriculture,
timber, tobacco, fires,
557
00:24:52,057 --> 00:24:55,160
whatever, public money
cannot be used in that way.
558
00:24:55,160 --> 00:24:56,394
The other one restricts
559
00:24:56,394 --> 00:24:57,762
the investment of pension money,
560
00:24:57,762 --> 00:25:03,702
in particular state
pension money in nonfinancial
561
00:25:03,768 --> 00:25:08,607
portfolios, non-financial funds
for any purpose other than
562
00:25:08,673 --> 00:25:11,676
financial return, so that you're
not using state pension money.
563
00:25:11,710 --> 00:25:13,945
And that's that's going on.
564
00:25:13,945 --> 00:25:17,983
And I think 22, 22 states
so far have adopted that.
565
00:25:18,049 --> 00:25:20,852
So we're getting close
to about half the states
566
00:25:20,852 --> 00:25:23,188
that have addressed it
at at least some level.
567
00:25:23,188 --> 00:25:25,924
Alabama had SB 261 that passed
568
00:25:25,924 --> 00:25:27,759
last legislative session
that fell into the
569
00:25:27,759 --> 00:25:29,761
first category
about the use of public money.
570
00:25:29,761 --> 00:25:30,128
Okay.
571
00:25:30,128 --> 00:25:31,997
They have not tackled
572
00:25:31,997 --> 00:25:37,269
the pension side of things, but
those are all examples of how
573
00:25:37,335 --> 00:25:39,771
sort of publicly
people are pushing back.
574
00:25:39,771 --> 00:25:40,639
But on the private sector,
575
00:25:40,639 --> 00:25:44,242
people are divesting from ESG
because it's underperforming.
576
00:25:44,442 --> 00:25:47,178
There's a new study out
by somebody named Christos
577
00:25:47,178 --> 00:25:48,947
McCready's and Dr.
578
00:25:48,947 --> 00:25:53,051
Marsh Margie Simon,
and they're finding
579
00:25:53,118 --> 00:25:56,354
is that investment portfolios
that ignore ESG metrics
580
00:25:56,555 --> 00:25:56,988
and rely
581
00:25:56,988 --> 00:26:01,226
period purely on returns
in fact generate higher returns
582
00:26:01,293 --> 00:26:05,697
that ESG portfolios are more
volatile than non ESG portfolios
583
00:26:05,697 --> 00:26:08,266
and higher risk in that
they underperform the market.
584
00:26:08,266 --> 00:26:09,935
This is a study
that just came out.
585
00:26:09,935 --> 00:26:12,938
According to an article
in Forbes last week,
586
00:26:13,071 --> 00:26:18,009
assets under management
in ESG declined by 339 billion.
587
00:26:18,009 --> 00:26:21,212
And just the second
quarter of 2023.
588
00:26:21,279 --> 00:26:24,816
So investors are starting
to realize, this ESG
589
00:26:24,816 --> 00:26:25,951
is not worth it.
590
00:26:25,951 --> 00:26:27,852
Like we want
returns on investment.
591
00:26:27,852 --> 00:26:31,623
We need to divest from from ESG
because it's
592
00:26:31,623 --> 00:26:32,891
not generating returns.
593
00:26:32,891 --> 00:26:37,362
It was faddish in 2019, 2020,
but now people have
594
00:26:37,462 --> 00:26:40,632
woken up to the reality of it
and they've realized that over
595
00:26:40,632 --> 00:26:43,768
time,
limiting the range of investment
596
00:26:43,768 --> 00:26:47,839
possibility is not a long term
wise strategy
597
00:26:47,939 --> 00:26:52,644
of prudent investment. And so
598
00:26:52,711 --> 00:26:53,845
ESG is dropping.
599
00:26:53,845 --> 00:26:56,281
Even in the last proxy season,
600
00:26:56,281 --> 00:26:59,985
we saw fewer shareholder
proposals dealing with ESG,
601
00:27:00,018 --> 00:27:02,654
even just on that level,
even the shareholders,
602
00:27:02,654 --> 00:27:03,722
those have dropped a lot.
603
00:27:03,722 --> 00:27:05,924
And I think that has to do
with sort of the pushback
604
00:27:05,924 --> 00:27:09,160
against Anheuser-Busch
and Target for taking
605
00:27:09,227 --> 00:27:12,631
very controversial political
stances in their advertising
606
00:27:12,797 --> 00:27:14,466
and suffering
607
00:27:14,466 --> 00:27:15,767
based on consumer
608
00:27:15,767 --> 00:27:16,735
demand plummeting
609
00:27:16,735 --> 00:27:18,203
for their products and saying,
610
00:27:18,203 --> 00:27:19,838
we're not going to shop
at Target
611
00:27:19,838 --> 00:27:22,440
because these products
are putting the children section
612
00:27:22,440 --> 00:27:24,442
or we're not going to buy
Bud Light
613
00:27:24,442 --> 00:27:26,978
because we don't like the way
it's being marketed
614
00:27:26,978 --> 00:27:29,814
and because of the hits
that those companies took,
615
00:27:29,814 --> 00:27:32,817
I think we saw as shareholders
saying, well, wait a second, we
616
00:27:32,817 --> 00:27:35,253
we need to take a step
a step back here.
617
00:27:35,253 --> 00:27:38,423
And we can't just
we can't just sabotage
618
00:27:38,423 --> 00:27:40,625
the companies that were that
we own.
619
00:27:40,625 --> 00:27:42,560
Otherwise, what are
why are we owning these?
620
00:27:42,560 --> 00:27:43,662
All right.
621
00:27:43,662 --> 00:27:46,231
And just so one thing to sort of
ramp up here,
622
00:27:46,231 --> 00:27:48,433
I think the point is like
623
00:27:48,433 --> 00:27:50,769
there's somehow that thought
that you could either
624
00:27:50,769 --> 00:27:54,072
pursue returns or profits
or do something
625
00:27:54,072 --> 00:27:57,108
that is good for society,
but profit is actually good
626
00:27:57,108 --> 00:27:58,710
for society, too, isn't it?
627
00:27:58,710 --> 00:28:00,078
That is such a good point.
628
00:28:00,078 --> 00:28:02,180
Dan. Profits are great
for society
629
00:28:02,180 --> 00:28:05,183
because what,
what what do businesses do?
630
00:28:05,283 --> 00:28:06,751
They employ people.
631
00:28:06,751 --> 00:28:10,388
They add value to society
by giving us goods and services
632
00:28:10,388 --> 00:28:13,825
at cheaper prices
under a state of competition.
633
00:28:13,892 --> 00:28:17,862
And they just they add value
to our everyday lives.
634
00:28:17,862 --> 00:28:20,865
And that is a wonderful thing.
635
00:28:21,032 --> 00:28:23,268
Jobs, opportunities.
636
00:28:23,268 --> 00:28:25,103
And they invest
in their communities
637
00:28:25,103 --> 00:28:27,072
in many different ways as well.
638
00:28:27,072 --> 00:28:30,608
What company
wants to headquarter in a place
639
00:28:30,608 --> 00:28:33,611
and see that place doing poorly?
640
00:28:33,611 --> 00:28:34,345
Not none.
641
00:28:34,345 --> 00:28:37,315
Then they all invest in their
communities in different ways.
642
00:28:37,315 --> 00:28:40,819
Corporations are astounding
and what they do to
643
00:28:40,819 --> 00:28:43,455
improve the quality of life
644
00:28:43,555 --> 00:28:47,258
and every dollar and
profit they get is is ultimately
645
00:28:47,258 --> 00:28:48,893
because
somebody purchased their profit
646
00:28:48,893 --> 00:28:51,529
and then showed that they wanted
to buy that good value.
647
00:28:51,529 --> 00:28:53,198
Sign of value
is a sign of value.
648
00:28:53,198 --> 00:28:55,100
Well, thanks so much
for coming on and joining us.
649
00:28:55,100 --> 00:28:56,735
And thank you
all for joining us.
650
00:28:56,735 --> 00:29:03,007
Join us again next time
for another E Conversations.
651
00:29:03,074 --> 00:29:05,243
This has been e conversations,
652
00:29:05,243 --> 00:29:08,580
a joint production of Troy
Church Vision and the Manuel H.
653
00:29:08,613 --> 00:29:11,716
Johnson Center for Political
Economy at Troy University.
