The Political Pollution of Capital Markets
2022-12-12 · Guest: Paul Atkins (Former SEC Commissioner) · 52:43
Political pollution of capital markets and ESG
Bob Zadek and former SEC Commissioner Paul Atkins discuss the historical mandate of the Securities and Exchange Commission and its shift toward political involvement. They analyze the components of ESG—Environmental, Social, and Governance—and how these criteria are being used to influence capital allocation.
Topics: SEC, ESG, financial regulation, capital markets, material disclosure, investment ethics Speakers: Bob Zadek, Paul Atkins
The Role and History of the SEC [00:01]
Bob Zadek: Welcome to the Bob Zadek Show, your home for insight and in-depth analysis. Listen live right here, or join us at BobZadek.com. That’s Z-A-D-E-K, BobZadek.com. The Bob Zadek Show: Ideas, not attitude; information, not talking points.
Hello, friends. I’m Bob Zadek, host of the country’s longest-running libertarian broadcast, nationally streamed at 8 a.m. Pacific time, Sundays on the 860 AM app. My Bob Zadek Show podcast archive holds 15 years of major issue discussion and is the ideal resource to remind us of the errors of the past, especially since many are still with us. I promise you in-depth content on social, political, and economic issues that really matter, along with the ideal guest, accessible and entertaining. Our standard: ideas, not attitude.
Today’s guest, former two-term SEC Commissioner Paul Atkins, exceeds those standards. Paul is presently the chief executive of Potomac Global Partners, a New York and DC-based financial services consultancy. Paul served as a member of the Congressional Oversight Panel for TARP. Remember that? And was a partner in PricewaterhouseCoopers and an attorney with Davis Polk. Paul, welcome to the show.
Paul Atkins: Thank you, Bob. Thanks for having me.
Bob Zadek: Now, today’s topic we can subtitle as “Financial Markets Meet Environmental, Social, and Governance,” which sounds rather benign, but it’s far from it. Imagine you’re seeking the best physician to cure a serious medical condition. What’s the likelihood you’ll ask the prospective physician her opinion on, let’s say, immigration or cash bail or criminal justice reform? Or, well, you get the point.
As Paul will explain, financial regulation is forcing the politics of ESG into our financial markets, resulting in lower yields for all of us and a misallocation of capital. “The Political Pollution of Capital Markets” is today’s topic. Paul, good morning. Now, before we start, just as basic information, just so our audience can really get into today’s topic, tell us just in a really short introduction—you were an SEC commissioner for two terms—tell us the role, the statutory historical purpose of the SEC so we can understand today’s discussion in a context.
Paul Atkins: Okay, all right. Well, thanks, Bob. Well, so the SEC is, you know, a government agency, and it doesn’t stand for Southeastern Conference or anything like that. And it was created back in 1934. So this is in the wake of the 1929 stock market crash. So Congress and the new FDR administration had a series of statutes that were enacted that were trying to govern the securities markets and bring disclosure to them and more transparency and that sort of thing. And so the SEC was created as a specialized agency to be a regulator of the financial markets, at least the public markets, and then also as an enforcement agency.
And so, you know, now it’s 80-some years later, and so the SEC has, you know, a whole big regulatory rulebook of regulations that govern brokers and asset managers like mutual funds and investment advisors, and then all sorts of other parts of the infrastructure of trading securities here in the United States.
Bob Zadek: And I want to undo a bit of folklore that seems to be out there in the public. And that is: it is not the role—I’ll say this emphatically—it is not the role of the SEC to make sure that only good investments are offered for sale. The SEC does not do, in theory, quality control on how good an investment is, but rather to make sure that when decisions are made by the investing public, they have the best information available. So it is—and if, Paul, if you need to modify this, please do so—its job is to make sure or to preserve the integrity, the quality, the purity of the information which is offered to the investing public because, as that clothing seller in New York in the ’70s used to say, “An informed consumer is our best customer.” Is that a fair summary as we get into today’s topic?
Paul Atkins: Yeah, I think so. It’s, I mean, sometimes the SEC is a bit schizophrenic as to how it approaches these things. But yeah, in theory and by the intent, I think, of Congress and all that, it was to have the SEC try to make sure that the information in the marketplace is accurate and that public companies—and this is a key point—provide material information to investors so that they can make their investment decisions. So that’s not to require companies to disclose everything, every possible thing, because that’s impossible, but to disclose material information that’s, you know, that’s accurate.
Bob Zadek: And one would expect that as the SEC moderates and regulates the information which a seller of investment securities is offering to the public, one would expect that the SEC would care about the kind of information that a typical investor would be interested in in making his or her investment. That is, there’s a lot of information which a seller of securities could offer, but has no relevance whatever to the investment decision, as in my hypothetical.
Defining Environmental, Social, and Governance (ESG) [08:45]
Bob Zadek: But I teed up the topic. Now, today’s topic is ESG. It is Environmental, Social, and Governance. So, Paul, that’s today’s topic. What is the relevance of those three words to investment? And why are we talking about this current buzz phrase, “Environmental, Social, and Governance”?
Paul Atkins: Well, so this is kind of an amalgam of a lot of different ideas that have kind of been percolating in investment circles for a few decades. And so ESG, like you said: Environmental, Social, and Governance issues. It’s kind of odd that these three things are thrown together because environmental obviously has to do with, you know, the disclosure and investment in what we now call sustainable companies or sustainable products, and that itself has a very squishy meaning.
And then the social aspect is like everything, like what we’ve seen over the last few years with, you know, when people talk about, you know, like the quality or equity or whatever the issues are, or anti-discrimination issues and that sort of thing; the workers, you know, how workers are treated and whatnot.
And finally, governance has to do with how a company is run, you know, the roles and interactions between basically the three groups in a company, and that’s, you know, the shareholders, the board, and management. And so there’s a long history of, you know, public companies, how they are governed, and so the rights of shareholders, and how—what the duties of directors are, and then how management interacts with that. And so basically, you know, investors invest money in the company, they have their representatives, the board of directors, who are meant to oversee management and oversee the company, and then management, which is of course the hired help, you know, how they’re incentivized and what their duties are to the company and to the shareholders. So that’s the governance aspect.
So, anyway, so all this stuff has been, you know, these three topics have been talked about now for a few decades. And the way it comes into play right now is that more and more institutional investors and then individual investors, I guess, are using some or all of these various criteria to have as filters for their investment decision-making, like what companies they want to put money into or what companies they want to avoid.
And back—I mean, it started back in the ’70s where state pension plans, several states directed their pension plans to screen out so-called “sin stocks,” like no tobacco, no alcohol, no gambling. A lot of religious-oriented groups did the same thing. And then in the ’80s, there was all the issue about South Africa divestment, and so that counts as kind of this ESG type of thing. There was a lot of political, you know, discussion of that, and it was very loud politically, but ultimately it didn’t have much of a real effect in the financial markets, as we can talk about that a little bit later about how the financial markets work.
And then back in the 2000s, then there was a whole movement by, again, by states to screen out guns or Iranian investments or even fossil fuels, depending on the state. So now it’s after, especially after, you know, COVID and during that time and then the George Floyd issues, then this ESG by the private sector has really kind of grown, and we’re—investors are putting pressure on public companies to, you know, to change their business models to, you know, deal differently with workers or whatever, and these institutions are looking to invest in quote-unquote “good companies” rather than the undesirable ones.
Bob Zadek: Now, just to show to our listeners why this matters so much to them, because they would, if they listen to your narrative, they would wonder, “Why do I care?”
Would you like the summary of the next segment of this transcript?
Bob Zadek: It’s sort of unpleasant and maybe stupid, but why do I care? But of course, they profoundly care. Investors—the average retail investor, either directly by their own decisions, what they do with their own funds, or indirectly—their pension plan is funded in part, of course, by making investments. Their union pension plan is, if they have an IRA or a 401(k), well, somebody is managing that money. So everybody’s money is one way or another managed by somebody else for the most part, except for day traders.
So, if you are an investor and dependent upon having enough money so you can retire at the standard you want, your goal and sole goal is to have those funds be invested wisely so they grow. That is all you really care about as an investor. As a retail investor at the bottom of the food chain, you care that you have made sensible decisions and that you’re going to prosper as a result. So ESG so far sounds a little bit vague and maybe some people are rolling their eyes, but show us through the large institutional investors how this profoundly and, Paul, negatively affects each and every listener to our show.
Paul Atkins: Well, that’s the perfect issue to raise here because basically, if you think the government’s bad at spending other people’s money, that’s what we’re talking about here, basically. So back in, say, 1990 and coming out of the ’80s into the ’90s—and that’s when I spent four years at the SEC early on working for two chairmen of the SEC—back then, the public markets looked a lot different than they do now. More than half of all the money that was invested in the U.S. stock markets was held by individuals, individual investors. And that’s, you know, not just the Rockefellers of the world, but also normal folks who would be putting money into the stock market through their brokers or whatever. But they made up well more than half—I can’t remember the exact amount, 60% or more—of the total stock market.
Today that’s completely reversed. Today more than 70%—it’s like 78% or something like that—of the total amount of money held in the U.S. markets is held by institutions. And that means that average individual investors are no longer investing directly in stocks because things have gotten complicated; there’s so many more stocks out there and whatnot to choose from. And so they’re putting their money into exchange-traded funds or mutual funds and otherwise with other investment managers. And so that means that somebody else is looking after that money.
And so it might be an index fund—say you’ve invested in the S&P 500 fund or something like that—or in other more narrow type of things, or in a global equity large-cap fund or whatever it may be. But somebody else is managing that. As that money goes in and out and the stocks that are held by these various funds, somebody has to vote the proxies. Because again, when you’re holding common stock, you have a vote. And so when annual shareholder meetings come up, there are various issues that shareholders have to decide, and so somebody’s voting the proxy. And so you’re not doing that because it’s not you who own that share of stock of the company, but it’s the fund that you’ve put money into. If Vanguard or Fidelity or whoever owns that, there’s a portfolio manager or a committee or somebody who is deciding how those proxies are voted.
The Weaponization of Proxy Voting [16:20]
Paul Atkins: So over time, those sorts of issues now are—because they’re decided by these institutional investors—there are people who are much more politically inclined. Let’s say these politicized shareholder activists, I’ll call them, at either—you know, these are non-governmental organizations or some of them are active managers of funds—but they are putting pressure on public companies through these shareholder proposals to try to sway the company policy of either businesses that they go into, products that they issue, how they treat their workers, and all sorts of things like that. And they are pressuring other investment managers to vote their way as well.
So that’s where other people’s money is being used. The power of these large investment managers through their voting of their shares is swaying how public companies are operating. And sometimes that’s not necessarily in the most financially reasonable way, but it’s basically to get out of certain lines of business. Like, there are these groups out there who are trying to pressure oil and gas companies to get out of the oil and gas business and to go into some other kind of electrical type or whatever other type of business. So that’s just one example.
But over time, dating all the way back to Saul Alinsky back in the ’70s, he was the first one who recognized the power of swaying corporate management through the use of the shareholder proxy process. And that has had some very serious and long-range effects over the last few years. Saul Alinsky, just as a side note, is claimed by many to be one of former President Obama’s tutors who taught him the game of politics, just in case that name is vaguely familiar to our listeners.
Bob Zadek: Now, you mentioned proxy voting and the like. Just to put that into a really dramatic context: Americans, for the most part, hold the right to vote as being quite important, if not cherished. We remember in recent public battles over the presidential election, it was a big deal if people were deprived of their right to vote. There were lots of fights about the process of voting. In other words, we wanted to retain control over our franchise, our right to vote. Well, the right to vote shares of stock is the same thing. And when we vote for members of the House of Representatives, we are voting for people to represent our best interest. And we select who we vote for based upon how closely the candidate for the House of Representatives or the state equivalent—how closely that candidate reflects our personal views. And we kind of like it. We like having a say, albeit indirectly.
This is the same thing. In corporate governance, we don’t get to vote and control officers and employees of the corporation. We get to vote for the people who will represent us in those elections. And how offensive does it sound if our listeners are discovering that their representatives are not voting at all in our best interest and may not reflect our views? So it is no different than if you gave your right to vote for members of the House of Representatives to a fund, an institution, to vote for you. That’s what we have done. And that has been abused by those people who now have acquired the franchise, the right to vote.
Now, if an investor were investing, an investor would be free to give their money to a corporation if they were investing directly, like the good old days. They might say, “Making money is secondary to me. What is important is social conscience,” and so whatever other standards you have, and you would give your money understanding you are sacrificing yield for policy. Your decision, free to make it—it’s your money. But now, as Paul explains, the investing public, who may just be concerned about the most wise economic investment, they find that they are, against their will and without their knowing about it, forced to sacrifice yield to further somebody else’s social goals. Do I overstate that, Paul?
Paul Atkins: No, you’re right. And so that’s sort of the main message about all this: that people who are putting their money into some of these large ETFs or mutual funds or whatever—however you’re investing your money—that you’re unwittingly powering an ideological strategy by folks who are living in the big cities on the coasts, who maybe don’t share your outlook and don’t really necessarily share your goal of having financial returns to fund your old age, for when you’re in retirement, for college for your kids, or whatever for health needs. They are more interested in doing quote-unquote “good” with the money that’s being controlled by these various funds and where they’re being invested and who is being disinvested from, the messages that they’re sending out to companies and that sort of thing. So it’s a very powerful type of movement that’s going on here. And it’s not just when I mentioned the shareholder votes; so that’s just one aspect.
thoughtPaul Atkins: The real, um, the real telling part of all this is the behind-the-scenes sort of strong-arming, almost mafia-type tactics where, uh, people representing some of these big investment managers come into, uh, you know, to meet with corporate management and say, “You know what? We’re going to vote against you in the upcoming shareholder, uh, meeting,” or, “We’re going to, uh, you know, if you don’t do X, Y, and Z that, uh, you know, we approve of, uh, then we’re going to either disinvest from you, we will, um, or—or we won’t lend to you.” It’s—it’s just—it’s, uh, it’s a growing type of, uh, of pressure that’s being put on these, uh, various companies to try to have them, uh, follow these various type of ideological, uh, standards.
And so that—what that does, ultimately, it really cuts down on the returns that, uh, investors get. And if you’re, uh, uh, saving for retirement or you’re just saving, uh, in a mutual fund, uh, outside of that, uh, you will have less money, future, live on, uh, and because all of this stuff costs money, uh, uh, and of course a lot of the sustainability bit is, uh, a bit more, uh, let’s just say risky than, uh, than other sorts of investment.
The Exxon Board Battle [24:45]
Bob Zadek: Now, uh, a real-life example, if you will—and there are many, but one that I observed happening, I believe it was Exxon, which actually had lost a bit of a battle over members of the board of directors, where activist groups who were not concerned about maximizing profits but other goals actually got to be on the Exxon board. Now, I’ve—I’ve simplified the Exxon experience, but Paul, if you can—because it is a recent and real example of how this all works—tell us if you can, and if you recall, about Exxon and what happened.
Paul Atkins: Yeah, well, so this goes back a couple of years now, and, uh, so Exxon’s returns were not, uh, doing that well, uh, during this time. If you remember, uh, energy prices were very low, uh, different than what they are at the current time. And, uh, and so, um, uh, Exxon was facing pressure from, uh, some of these institutional investors to—some saying, “You know, you should get out of oil and gas because it’s bad for the environment, and we’re going for, uh, you know, zero net emissions and—and that sort of thing,” uh, and trying to have Exxon, uh, you know, change its, uh, strategy, uh, and investments of its own investments in, um, new oil and gas fields and things like that, and to go down to alternative sorts of, um, energy types of things.
And so, uh, this one, uh, sort of single-purpose hedge fund grew up, uh, was put together, but—and called Engine No. 1. They ran what we call a “short slate” of directors, uh, three against, uh, you know, the other directors that were being put up by the board, uh, by the nominating committee. And, uh, because some of the large investment management funds—in particular BlackRock, State Street, and Vanguard—switched their normal voting for on behalf of… they—they, uh, usually voted with management. This time around, because of, um, the pressure and—and other things, just, uh, how they viewed things differently, they voted for the inserted that short, uh, slate of insurgent directors who actually won. Each one of them won a majority so that they could, uh, be, uh, you know, take a seat as a director.
So that was quite, uh, uh, you know, big news in, uh, investment management circles, corporate governance circles, uh, and kind of shook everything up. Uh, and so, um, and that kind of got the whole discussion going about ESG. And again, so these—those three, the Vanguard and, uh, State Street and BlackRock, have some of the largest, um, holdings, um, in index funds. Vanguard has, uh, very low fees, um, in there, uh, for their funds, and so they’ve accumulated a lot of, uh, uh, assets under management. And, um, so the three of them combined with a whole bunch of other things were, you know, union pension funds and state pension funds and whatever that was, uh, able to throw, um, over the top, uh, you know, these—this, uh, insurgent, uh, slate of directors.
Bob Zadek: And is it possible—it’s probably impossible, but I’ll ask the question—is it possible to at least make informed speculation on the effect on Exxon of this, uh, gaining seats on the board of activist directors? Or is it much ado about nothing? And what is it—what is there about the Exxon experience that ought to give concern to the investing public?
Paul Atkins: Well, again, so here, I mean, going back to, uh, Exxon has—is, uh, you know, is obviously has been around a long time. It, uh, prides itself on always paying a dividend and, um, and so a lot of—it has a large group of—still, unlike some other companies, it has a lot of individual investors still holding its stock. So I understand that the individual investor group voted with management more; it’s like some 90-some percent of those shareholders voted for management, whereas it was the institutional investors voting other people’s money, uh, for, uh, to, uh, uh, you know, uh, have that, uh, insurgent slate win.
So, um, so again, we’re kind of, uh, focusing on, so, you know, whose interests are being represented here? And so if—if, uh, you know, uh, the, uh, normal individual investors are behind management strategy, and now the institutional investors are saying, “Well, no, you need to change that and get out of oil and gas,” maybe that looked fine a couple of years ago, but now it doesn’t look so fine, I would argue. And, um, and so—or maybe it would be—maybe not fine or whatever, but it’s more, you know, there are other opportunities out there, and now obviously there’s a big demand still for the energy provided by, uh, oil and gas.
So, um, so who knows what the, uh, you know, the pressures are within, um, the company? I mean, Exxon has announced more investment in quote-unquote “sustainable” type of areas and, uh, obviously, um, there’s—money’s not infinite, so some—some investments are going to be sort of changed and—and, you know, the strategy of the firm may change. So who’s to say what it actually looks like inside? Obviously, that’s, uh, you know, I’m not privy to that, and, um, uh, but we’ll—sp—time will tell.
But again, you know, do some of these pressure points—is this going to hurt Exxon in the long run? Uh, you know, if management thinks one way and now you have three insurgent directors who are maybe pressuring it to do something else, is that, uh, the best for the company or not? Um, ultimately, it’s the investors who are putting money into it who will either get the benefit or pay the price of those wrong decisions.
Bob Zadek: Two thoughts come to mind. You sh—you quoted an amazing statistic that I was—that 97% of the individual investors supported the existing Exxon board. And however, a majority—substantial majority, I presume—of the institutional investors, those investors investing somebody else’s money, voted against existing management. Now, if you assume that—take that statistic—97% of the individual investors supported management, but their vote doesn’t count. Indeed, their vote is reversed and is offset by the private vote of the tiny handful of those people making investment decisions at BlackRock. So the whole shareholder democracy has been torn apart.
And that is—you said it may not be—the phrase was, you—it may not be good for Exxon. I will remind our audience that when you say it’s not good for Exxon, what you’re really saying, obviously, it’s not good for Exxon’s employees, human beings; it’s not good for employee—for Exxon suppliers; and it’s not good for Exxon’s creditors; and it’s not good for Exxon’s investors. So what you—what you have explained is that the woke voting of institutional investors, voting in the way that appeals to the private egos of the management of BlackRock, that it is damaging—there are—there is so much collateral damage of people who don’t get a seat at the table as a result of this. So this is not an eye-rolling, “Oh well, they’re at it again.” This has profound effects upon the economy.
Now, Paul, you also mentioned that—I want to expand upon that. You—you made some—a passing reference to financial markets. Our system of free market for an invest—in—public investing public, so that if millions of individual investors are provided with adequate, accurate information, they will collectively allocate capital where it will provide the greatest return, which means the economy grows, new products are invented, new drugs are discovered, and everybody is better off. And is it hyperbole, or is it worth discussing to express the fear that everything that supports higher standard of living is at risk with this upsetting of the allocation of capital?
Paul Atkins: Might not be nine—I don’t remember what it’s—over 90%. It might not be—I don’t know about 97%—but the—the percentage of, uh, of, uh, individual investors voting that to support management at Exxon… but—but anyway, but—but it—it’s 90-something.
The End of the Wall Street Rule [35:40]
Paul Atkins: But regardless of that, I just wanted to—so, historically, individual investors, usually there’s the old Wall Street Rule, it was called, so that if you had shares with a broker, and if the broker would send you the proxy statement and say, “You know, please vote your shares, tell me how to vote them, and so instruct me how to do that.” And up until like 2010 or so, basically the brokers would follow the Wall Street Rule, and this was kind of ensconced in your stock exchange rules that, you know, for uninstructed votes, they’d go ahead and vote with management because people would figure, “Well, you know, then the investor is happy with his investment because if he doesn’t like management, he doesn’t like the direction of the company, he’s going to sell and get out of there and put his money elsewhere.”
But then, you know, when we talk about how a lot of little issues have changed here to kind of build up to the current point: back under the Obama administration, the SEC strong-armed the New York Stock Exchange and NASDAQ to change their rules and basically do away with the Wall Street Rule. So, for uninstructed votes for these sorts of shareholder questions, the brokers will not vote the individuals’ shares. So that has kind of given more power to union pension funds and to some of these other activist funds because individual votes, which normally are voted by management, don’t count so much.
So that’s why—I mean, going back to Alinsky and some of these other issues where people who are usually on the left have figured out that you can’t get things through Congress because of the even division there and the rules in Congress, and increasingly they’re trying to get things through regulation, especially here in the Biden administration at the SEC and elsewhere, to try to have investment go in more, to their point, ideologically acceptable ways. So now they have realized that they can actually do things through the private sector and through these investment managers to put pressure on companies to achieve Net Zero by whatever arbitrary dates people are now talking about—2030 or 2050 or whatever the date is—and to get pledges out of these investment managers to achieve their goals that way.
So whether or not that’s in the best interests of, like you say, workers and investors who are trying to save for the future, trying to get the best sort of return from their investment or not—and that’s a real question—but you can see how the specter of ideology is infecting now the investments for most people who are just looking for a good return. It is pretty troubling because, again, these folks are using other people’s money to try to achieve what their own personal ideological goals are, and so that’s the most troubling aspect of it.
Bob Zadek: Since I am an unreconstructed free marketer, I will take to the grave my faith in the free market. My wisdom of the collective action of millions of people, each making private decisions, will always get to the right result. I will take that with me forever. The question that occurred to me—and no, Paul, I’m not proposing a new business model for you and I to do in our spare time, but just to see how all of this works—from what you have said, what jumps into my head is: isn’t there a marketplace (and I know there is something like this already, but please speak to it if you can), isn’t there a market for an investment fund, a BlackRock, a State Street, if you will, which says, “We pledge we will make our investment decisions on a purely economic basis, and we have no interest in doing anything other than increasing the return, and that is our pledge”? Why wouldn’t they, or would they, crowd out over time those investment funds that subordinate yield to other social goals?
ESG Fees and Financial Democracy [41:15]
Paul Atkins: Well, I think that’s a great point. And so there are some—and I don’t want to single out any particular type of fund out there—but there are some that are emphasizing that right now and growing up the last year or two. And so they are making a point that, “We’re not going to engage in that sort of ideological screening of investments, and we’re not going to twist companies’ arms behind closed doors and that sort of thing to advance our ideology.” And so we’re not going to go through the ESG investing, which has so many made-up metrics to try to screen companies and that sort of thing.
And so hopefully, you know, their fees will be less because—I mean, we haven’t really touched on it, there’s so many aspects of this that are interesting—but it’s in these investment managers’ interests to really push the whole ESG investment process because they can charge higher fees for that. And even there was a PricewaterhouseCoopers survey that was done that said 78% of investors are willing to pay a 3% to 5% premium to invest in ESG, and that there’s more demand now for ESG-related products, whatever that may mean, than there are investments for that to be put into. So you can see how, if you’re a contrarian investor, maybe this is not the thing to put your money into in the first place.
But regardless of that, I agree with you that over time that’ll happen. But in the meantime, the power that some of these investment managers have—and even going back to things that should be ideologically pure, so an S&P 500 investment fund, a passive investment fund—these big firms are using the money that investors are unwittingly putting into those funds, or even their investment advisors are doing it, but to them, they have no transparency in what the use for those funds are being put to, and if they’re being used for a big money manager to go into a corporation and say, “We demand that you follow our prescription here of socially proper metrics of your business and how you’re going to be deciding how to allocate your own—how to drive your strategy for the future.”
So the folks who are putting their money into some of those big index funds are being unwittingly used. Their assets are being used to advance issues that they may not agree with and that may over time not be in their financial best interest. So that’s the real rub. And so just to quote the CEO of this British investment scheme, Hermes Investment Management, he said a few years ago—he was complaining about the “increasingly siloed view that’s focused on financial rather than societal returns” in the investment management industry, and that investment managers need to think not just about our pensioners, but about those pensioners’ grandchildren.
And so, for retirees, financial security, I would think, is their top priority and not necessarily to save the world. I mean, that’s fine, and you should if you want to do that, you should put your money in, but there should be full transparency and there should be proper disclosure about all this. And the fiduciary duty of these pension managers and of other financial managers to their investors should be inviolate there. And that’s where a lot of the controversy is coming now from state financial officers, for example, in the red states—like 26 of them have been putting contrary pressure on some of these investment management firms. And Florida, for example, has kicked some out, has taken money away from them from being managed by them for just these same reasons. So there’s a lot of controversy here, but that’s why people need to be aware of how your money could be used and to ask questions of your investment manager, ask questions of where you’re—by looking to see how your money’s being used by your various funds.
Bob Zadek: Nothing in this show is expressing an opinion about ESG as concepts, as goals. Agnostic on that. The point of this show is as to social goals that you may have as to where the country, indeed the world, ought to go—God bless you. And it is the goal of the financial system to produce wealth for you and distribute it to you so that you can privately take the wealth the system has given you and spend that, give it away in furtherance of whatever complements your belief system. So this is not about whether these principles are appropriate and should be encouraged. This is about who gets to decide how your money is used. This is about financial democracy.
The Purpose of Capital and the Dangers of ESG [47:07]
Bob Zadek: It’s your money, and a stranger should not be permitted to further the stranger’s social goals. The stranger who is managing your money has only one assignment: Increase your wealth so that you can spend your money however you wish. We are not saying corporations shouldn’t do that. But everybody should have a choice as to how their own money is spent. And if a corporate manager appeals to a certain segment of the population by how they spend their money or corporations’ money or gives it away, if that’s their strategy, fine. They will draw investors who are sympathetic to that. So this is about—not about the principles, are they good or bad—it’s about who gets to spend your money. Paul?
Paul Atkins: Yeah, I agree. So I mean, so let me just do like four points real quick, because I know we’re about done. But um, so first of all, ESG investing, like you say, maybe fine. If you like that, then you know, God bless you, put your money into that and whatnot. But be aware of that your money could be used in ways that you don’t necessarily want it to be. So you have to ask questions. So ESG is investing is dangerous, I think, because it uses made-up metrics, it’s ideologically driven, and could be um, you know, against your own interests. It invests in companies again for ideology and it distorts markets by denying capital to to uh to very legitimate uh types of uh productivity and it could cut down an innovation competition. Again, to your detriment, because by investing into uh, you know, solid uh uh products that uh that have a market need, uh regardless of you know what the ideology, you know, pro or con might be, is uh kind of the essence of uh of investing in the marketplace.
And then ultimately you know if uh ESG—just remember it’s about implementing and pushing social and environmental policies through means other than our constitutional uh political process and so this is all about power and all about trying to uh get to ulterior motives down there. So if you’re not on board with that, you know, please be aware that you’re—that you know you have uh a lot of power through uh how you—where you place your money and just is ask your advisors or look at how what the statements are behind the um uh the investment manager that is running your fund and look at if they’re talking about ESG principles and all that. Maybe you should steer away from that and go to an another sort of uh fund out there that does not do that.
Bob Zadek: And this is about—we live in a complex economic system and each segment of our system has a specific assignment, a specialization. It is the specialized role of a profit making corporation to produce wealth so that the wealth can be used to improve the quality of life for all of us. That’s their assignment. It is not the assignment given to a manufacturing company in the Midwest to save the polar bear. Their assignment is use the money we give them to make more money so that society can spend it appropriately. Paul, how can—is there a way that our friends out there can follow your writing and to keep track of your views?
Paul Atkins: Sure. Well, so uh my firm, we have a—it’s uh uh it’s uh patomak.com. We have uh uh blog posts and and whatnot that we put on there. Um so that’s one way. Another I would suggest uh the two commissioners of the SEC today, uh Hester Peirce, P-E-I-R-C-E, and Mark Uyeda, who have a lot of interesting speeches uh on these issues uh to look at. Uh but uh I think there’s an—you know, happy to happy to take questions uh afterwards and uh but about all this.
But it’s very important to realize that you know when people talk about nowadays it’s politics or ideology 24-7 in all different ways. Uh that’s—it’s unfortunate that it’s invaded uh the investment management industry. And I think ultimately that’s detrimental to investors and people could be really hurt the long term because every little bit, whether you’re spending money more on higher fees for these ESG funds or whatever, all that you know, through compounding of interest, uh, that really hurts after 20, 30, 40 years of saving and investing.
Bob Zadek: Paul, thank you so much for giving us an hour of your time. This has been a wonderful conversation. I’ve thoroughly enjoyed it, and I know that our audience has as well. Thank you so much, Paul Atkins. Bob Zadek saying so long for now. We’ll be back again next Sunday for another hour of ideas, not attitude. Thank you so much.