December 10, 2024 • 30 mins
Dr. Dan Sutter, of the Manuel Johnson Center for Political Economy, hosts EconVersations, a program that explores the role of free markets in promoting prosperity through conversations with Manuel Johnson Center faculty and guests.
1 In this episode, Dr. Sutter interviews Dr. Allen Mendenhall, as they discuss ESG Investing: A Market-Based Phenomenon or a Stealthy Form of Central Planning?
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(00:00):
The opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is a conversations.
A joint production of TroyTrojan Vision and the manual H.
Johnson centerfor Political Economy.
(00:20):
Now, here'syour host, Doctor Dan Sutter.
Hello.
Welcome to your conversations.
I'm your host, doctor DanaSutter of the Johnson Center
for Political Economyat Troy University.
ESG investinghas gone in the span
of about three years,
from a relatively obscureinvestment topic
to a significantpolitical issue,
(00:41):
with state legislatures
even taking up billsrelated to this question.
What does ESG involve?
And more importantly, perhaps
in light of all the attentionnow being paid to it,
does it represent a market
and thereby, by implication,voluntary phenomenon?
An examinationof whether ESG is truly
libertarian is critical, in
light of critics labeling ESGas socialism or central planning
(01:03):
and defenders of ESG claimingto be defending free markets.
How should we evaluate ESG?
Join me on the show today
to discuss this topic is DoctorElement Mendenhall.
He's the Grady Rogierprofessor and executive director
of the Johnson Center.
Doctor Mendenhallearned an undergraduate degree
from Furman,
a law degree from West VirginiaUniversity, and a Ph.D.
(01:24):
in English from Auburn.
He has been with Troysince 2020, and has become
one of the leading criticsand scholars on ESG.
Welcome back to the show, Alan.
Thank you, Doctor Sutter.
It's a pleasure to be here.
And, so before we get startedhere, we're going to be talking
about, some research that we've done.
We just, have gotten a paperaccepted examining this topic.
(01:46):
So, it's to. And where is that?
Do we kind of work?
It's one of the Emory'slaw journals,
the Emory Journal of Lawand Corporate Governance.
And so let's start here.
And we're about to get into
this question about
whether ESG is truly a marketor voluntary phenomenon.
But first, I start by reminding,because
we've had a couple of showsabout ESG before,
(02:06):
but reminder, very first,what exactly ESG stands for
and what's involved with that?
Well, the acronym ESG standsfor environmental, social
and Governance.
And what that refersto are the non-financial
standards and factorsthat banks, financial
institutions and institutionalinvestors, among others,
(02:29):
account for when they allocatecapital or assess risk.
And there's actually
two, two wayswe can sort of view those.
So we can talk about ESG
from an investing standpoint,and that ESG is
corporate governance.
And although they are clearlyrelated in the same ESG,
there's a slightly differentinterpretation there.
(02:49):
I thinkwe want to be clear of it
because we'll be referring toboth of these different ideas.
Yeah. Yeah.
So in the former,when you're talking about what
company management and boardsdo internally,
how they integrate ESG factorsinto their,
corporate structure,their policies and practices.
Whereas ESG investmentrefers to what, asset managers
(03:12):
and institutional investors are,
an individual investorsas well, do when they,
when they invest money orwhen they construct portfolios.
And this evaluates companies
not just on financial
performance, butbased on their ESG, metrics.
So it involves screening,
choosing or excluding companiesbased on ESG performance.
(03:34):
It involves active engagement,
shareholders influencing
corporate policies to alignwith ESG goals, and impact
investing,which is targeting investments
that yield measurableESG benefits, allegedly
benefits alongsidefinancial returns.
Now, as an investor, if you or
I don't have any money to
invest, but anybodywho has some money to invest
(03:57):
and should they be okay,
should they be allowed to go out
and try to make use their moneyto make the world
a better place, as opposed tojust trying to make a big return
for for themselves or tryingto make the most money they can?
Yeah, there
there are no legal
or ethical issuesor moral issues with somebody
investing his or her moneyas he or she wishes.
(04:19):
Voluntaryinvestment is perfectly okay.
So wewere actually in this research.
We were responding to a,a paper that had been written
by, I think, as a Yale Lawprofessor named, Jonathan Macy,
who raised that,who made the argument
that ESG is libertarian.
(04:40):
So tell us briefly,
a little bit of what his,argument was there.
Yeah.
I think what he istrying to show is that,
government has failedin many areas, many times over
many years,and that this turn toward
private corporations
representsa libertarian movement.
(05:04):
I believe he's wrong, andwe can maybe talk about that.
But the theI guess the general framework
for his paper is that, okay,
we have all this governmentfailure
and now we need
we need to turn to the privatesector to fix things.
Yeah.
And he even refers to like, youknow, corporations have become
the view,
be viewed as, organizationsthat can get things done.
(05:25):
Whereas government right, can't.
And then also maintainingthe idea that
because this is operatingthrough markets as opposed
to governmentmandate, it's in coercion,
that that somehow
this would be a more libertarianor voluntary way
to address questionslike climate change or, gender
(05:45):
equity or topics like that.
Right. I think that's a fair
representationof his argument. Yes.
So let's get it.
You know, we we,we took issue with this.
And so let's step throughsome of the, points
that we wanted
to make in response to startingwith the fact that they're now
depending on differentmeasures, trillions
of dollarsliterally being invested,
(06:08):
in ESGinvesting of different types.
Given that, we said before,anybody is free to
use their money
however they want,whether they want to make it
know, try to make the worlda better place,
try to gofor the best return possible,
or if they mighteven be concerned
about making a lot of moneyout of something
that they thoughtwas morally questionable.
(06:31):
Then what's the problemwith, with, all this money
being in financial marketsdirected to ESG?
I mean, is itjust the fact that maybe
finally, Wall Street'sgrowing a conscience and cares
about somethingother than their profits?
Well, this isthis is the critical piece
because we have projecteda 150 trillion assets
(06:52):
under management as of 2025,which we're almost
to we're sitting herein December 2024.
Well, according to, Forbes,
we have 2781 billionairesin the world,
accounting for a combined wealthof 14.2 trillion.
That's nowhere near
150 trillionin the United States,
we only have
756 billionaires, only one herein the state of Alabama.
(07:16):
So how do you get to a $150trillion of assets?
Well, a lot of it is explainedby the investment of government
money, whether in the formof bonds, municipal bonds.
Are there other forms of bonds?
But largely stateand federal pension, dollars
and pension moneyof other foreign sovereigns,
(07:38):
as well as sovereign wealthfunds?
These are
all forms of government moneythat get invested.
And, when we're talking aboutgovernment money, government
money is alwaysderivative of taxpayers.
Okay.
So let's start with, pensions remains their pensions.
And in theory, of course,especially when you have defined
benefit pension plans,
(08:00):
you've got the pension planor the fund
is collecting the, moneythat, that, members or,
contributors pay every month
or their employeris paying to this fund,
and then they're supposedto be investing that,
to get returns, to be ableto pay the promised benefits.
So and then particularlythen you have both those
(08:20):
in the private sectorand, the public sector.
So when we think about a public,employees, pension plan
and some of these are very
prominent ones,
like in California
and New York, that have longhistories of activism,
let's, let's get into this.
Is there really, like,informed consent or or
are the members, agreeing towhat's going on here?
(08:43):
Yeah, that's athat's a great question.
You mentioned California.
I think CalPERS managessomething in the range of $503
billion in assetsfor over 2 million members.
And so you're going to havea misalignment of incentives
due to diversity of beneficiaryinterests.
There's no waythat you can invest money,
that pension moneyin a way that accounts
(09:03):
for every beneficiary'sindividual interest.
It's just not possible.
And so then you getinto fiduciary duty problems.
Maybe there are some peopleout there who prefer to maximize
social welfare
by their, investmentsand not financial returns.
But then how do you go
and measurethe different degrees
of social welfareand people's risk
(09:25):
appetite for different degreesof socially based
or socially responsibleinvesting? It's not possible.
The only criterionthat you can actually use
that would apply writlarge in that way
is the the maximizationof financial returns.
It's really the only measurethat can apply across the board,
fairly and non politicallybecause another,
(09:48):
another issue you get intois politicized decision
making, due to, the appointeesof different trustees
of these funds and and also,
the politicization of,investments themselves.
If you're investing in ESGweighted portfolios,
which ones do you choose?
What what, companieshave to get screened out.
(10:09):
And once you start
getting into that sort of nittygritty, you, you
and inevitably, politicizethe investment process.
No, no,
as you mentioned it,
some of this,
especiallywhen you have a pension
plan like thisand it's inevitable you or I
or many people are going to be, part of the same pension plan.
(10:31):
Somebody's got to invest those,assets in charge.
And because the alternativewould be we could have our own
independent, investment accounts.
That's a defined contributionplan, IRAs.
And then with that,I think everybody could,
allocate their, their fundsto whatever they want.
But in these,
defined benefit plans, ittruly is a payment plan.
(10:53):
And the planhas to be investing in somehow.
But you raise a very good point.
I mean, there could be liberalsand conservatives,
members of this same plan.
And when they want to makethe world
a better place or invest itin, companies
aligned with their values,
they want to invest incompletely different,
causes all together.
Well, and typically,
the opt out provisions areincredibly difficult to meet.
(11:16):
Sometimesthey're non-existent in places.
And so let's say
that you are justan elementary school teacher
and you'rea Christian conservative
elementary school teacher.
We'll just use this examplebecause it's probably one
that fits somebody in our state.
And you find out that,
state pension money isbeing invested in ESG portfolios
(11:36):
that include companieswho are there
because they provide, abortionservices,
to employeeswho want to go out of state
to get an abortionbecause their company won't,
because their state won'tallow abortion in the state.
Well,you have obvious moral and,
(11:56):
and personal objectionsto that policy of that company.
And little did you know thatyou are indirectly subsidized
in that company's policy.
This creates a freedom of speechproblem after the,
Janus decisionthat the US Supreme Court
handed down a few years agoregarding, mandatory,
union duesand how they could not be used,
(12:18):
because they would violatefree speech to support causes
with which the, the union members disagreed
when the, when the membersmandatory.
So, for example,if I'm a member of the
Alabama State Bar, as I am,
it's it's
problematic if my state bar dues
were being used to supportother sort of political cousins.
Well,that logic, that reasoning,
that rationale can be extendedto this situation.
(12:41):
And I believe they'rethey're genuine, real
and concerning First Amendmentissues with these pension funds
investing in ESG, funds.
And then there's also perhapsa the more
there's another type of problemhere, the members
who simply would like their,contributions to be invested
(13:01):
in such a way
to make surethat they have that,
those retirement benefits thatthey're counting on, they're
they're planning to work there30 years
or 25 years and retire with,these pension benefits.
And if the pension fund usesall of their money
trying to make the worlda better place
and then say, well,we invested in all of these,
solar, companies,and they went bankrupt.
(13:23):
We don't have any moneyto pay your benefits.
Then you've got another veryyeah, significant problem.
Unfunded liabilitiesis a problem even before ESG.
And it's even more of a problemafter ESG.
And you'll see some companiestrying to institute
things like pass through votingor an informed,
intermediationmodel where they try to to,
(13:47):
solicit
input from the members before,before the, the investments
occur or,they take proactive steps
to try to understandbeneficiary preferences.
But there are key problems here.
Number one is there'sthere's low voter turnout.
There's low participation ratewith those, measures.
But also, there
(14:07):
those measures are limitedto a narrow range of options
predetermined by the advisoryfirms.
It's not truly the beneficiariesgetting free agency
to select from whatever
menu of options they desire.
It's a it's a it's
a very small menuselected by the advisory firm.
(14:28):
And so in essence,
there's not truly free choicefor the beneficiaries.
And then it sayssome of these plans
are also state programs.
I believe it's 40 or 41 statesthat actually guarantee
the benefits of members of either the state law
or even their stateconstitutions.
(14:50):
If the pension fundat some point in the future
doesn't have the money to paythe promised benefits,
taxpayers are on the hook.That's exactly in effect.
Ultimately, the the the
the pension manager
isn't trying to make the worlda better place
if they fail in their
they're actually puttingthe taxpayer
additional taxpayer money.
And taxpayershave already paid in effect,
as part of the salaries
(15:11):
that you can think of that,that pension
is part of the compensationfor the employee.
So they've already paid for itthere.
And then if you don't
get the expected returns,taxpayers are on the hook again.
That's exactly right. Yeah.
You've extracteda bunch of wealth
from the people of your stateand basically flushed it away.
You mentioned theterm, sovereign wealth fund.
And that's also wherea lot of this, globally assets.
(15:34):
Come on, mention
what that is,
because there's actually beensome talk of
maybe should the United Statestry to increase,
what's it tell us about these?
Yeah, these are, governmentowned investment funds.
They're they're common in oilrich nations like Norway are
like many of the,Middle Eastern countries.
And they're sometimesderived from commodity
profits,their currency reserves.
(15:54):
But they invest in, they invest
in and thingslike weather, stocks, bonds,
and also, basically,exchange traded funds.
This iswhat is really we're seeing
because because of the risein passive investment
since, the 80s,we see a lot of the sovereign
wealth fund moneybeing put into the ETFs.
(16:17):
And some of theseETFs are, ESG friendly.
And then let's get it.
Another part of it,another element of
is these, index fundsor these managed funds.
And there's two issuesthat arise here.
There are some of these funds
that are explicitly labeledas ESG investment funds.
(16:37):
That's right.
And then there are other thingsthat are like S&P 500, funds.
They're supposed to simply beinvesting in S&P 500 firms.
And, you know
what?
What are the issuesinvolved here?
Well, an ETF that tracksthe S&P 500
is typically going to performwell over time just because
(16:58):
generally the market performswell over time.
But I guess the, the, the issuewith passive investment
that, that becomes problematicis when you are investing
other people's money.
Again, we're talking about, asset management firms
getting very wealthy off of theinvestment of, of government
money firms like Blackrock,State Street and Vanguard.
(17:19):
Now when they gain that wealth,what they then do
is they engage corporations.
They go out and buy, shares of companies.
So they, they're, you know,they're the leading,
stockholders of most companiesthat are publicly traded.
So they are, interestinglyenough, they're they're, they're
they may be the largest
shareholderand direct competitor companies
(17:42):
or what they typically didhistorically was they bought
shares of companies that wereinvesting in infrastructure
and that were most likelyto get government subsidies.
So they were
taking government moneyon the front end, investing it
and then
investing it in companies
that were getting governmentsubsidies on the back end.
And that's just basically
a giant wealth extractionfrom taxpayer, business model,
(18:04):
where you're just siphoning outgovernment money on both ends.
And that's what your wholebusiness model is predicated on.
And then the issue arises,if you've got one of these non
explicitly ESG guys, it's justS&P five right off the green.
And then using using the moneyusing in effect
the leverage that comesbecause we own 20 or 25% of your
(18:25):
your the stockin your company because these
index funds are so popular now
when they reallyare a very good investment.
Yeah.
To use that fund which again,the people in the investors
didn't put that money in there
explicitly to pressure companiesto do ESG.
But when, Blackrock is talkingto companies saying
we have all this money,we own all of your stock,
(18:47):
we're going to force youto try to do or convince you
to do things that aren'tgoing to help your bottom line.
Yeah.
And that's
that's the whole reasonthe SEC instituted its new names
rule, which requires 80% of the,the securities
in a portfolio to matchhow they're advertised as being.
So if they're advertisedas being ESG,
you know, 80% of the fundis advertised in FDA, 80% of the
(19:09):
securities in that portfolioactually have to be ESG related.
And part of that's because,
ESG weighted portfolios didpretty well during the pandemic.
But it turns out, oh,they weren't ESG at all.
This is what we callgreenwashing or woke washing,
where companies, are the fundsadvertise themselves
as being sustainable
(19:30):
or socially responsibleor whatever the term may be,
when in reality
they just haveevery single company
that you know,any other portfolio has.
They're justvirtually interchangeable.
And that's why
they're the reason they didwell is because
all they really did was trackthe S&P 500.
They weren't actually ESG.
Yeah, yeah.
So we talked a lotabout the investing part of it.
(19:52):
But there is alsoa lot of government regulations
and laws and mandates andnot just the USA but globally.
And in fact, I mean, this is toobig of a topic to get into.
But, it is a little bitabout some of these,
laws that are sort of pushingthe market to ESG.
Well, there's a sort of a macroand a micro versus
(20:12):
the macro version.
I mean, ESG derives fromI mean, it predates this,
but it really was articulatedthe first time at the Who
Cares Women's Conference,which was sponsored
by the United Nations andthe government of Switzerland.
Of course,
the United Nation
gets roughly three fourthsof its funding from government.
And, and it's a very governmentdriven, phenomenon.
(20:33):
Whether you're talking about U.Stax credits for clean energy
or stricter emission standards,
or whether you're talking
about the European Union'sGreen New Deal and climate law,
over 60 jurisdictions across,
across the worldrequire ESG data disclosures.
We now have new, SECdisclosure mandates
coming down the pipeline.
(20:54):
We also have a new Department
of Labor regulationthat is, ESG related.
And, and the heavy regulationpredates ESG,
but it has expanded with both
climate and diversityinitiatives.
I think we see, for example,
even stock exchangesadopting new, regulations.
If you want to be tradedon Nasdaq, for example,
(21:15):
now you have to disclosethis diversity stuff.
And what's really interestingis how costly
all these disclosures are writlarge across the economy.
They could cost usbillions of dollars
just to produce information
that is alreadypublicly available,
that investorscan already find out there.
So they're just sort ofreproducing data that exists.
(21:35):
And, andand that's just a wasteful.
If it turns out that
even before the governmentacts, the prospect of government
action can sometimes lead,people in the market to,
take action.
And this makes it even harderto draw a clear line.
This is government.This is voluntary.
(21:57):
We've got long beforea government acts.
People might be lookingto change their investments.
Right? Yeah. Well, two,two things about investments.
They they're about maximizingreturns and mitigating risk.
Well,a lot of the proponents of ESG
focus on that second part,mitigating risk.
And one of the risks they talkabout is regulatory risks.
You need to be
you know, you need to worryabout regulatory.
(22:18):
Meanwhile,they're spending a ton of money
lobbyingfor the very regulations
that they're warning against.
So it's it's a self-fulfillingprophecy.
And that respect, they
they want the regulationsto come down the pipeline
and essentially ESG,
if you think about it this way,if you narrowed the range.
So if if diversification iswhat minimizes risk
(22:40):
because you're ableto spread your assets across
different industriesagainst fields,
and that way,
if something that there'sa downturn in one area,
well, you're you're protectedby upticks in the other area.
Well, ESG narrowsthe range of possibility
mathematically over time.
It's not possible for itto succeed against
somebody that doesn't havethat has more diversification.
(23:02):
But what the people that
advocate ESG, youtherefore, want to do to make
ESG work is institutemore regulations.
They want to change the rules of
the game, because ESG only worksif everybody has to play
by those rules.
So just to be clear about this,
what we're talking about hereis that you wouldn't
want to be the ownerof a coal mine.
For instance,
the day that the governmentdecides that they're going to
(23:23):
to ban coal,
financialmarkets are forward looking.
You're going to wantto take that into account,
and you're
going to wantto get out of that investment
before the governmentcomes along.
And this makes it
really difficult for us to tellif this is voluntary or not.
And so you'd see companies
moving out of, say, fossil fuelsinvestments, disfavor things
into the politicallyfavorite things
(23:44):
before necessarilylaw is coming into place.
And so it's not it'snot completely wrong.
And you saw somethinglike that happened
with even the state of Maine,for example,
divesting from,from fossil fuels.
And, and that's also,problematic because of the,
the high degree of returns
historicallythat such an industry yielded.
So we think that this, topicis this,
(24:04):
this interpretation of ESGis important
because we have seen, antiESG movement,
show upeven in terms of some anti-gay
ESG billstaken on by different states.
It's becomea politically contentious issue
by Vivek Grandma Swami,who's going to be an, that,
President Trump
Department of Government
(24:25):
Efficiency really sort ofcame to prominence by,
touting someof the other forms of ESG.
It's really important
in termsof trying to think about
what's going on with the antiESG market movement
as to whether or not you seeESG as primarily a market based
phenomena, or if it'sa government driven phenomenon.
(24:45):
Right? Correct. Yeah.
If ESG does not rely onvoluntary market driven choices,
then its implementationthrough mandates
and government interventionand coercive pressures
undermines individual freedomand the free market.
In that case,it lacks moral justification
and should not be instituted
because it imposescollective goals
(25:06):
at the expense of personalchoice and market autonomy.
And I think that's a broad
philosophical statementthat is profoundly true.
And then this is also important,because
we've certainly seensome of the,
major financial institutionspulling back a little bit from
from ESG.
I think it was,
Vanguarddropped out of the net zero
(25:27):
asset,Managers Coalition, the,
the CEO of Blackrockhas disavowed, ESG publicly.
And then related to that,especially after the
the recent 2024presidential election,
we've seen some peopletalk about,
oh, we're going to peakwokeness, in society generally.
(25:51):
Is it
possible thatESG is going away on its own?
And in thatwe might be, meeting a
if not quite a dead horse,you hear one that's clearly,
on its last legsand going out anyway, or
is this stillan important issue to engage?
I think that it remainshighly relevant
despite the apparent retreat.
(26:12):
Yes, there are some successesthat the anti
ESG movement can claim,but there is also
a large degree of rebrandingthat's taking place.
It's taking the taxonomiesof ESG
and altering themso that instead of saying,
we've got an ESG portfolio,we've got a socially responsible
(26:32):
investment, something likethat is occurring.
The pushback against ESG does,I think, highlight
the need to reaffirmthe moral value of profit
making within the boundsof the law,
and the importanceof respecting the voluntary,
complex nature of business?
Businesses are specific entitiesthere with a
(26:54):
a, a legal purpose,and that is to maximize profits
for shareholders.
And too often peoplethink about profit maximization
as a bad thing without fullyunderstanding what it is
that a firm exists to do.
There are vehicles for charity,there are vehicles
(27:16):
for philanthropy,and those are perfectly suitable
ways for peopleto reallocate wealth or to give
and and do things that we nowcall socially responsible.
But when you
use the corporate structure,when you use the corporation
to try to do that,
I believe you're either beingdisingenuous, you're trying to,
(27:37):
basically trick peopleinto thinking we're doing,
you know, we're doing all thisgood stuff.
That's just a marketing ploy.
I did.
The greenwashing.
The greenwashing.
Right?
Or, you know, you're doingthings under, regulatory
pressure, other formsof, of coercion, coercion
through throughsort of the Blackrock
StateStreet Vanguard shareholder,
(28:00):
engagement and
other, you know,other things of that variety.
Yeah.
And I certainly think, you know,
as you mentioned,I reaffirm or affirming
because I think that thethe folks
who think that business doesn'treally have a right to exist
unless it advances largersocial purposes
or becomesa tool of social engineering.
(28:21):
I think that they havea lot of sway.
There are a lot of folksout there that think that way.
We think that investment
should be,
financial marketsreally should be a tool of
social engineering and, advancepeople's preferred causes.
And it ignores or forgetsthe whole point of that.
Like these businesses aremassive, massive organizations
and they're all voluntary.And they create jobs.
(28:42):
They provide goods and services.
They thrivebecause they serve the needs
of owners, employees,customers, communities
through mutual agreementbenefit.
And when you impose, ESG externally,
you risk distorting this dynamicby turning private
organizations into toolsfor advancing specific agendas.
Well, thanks so much forcoming on to talk about this.
And thank youall for joining us.
(29:04):
Join us againnext time for another E!
Conversations.
This has been E conversations,
a joint production of Troy torchenvision and the manual H.
Johnson Center for PoliticalEconomy at Troy University.
The opinions expressed on
this programrepresent the viewpoints
of individual authorsor contributors,
and do not necessarily reflectthose of Troy University.
This is a conversations.
A joint production of TroyTrojan Vision and the manual H.
Johnson centerfor Political Economy.
(00:20):
Now, here'syour host, Doctor Dan Sutter.
Hello.
Welcome to your conversations.
I'm your host, doctor DanaSutter of the Johnson Center
for Political Economyat Troy University.
ESG investinghas gone in the span
of about three years,
from a relatively obscureinvestment topic
to a significantpolitical issue,
(00:41):
with state legislatures
even taking up billsrelated to this question.
What does ESG involve?
And more importantly, perhaps
in light of all the attentionnow being paid to it,
does it represent a market
and thereby, by implication,voluntary phenomenon?
An examinationof whether ESG is truly
libertarian is critical, in
light of critics labeling ESGas socialism or central planning
(01:03):
and defenders of ESG claimingto be defending free markets.
How should we evaluate ESG?
Join me on the show today
to discuss this topic is DoctorElement Mendenhall.
He's the Grady Rogierprofessor and executive director
of the Johnson Center.
Doctor Mendenhallearned an undergraduate degree
from Furman,
a law degree from West VirginiaUniversity, and a Ph.D.
(01:24):
in English from Auburn.
He has been with Troysince 2020, and has become
one of the leading criticsand scholars on ESG.
Welcome back to the show, Alan.
Thank you, Doctor Sutter.
It's a pleasure to be here.
And, so before we get startedhere, we're going to be talking
about, some research that we've done.
We just, have gotten a paperaccepted examining this topic.
(01:46):
So, it's to. And where is that?
Do we kind of work?
It's one of the Emory'slaw journals,
the Emory Journal of Lawand Corporate Governance.
And so let's start here.
And we're about to get into
this question about
whether ESG is truly a marketor voluntary phenomenon.
But first, I start by reminding,because
we've had a couple of showsabout ESG before,
(02:06):
but reminder, very first,what exactly ESG stands for
and what's involved with that?
Well, the acronym ESG standsfor environmental, social
and Governance.
And what that refersto are the non-financial
standards and factorsthat banks, financial
institutions and institutionalinvestors, among others,
(02:29):
account for when they allocatecapital or assess risk.
And there's actually
two, two wayswe can sort of view those.
So we can talk about ESG
from an investing standpoint,and that ESG is
corporate governance.
And although they are clearlyrelated in the same ESG,
there's a slightly differentinterpretation there.
(02:49):
I thinkwe want to be clear of it
because we'll be referring toboth of these different ideas.
Yeah. Yeah.
So in the former,when you're talking about what
company management and boardsdo internally,
how they integrate ESG factorsinto their,
corporate structure,their policies and practices.
Whereas ESG investmentrefers to what, asset managers
(03:12):
and institutional investors are,
an individual investorsas well, do when they,
when they invest money orwhen they construct portfolios.
And this evaluates companies
not just on financial
performance, butbased on their ESG, metrics.
So it involves screening,
choosing or excluding companiesbased on ESG performance.
(03:34):
It involves active engagement,
shareholders influencing
corporate policies to alignwith ESG goals, and impact
investing,which is targeting investments
that yield measurableESG benefits, allegedly
benefits alongsidefinancial returns.
Now, as an investor, if you or
I don't have any money to
invest, but anybodywho has some money to invest
(03:57):
and should they be okay,
should they be allowed to go out
and try to make use their moneyto make the world
a better place, as opposed tojust trying to make a big return
for for themselves or tryingto make the most money they can?
Yeah, there
there are no legal
or ethical issuesor moral issues with somebody
investing his or her moneyas he or she wishes.
(04:19):
Voluntaryinvestment is perfectly okay.
So wewere actually in this research.
We were responding to a,a paper that had been written
by, I think, as a Yale Lawprofessor named, Jonathan Macy,
who raised that,who made the argument
that ESG is libertarian.
(04:40):
So tell us briefly,
a little bit of what his,argument was there.
Yeah.
I think what he istrying to show is that,
government has failedin many areas, many times over
many years,and that this turn toward
private corporations
representsa libertarian movement.
(05:04):
I believe he's wrong, andwe can maybe talk about that.
But the theI guess the general framework
for his paper is that, okay,
we have all this governmentfailure
and now we need
we need to turn to the privatesector to fix things.
Yeah.
And he even refers to like, youknow, corporations have become
the view,
be viewed as, organizationsthat can get things done.
(05:25):
Whereas government right, can't.
And then also maintainingthe idea that
because this is operatingthrough markets as opposed
to governmentmandate, it's in coercion,
that that somehow
this would be a more libertarianor voluntary way
to address questionslike climate change or, gender
(05:45):
equity or topics like that.
Right. I think that's a fair
representationof his argument. Yes.
So let's get it.
You know, we we,we took issue with this.
And so let's step throughsome of the, points
that we wanted
to make in response to startingwith the fact that they're now
depending on differentmeasures, trillions
of dollarsliterally being invested,
(06:08):
in ESGinvesting of different types.
Given that, we said before,anybody is free to
use their money
however they want,whether they want to make it
know, try to make the worlda better place,
try to gofor the best return possible,
or if they mighteven be concerned
about making a lot of moneyout of something
that they thoughtwas morally questionable.
(06:31):
Then what's the problemwith, with, all this money
being in financial marketsdirected to ESG?
I mean, is itjust the fact that maybe
finally, Wall Street'sgrowing a conscience and cares
about somethingother than their profits?
Well, this isthis is the critical piece
because we have projecteda 150 trillion assets
(06:52):
under management as of 2025,which we're almost
to we're sitting herein December 2024.
Well, according to, Forbes,
we have 2781 billionairesin the world,
accounting for a combined wealthof 14.2 trillion.
That's nowhere near
150 trillionin the United States,
we only have
756 billionaires, only one herein the state of Alabama.
(07:16):
So how do you get to a $150trillion of assets?
Well, a lot of it is explainedby the investment of government
money, whether in the formof bonds, municipal bonds.
Are there other forms of bonds?
But largely stateand federal pension, dollars
and pension moneyof other foreign sovereigns,
(07:38):
as well as sovereign wealthfunds?
These are
all forms of government moneythat get invested.
And, when we're talking aboutgovernment money, government
money is alwaysderivative of taxpayers.
Okay.
So let's start with, pensions remains their pensions.
And in theory, of course,especially when you have defined
benefit pension plans,
(08:00):
you've got the pension planor the fund
is collecting the, moneythat, that, members or,
contributors pay every month
or their employeris paying to this fund,
and then they're supposedto be investing that,
to get returns, to be ableto pay the promised benefits.
So and then particularlythen you have both those
(08:20):
in the private sectorand, the public sector.
So when we think about a public,employees, pension plan
and some of these are very
prominent ones,
like in California
and New York, that have longhistories of activism,
let's, let's get into this.
Is there really, like,informed consent or or
are the members, agreeing towhat's going on here?
(08:43):
Yeah, that's athat's a great question.
You mentioned California.
I think CalPERS managessomething in the range of $503
billion in assetsfor over 2 million members.
And so you're going to havea misalignment of incentives
due to diversity of beneficiaryinterests.
There's no waythat you can invest money,
that pension moneyin a way that accounts
(09:03):
for every beneficiary'sindividual interest.
It's just not possible.
And so then you getinto fiduciary duty problems.
Maybe there are some peopleout there who prefer to maximize
social welfare
by their, investmentsand not financial returns.
But then how do you go
and measurethe different degrees
of social welfareand people's risk
(09:25):
appetite for different degreesof socially based
or socially responsibleinvesting? It's not possible.
The only criterionthat you can actually use
that would apply writlarge in that way
is the the maximizationof financial returns.
It's really the only measurethat can apply across the board,
fairly and non politicallybecause another,
(09:48):
another issue you get intois politicized decision
making, due to, the appointeesof different trustees
of these funds and and also,
the politicization of,investments themselves.
If you're investing in ESGweighted portfolios,
which ones do you choose?
What what, companieshave to get screened out.
(10:09):
And once you start
getting into that sort of nittygritty, you, you
and inevitably, politicizethe investment process.
No, no,
as you mentioned it,
some of this,
especiallywhen you have a pension
plan like thisand it's inevitable you or I
or many people are going to be, part of the same pension plan.
(10:31):
Somebody's got to invest those,assets in charge.
And because the alternativewould be we could have our own
independent, investment accounts.
That's a defined contributionplan, IRAs.
And then with that,I think everybody could,
allocate their, their fundsto whatever they want.
But in these,
defined benefit plans, ittruly is a payment plan.
(10:53):
And the planhas to be investing in somehow.
But you raise a very good point.
I mean, there could be liberalsand conservatives,
members of this same plan.
And when they want to makethe world
a better place or invest itin, companies
aligned with their values,
they want to invest incompletely different,
causes all together.
Well, and typically,
the opt out provisions areincredibly difficult to meet.
(11:16):
Sometimesthey're non-existent in places.
And so let's say
that you are justan elementary school teacher
and you'rea Christian conservative
elementary school teacher.
We'll just use this examplebecause it's probably one
that fits somebody in our state.
And you find out that,
state pension money isbeing invested in ESG portfolios
(11:36):
that include companieswho are there
because they provide, abortionservices,
to employeeswho want to go out of state
to get an abortionbecause their company won't,
because their state won'tallow abortion in the state.
Well,you have obvious moral and,
(11:56):
and personal objectionsto that policy of that company.
And little did you know thatyou are indirectly subsidized
in that company's policy.
This creates a freedom of speechproblem after the,
Janus decisionthat the US Supreme Court
handed down a few years agoregarding, mandatory,
union duesand how they could not be used,
(12:18):
because they would violatefree speech to support causes
with which the, the union members disagreed
when the, when the membersmandatory.
So, for example,if I'm a member of the
Alabama State Bar, as I am,
it's it's
problematic if my state bar dues
were being used to supportother sort of political cousins.
Well,that logic, that reasoning,
that rationale can be extendedto this situation.
(12:41):
And I believe they'rethey're genuine, real
and concerning First Amendmentissues with these pension funds
investing in ESG, funds.
And then there's also perhapsa the more
there's another type of problemhere, the members
who simply would like their,contributions to be invested
(13:01):
in such a way
to make surethat they have that,
those retirement benefits thatthey're counting on, they're
they're planning to work there30 years
or 25 years and retire with,these pension benefits.
And if the pension fund usesall of their money
trying to make the worlda better place
and then say, well,we invested in all of these,
solar, companies,and they went bankrupt.
(13:23):
We don't have any moneyto pay your benefits.
Then you've got another veryyeah, significant problem.
Unfunded liabilitiesis a problem even before ESG.
And it's even more of a problemafter ESG.
And you'll see some companiestrying to institute
things like pass through votingor an informed,
intermediationmodel where they try to to,
(13:47):
solicit
input from the members before,before the, the investments
occur or,they take proactive steps
to try to understandbeneficiary preferences.
But there are key problems here.
Number one is there'sthere's low voter turnout.
There's low participation ratewith those, measures.
But also, there
(14:07):
those measures are limitedto a narrow range of options
predetermined by the advisoryfirms.
It's not truly the beneficiariesgetting free agency
to select from whatever
menu of options they desire.
It's a it's a it's
a very small menuselected by the advisory firm.
(14:28):
And so in essence,
there's not truly free choicefor the beneficiaries.
And then it sayssome of these plans
are also state programs.
I believe it's 40 or 41 statesthat actually guarantee
the benefits of members of either the state law
or even their stateconstitutions.
(14:50):
If the pension fundat some point in the future
doesn't have the money to paythe promised benefits,
taxpayers are on the hook.That's exactly in effect.
Ultimately, the the the
the pension manager
isn't trying to make the worlda better place
if they fail in their
they're actually puttingthe taxpayer
additional taxpayer money.
And taxpayershave already paid in effect,
as part of the salaries
(15:11):
that you can think of that,that pension
is part of the compensationfor the employee.
So they've already paid for itthere.
And then if you don't
get the expected returns,taxpayers are on the hook again.
That's exactly right. Yeah.
You've extracteda bunch of wealth
from the people of your stateand basically flushed it away.
You mentioned theterm, sovereign wealth fund.
And that's also wherea lot of this, globally assets.
(15:34):
Come on, mention
what that is,
because there's actually beensome talk of
maybe should the United Statestry to increase,
what's it tell us about these?
Yeah, these are, governmentowned investment funds.
They're they're common in oilrich nations like Norway are
like many of the,Middle Eastern countries.
And they're sometimesderived from commodity
profits,their currency reserves.
(15:54):
But they invest in, they invest
in and thingslike weather, stocks, bonds,
and also, basically,exchange traded funds.
This iswhat is really we're seeing
because because of the risein passive investment
since, the 80s,we see a lot of the sovereign
wealth fund moneybeing put into the ETFs.
(16:17):
And some of theseETFs are, ESG friendly.
And then let's get it.
Another part of it,another element of
is these, index fundsor these managed funds.
And there's two issuesthat arise here.
There are some of these funds
that are explicitly labeledas ESG investment funds.
(16:37):
That's right.
And then there are other thingsthat are like S&P 500, funds.
They're supposed to simply beinvesting in S&P 500 firms.
And, you know
what?
What are the issuesinvolved here?
Well, an ETF that tracksthe S&P 500
is typically going to performwell over time just because
(16:58):
generally the market performswell over time.
But I guess the, the, the issuewith passive investment
that, that becomes problematicis when you are investing
other people's money.
Again, we're talking about, asset management firms
getting very wealthy off of theinvestment of, of government
money firms like Blackrock,State Street and Vanguard.
(17:19):
Now when they gain that wealth,what they then do
is they engage corporations.
They go out and buy, shares of companies.
So they, they're, you know,they're the leading,
stockholders of most companiesthat are publicly traded.
So they are, interestinglyenough, they're they're, they're
they may be the largest
shareholderand direct competitor companies
(17:42):
or what they typically didhistorically was they bought
shares of companies that wereinvesting in infrastructure
and that were most likelyto get government subsidies.
So they were
taking government moneyon the front end, investing it
and then
investing it in companies
that were getting governmentsubsidies on the back end.
And that's just basically
a giant wealth extractionfrom taxpayer, business model,
(18:04):
where you're just siphoning outgovernment money on both ends.
And that's what your wholebusiness model is predicated on.
And then the issue arises,if you've got one of these non
explicitly ESG guys, it's justS&P five right off the green.
And then using using the moneyusing in effect
the leverage that comesbecause we own 20 or 25% of your
(18:25):
your the stockin your company because these
index funds are so popular now
when they reallyare a very good investment.
Yeah.
To use that fund which again,the people in the investors
didn't put that money in there
explicitly to pressure companiesto do ESG.
But when, Blackrock is talkingto companies saying
we have all this money,we own all of your stock,
(18:47):
we're going to force youto try to do or convince you
to do things that aren'tgoing to help your bottom line.
Yeah.
And that's
that's the whole reasonthe SEC instituted its new names
rule, which requires 80% of the,the securities
in a portfolio to matchhow they're advertised as being.
So if they're advertisedas being ESG,
you know, 80% of the fundis advertised in FDA, 80% of the
(19:09):
securities in that portfolioactually have to be ESG related.
And part of that's because,
ESG weighted portfolios didpretty well during the pandemic.
But it turns out, oh,they weren't ESG at all.
This is what we callgreenwashing or woke washing,
where companies, are the fundsadvertise themselves
as being sustainable
(19:30):
or socially responsibleor whatever the term may be,
when in reality
they just haveevery single company
that you know,any other portfolio has.
They're justvirtually interchangeable.
And that's why
they're the reason they didwell is because
all they really did was trackthe S&P 500.
They weren't actually ESG.
Yeah, yeah.
So we talked a lotabout the investing part of it.
(19:52):
But there is alsoa lot of government regulations
and laws and mandates andnot just the USA but globally.
And in fact, I mean, this is toobig of a topic to get into.
But, it is a little bitabout some of these,
laws that are sort of pushingthe market to ESG.
Well, there's a sort of a macroand a micro versus
(20:12):
the macro version.
I mean, ESG derives fromI mean, it predates this,
but it really was articulatedthe first time at the Who
Cares Women's Conference,which was sponsored
by the United Nations andthe government of Switzerland.
Of course,
the United Nation
gets roughly three fourthsof its funding from government.
And, and it's a very governmentdriven, phenomenon.
(20:33):
Whether you're talking about U.Stax credits for clean energy
or stricter emission standards,
or whether you're talking
about the European Union'sGreen New Deal and climate law,
over 60 jurisdictions across,
across the worldrequire ESG data disclosures.
We now have new, SECdisclosure mandates
coming down the pipeline.
(20:54):
We also have a new Department
of Labor regulationthat is, ESG related.
And, and the heavy regulationpredates ESG,
but it has expanded with both
climate and diversityinitiatives.
I think we see, for example,
even stock exchangesadopting new, regulations.
If you want to be tradedon Nasdaq, for example,
(21:15):
now you have to disclosethis diversity stuff.
And what's really interestingis how costly
all these disclosures are writlarge across the economy.
They could cost usbillions of dollars
just to produce information
that is alreadypublicly available,
that investorscan already find out there.
So they're just sort ofreproducing data that exists.
(21:35):
And, andand that's just a wasteful.
If it turns out that
even before the governmentacts, the prospect of government
action can sometimes lead,people in the market to,
take action.
And this makes it even harderto draw a clear line.
This is government.This is voluntary.
(21:57):
We've got long beforea government acts.
People might be lookingto change their investments.
Right? Yeah. Well, two,two things about investments.
They they're about maximizingreturns and mitigating risk.
Well,a lot of the proponents of ESG
focus on that second part,mitigating risk.
And one of the risks they talkabout is regulatory risks.
You need to be
you know, you need to worryabout regulatory.
(22:18):
Meanwhile,they're spending a ton of money
lobbyingfor the very regulations
that they're warning against.
So it's it's a self-fulfillingprophecy.
And that respect, they
they want the regulationsto come down the pipeline
and essentially ESG,
if you think about it this way,if you narrowed the range.
So if if diversification iswhat minimizes risk
(22:40):
because you're ableto spread your assets across
different industriesagainst fields,
and that way,
if something that there'sa downturn in one area,
well, you're you're protectedby upticks in the other area.
Well, ESG narrowsthe range of possibility
mathematically over time.
It's not possible for itto succeed against
somebody that doesn't havethat has more diversification.
(23:02):
But what the people that
advocate ESG, youtherefore, want to do to make
ESG work is institutemore regulations.
They want to change the rules of
the game, because ESG only worksif everybody has to play
by those rules.
So just to be clear about this,
what we're talking about hereis that you wouldn't
want to be the ownerof a coal mine.
For instance,
the day that the governmentdecides that they're going to
(23:23):
to ban coal,
financialmarkets are forward looking.
You're going to wantto take that into account,
and you're
going to wantto get out of that investment
before the governmentcomes along.
And this makes it
really difficult for us to tellif this is voluntary or not.
And so you'd see companies
moving out of, say, fossil fuelsinvestments, disfavor things
into the politicallyfavorite things
(23:44):
before necessarilylaw is coming into place.
And so it's not it'snot completely wrong.
And you saw somethinglike that happened
with even the state of Maine,for example,
divesting from,from fossil fuels.
And, and that's also,problematic because of the,
the high degree of returns
historicallythat such an industry yielded.
So we think that this, topicis this,
(24:04):
this interpretation of ESGis important
because we have seen, antiESG movement,
show upeven in terms of some anti-gay
ESG billstaken on by different states.
It's becomea politically contentious issue
by Vivek Grandma Swami,who's going to be an, that,
President Trump
Department of Government
(24:25):
Efficiency really sort ofcame to prominence by,
touting someof the other forms of ESG.
It's really important
in termsof trying to think about
what's going on with the antiESG market movement
as to whether or not you seeESG as primarily a market based
phenomena, or if it'sa government driven phenomenon.
(24:45):
Right? Correct. Yeah.
If ESG does not rely onvoluntary market driven choices,
then its implementationthrough mandates
and government interventionand coercive pressures
undermines individual freedomand the free market.
In that case,it lacks moral justification
and should not be instituted
because it imposescollective goals
(25:06):
at the expense of personalchoice and market autonomy.
And I think that's a broad
philosophical statementthat is profoundly true.
And then this is also important,because
we've certainly seensome of the,
major financial institutionspulling back a little bit from
from ESG.
I think it was,
Vanguarddropped out of the net zero
(25:27):
asset,Managers Coalition, the,
the CEO of Blackrockhas disavowed, ESG publicly.
And then related to that,especially after the
the recent 2024presidential election,
we've seen some peopletalk about,
oh, we're going to peakwokeness, in society generally.
(25:51):
Is it
possible thatESG is going away on its own?
And in thatwe might be, meeting a
if not quite a dead horse,you hear one that's clearly,
on its last legsand going out anyway, or
is this stillan important issue to engage?
I think that it remainshighly relevant
despite the apparent retreat.
(26:12):
Yes, there are some successesthat the anti
ESG movement can claim,but there is also
a large degree of rebrandingthat's taking place.
It's taking the taxonomiesof ESG
and altering themso that instead of saying,
we've got an ESG portfolio,we've got a socially responsible
(26:32):
investment, something likethat is occurring.
The pushback against ESG does,I think, highlight
the need to reaffirmthe moral value of profit
making within the boundsof the law,
and the importanceof respecting the voluntary,
complex nature of business?
Businesses are specific entitiesthere with a
(26:54):
a, a legal purpose,and that is to maximize profits
for shareholders.
And too often peoplethink about profit maximization
as a bad thing without fullyunderstanding what it is
that a firm exists to do.
There are vehicles for charity,there are vehicles
(27:16):
for philanthropy,and those are perfectly suitable
ways for peopleto reallocate wealth or to give
and and do things that we nowcall socially responsible.
But when you
use the corporate structure,when you use the corporation
to try to do that,
I believe you're either beingdisingenuous, you're trying to,
(27:37):
basically trick peopleinto thinking we're doing,
you know, we're doing all thisgood stuff.
That's just a marketing ploy.
I did.
The greenwashing.
The greenwashing.
Right?
Or, you know, you're doingthings under, regulatory
pressure, other formsof, of coercion, coercion
through throughsort of the Blackrock
StateStreet Vanguard shareholder,
(28:00):
engagement and
other, you know,other things of that variety.
Yeah.
And I certainly think, you know,
as you mentioned,I reaffirm or affirming
because I think that thethe folks
who think that business doesn'treally have a right to exist
unless it advances largersocial purposes
or becomesa tool of social engineering.
(28:21):
I think that they havea lot of sway.
There are a lot of folksout there that think that way.
We think that investment
should be,
financial marketsreally should be a tool of
social engineering and, advancepeople's preferred causes.
And it ignores or forgetsthe whole point of that.
Like these businesses aremassive, massive organizations
and they're all voluntary.And they create jobs.
(28:42):
They provide goods and services.
They thrivebecause they serve the needs
of owners, employees,customers, communities
through mutual agreementbenefit.
And when you impose, ESG externally,
you risk distorting this dynamicby turning private
organizations into toolsfor advancing specific agendas.
Well, thanks so much forcoming on to talk about this.
And thank youall for joining us.
(29:04):
Join us againnext time for another E!
Conversations.
This has been E conversations,
a joint production of Troy torchenvision and the manual H.
Johnson Center for PoliticalEconomy at Troy University.
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