Will ESG Destroy Capitalism? with Paul Tice

May 08, 2024 01:02:08
Will ESG Destroy Capitalism? with Paul Tice
The Atlas Society Presents - The Atlas Society Asks
Will ESG Destroy Capitalism? with Paul Tice

May 08 2024 | 01:02:08

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Show Notes

Join CEO Jennifer Grossman for the 203rd episode of The Atlas Society Asks, in which she interviews author Paul Tice about his book "The Race to Zero: How ESG Investing Will Crater the Global Financial System."

Now an Adjunct Professor of Finance at New York University, Paul Tice has spent the past 40 years working on Wall Street at some of the industry’s most iconic firms, including J.P. Morgan, Lehman Brothers, and BlackRock. His professional specialization in the energy sector has afforded him a unique perch from which to study the growth of the ESG and sustainable investment movement, and its destructive influence on corporate governance.

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Episode Transcript

[00:00:00] Speaker A: Hi everyone, and welcome to the 203rd episode of the Atlas Society asks. My name is Jennifer Anju Grossman. My friends call me Jag. I am the CEO of the Atlas Society. We are the leading nonprofit organization introducing young people to the ideas of Ayn Rand in fun, creative ways, including graphic novels and animated videos. Today, we are joined by Paul Tice. Before I even begin to introduce our guest, I want to remind all of you who are watching us on Zoom, Instagram, Twitter, Facebook, LinkedIn, YouTube. You can use the comment section to type in your questions, and we will get to as many of them as we can. So our guest, Paul Tice, is the author of the race 20 how ESG Investing will crater the Global Financial System. He has spent the past 40 years working on Wall street at some of the industry's most iconic tectonic firms, including JP Morgan, Lehman Brothers, and BlackRock. For most of his career specializing in the energy sector, he has made him a bit of an expert on climate policy and environmental regulation and its financial offshoot, the ESG and sustainable investment movement. In recent years, he has been an adjunct professor of finance at the Leonard Nurse Dern School of Business at New York University, teaching mainly on the energy, infrastructure and project finance markets. Paul, thank you so much for joining us. [00:01:39] Speaker B: It's great to be with you. [00:01:41] Speaker A: So first, let's start with a bit of background. Tell us about the boy, born and raised in Bay Ridge, Brooklyn. What influenced his early ambition and pursuit of a career on Wall street? [00:01:59] Speaker B: In college, I was pre law. I majored in English. At the time, I figured whatever I chose as a career, as long as I could write, it would probably help me. And after I graduated, got placed at a law school and then decided that studying the law wasn't for me. On second thought, it was a career that was a little too solitary. And at the time, I was working part time at Morgan Guarantee Trust during the last half of college, and so I made the switch, decided to get my MBA. You know, I figured I'd always like to write. I'd also like the quantitative side of math and science. And I was looking for a career that kind of fit both of those bills. And, you know, after I graduated, I found a job as a research analyst and working in the capital markets and was able to write for a living. And it has enough law in it, working with legal documents around bond indentures and LLC agreements to keep it interesting. But it's not the be all and the end all. So with every career, there's a certain amount of happenstance and changing your mind. So that clearly is at play with me. [00:03:12] Speaker A: Well, speaking of writing, I can tell from the many references to Ayn Rand and Atlas shrugged throughout your book, at some point you discovered her literature. When was that? What did you read and how did it speak to you? [00:03:27] Speaker B: It was later in my life as an adult, actually. After working on Wall street for about 20 to 25 years, I suddenly realized that I had not read a book since I started because there's so much reading involved between the financial press and trade rags, other research that you do that all day. So I had not read for pleasure in a very long time, which for an english major is pretty bad. I kind of redoubled my efforts and focused on reading great books, history, economics, philosophy. And I started by rereading Paul Johnson's modern times. And then I read the Rise and Fall of the Third Reich. I read Churchill's World War One history, Thomas Sowell, and then worked my way up to Ayn Rand. And I read Alice Shrug, and I also read the Fountainhead and then all of her essays on capitalism. So I came to it late in life, and I would recommend young people read it early in their life to prepare them, certainly going into college, for what may be thrown at them and give them context. But for me, it was clearly relevant because I read it during the Obama years when the business world was being told that you didn't build that and all of that obviously calls into mind altruism, and it's only gotten worse over the last decade, with ESG now taking off. [00:04:52] Speaker A: Absolutely. And Ayn Rand's unique moral defense of capitalism, which I think really sets her apart from other thinkers and economists and theorizers about capitalism. Now, getting to your book, part of the challenge in wrapping our minds around the threats posed by ESG investing is keeping up with the shifting definitions and mandates for students of all ages. Joining us today, would you start with a simple definition of what ESG is and what it isn't? Sure. [00:05:29] Speaker B: So ESG stands for environmental, social, governance. So these are factors. They're non financial factors that, as the argument goes, should be used to drive your company policy and your investment decision making, as opposed to the financial metrics that we've used for decades. It's a morally subjective universe, and the argument is that these will create financial value over the long term. But there's no proof that actually can happen. There's no proof empirically that ESG is a positive catalyst for financial performance or investment performance. So the entire market is being sold a bill of goods and it's basically predicated on the theory of stakeholder capitalism, which says that you need to run your companies for the good of society, for people and planet, as the phrase goes, as opposed to the owners of your company, the groups that provide you capital to grow, and your employees. So that's not capitalism. It may be the end stage of capitalism if we don't turn this thing around, but it's more closely aligned with fascism, really. It's basically state directed capitalism where the government is working through third party activists to pressure the private sector financial markets to achieve their political goals. Right? [00:06:59] Speaker A: Right. Yeah. I mean, it's a complete abrogation of private property rights. Somebody lends you money, invests in your business, and that is their capital, their property. If you work for a company and it's owned privately, it's their property. And of course, as Ayn Rand famously said, without the right to private property, no other rights are possible. So we see how. How very important this is. So let's talk a little bit about the origins of the ESG movement. You say the roots stretch all the way back to the 19th century Marxism, but really it crystallized during the 1980s by technocrats at the United nations and World Economic Forum. So what is the ESG origin story, if you will. [00:07:54] Speaker B: Just to finish the last question. ESG is not an investment fad. This is not something that we've discovered only in the last decade as a way to have outperformance, either as a company or as an investor. This is an agenda that's being forced on the market by third parties backed by the government. And as you say, it has a very long history to it, which I think we need to acknowledge if we're going to figure out a way to reverse it. But you can take this all the way back to the 19th century as just another attack on capitalism. Right? Started with Marxism, which targeted taking over the system through the labor function. ESG is now trying to accomplish that through the capital function. But it's basically the argument that capitalism doesn't work for everybody. So we need to reimagine and fix the system. What's unique about ESG and the modern attack on capitalism is that it is focused on fossil fuels, which obviously has driven capitalism and economic growth for 200 years. So there's a logic to why climate change is the core of ESG. Right. And why the goal is to defund fossil fuels. But if you look at the modern history of this movement, back in the 1980s, the United nations changed its mission statement from when they were originally formed it was to maintain the peace, right. It changed to an environmental and social program in the 1980s. And so climate change, sustainable development, were two verticals that were created during the late latter part of the 1980s. ESG was added 20 years later in 2006. But they're all led by the United nations and the fellow traveler of the World Economic Forum, because the world Economic Forum is a chief proponent of stakeholder capitalism, which is what animates sustainable development. The argument that businesses, in order to be sustainable, have to be run for the good of society. And again, the first environmental goal for ESG priority is climate change. So all of these are intertwined programs led by the United nations. Primarily, ESG is the funding mechanism. The leading advocacy group on Wall street, which every firm is a member of, is the United nations principles for responsible investment. And they have requirements for that membership, including integrating ESG into every portfolio and asset class that you manage. It's already been integrated. Now, moral duress has helped to spread this into Wall street, but the next phase will get darker because it will be regulations that will force it on everyone. [00:10:45] Speaker A: To what extent is ESG investing in consulting a mania being promoted by those who seek to make money off the movement? And to what extent is it, as you're describing, a deeper extension of the long march through the institutions following the leftist takeover of public education, the media, higher education, et cetera, to accomplish radical ends that would otherwise be difficult to achieve through the democratic process? [00:11:17] Speaker B: I think it's both. I think there is enough money to be made to grease the wheels, and there clearly are a lot of grifters around the ESG trade. You've got a cottage industry of companies that provide ESG ratings and scoring and proxy advice and consulting services. The investment banks and the investment managers can make more money if they raise capital for a sustainability fund. They can charge higher fees. You have certain products on the underwriting side where they can charge higher fees. So there's enough money to be made where it distracts the people in the industry from the bigger picture. And I think everyone is losing sight of the forest for the trees. And not to mix metaphors, it's basically a boiling frog. It's slowly ratcheting up. And I don't think people within the industry, to the extent that they can speak out, and thats also another problem with ESG. Most people cant speak out. They dont realize what the implications are for Wall street going forward if ESG really takes a permanent hold on the way capital flows move around the market. So I think money is a part of it grifting, self serving, so called advocates. And a lot of those people making money off of it work in. In the university set at business schools. There are more than 200 sustainable business centers and universities worldwide. And typically, in the case of NYU, Stern, and most of the others, it's probably being run by an environmental activist who has rebranded themselves as a sustainability expert, and they put out research that is meant and intended to bolster the case for sustainable investing. It fails and has failed up until now, but you have a lot of people with conflicts of interest around this that are making money, that are pushing the agenda. But I think the bigger problem, though, is that the financial markets, the private sector, are the last pillar of society to fall to a progressive program that over the last 40 years has taken the other pillars that you mentioned first, the schools, the universities, the media, organized religion, it's all fallen to the progressives. And I think the financial markets now are the last one to go. And the problem is that we've got two generations that are indoctrinated in climate change and other progressive issues, and now that's leaning on Wall street. And it's only a matter of time before you replace all the people working in the industry with younger people with a much different mindset. [00:13:56] Speaker A: So you talked about these academic centers that are trying to make the case that ESG investing is actually, I guess, lucrative, or that there's something that all the other analysts didn't see, and that, in fact, that this is a way to be more profitable again in the long run. How serious are those attempts? Or at some point, does everybody just kind of give up and say, it's not really about making more money and providing more value for shareholders, it's about some other, larger goal? [00:14:38] Speaker B: Initially, I would say over the last few years, the initial push was to try to make the case that you can make more money by following a sustainable investing program. Right. You can't outperform the market. That's changed recently, but there's been no shortage of publications put out, both by universities as well as Wall street, to try and make that case. But it's always weak. The way I would characterize a lot of the research purportedly proving the ESG cases. It's like a collection of Bigfoot sightings. They all kind of have the same kind of outcome where we think we see something, we're not sure what it is, we need to keep digging. We need to get better data because the truth is out there. That's a fair way, I think, to characterize much of the research that's been put out, and part of the problem with a lot of that research, which goes back to 1970, you're trying to argue that ESG led to outperformance for decades, and no one in the market actually talked about it. I mean, I worked in the market in the eighties, the nineties, the two thousands never heard of ESG. Most investors were not impact oriented investors. Sustainability was not a concept. So the argument being made, which is quite incredible, is that companies were following ESG policies. They didnt even know it. Investors were as well, and they were outperforming the market, even though the markets efficient. And thats not possible. So thats one of the crazy arguments being made by ESG. The other problem too, is that youre arguing that non financial factors will drive financial performance. Also a fairly amazing argument. And then the third problem is that going forward, the entire ESG agenda will change. Its all focused on net zero decarbonization. Climate change is the priority. That hasnt been the case historically, but it will be more aggressive because of the 2030 goals that we've set for the planet and for this country. So the ESG will change in terms of what the goals are. So actually, historical performance is not even relevant. [00:16:48] Speaker A: Right. [00:16:49] Speaker B: Got it. So there's been an attempt to kind of prove that it can lead to outperformance. I think the activists and the advocates are backing away from that. And now you see them reframing the argument to, well, ESG is more of a risk management framework, and so we should think about risk adjusted returns. So that basically allows you to accept lower returns because youre managing ESG risks better. Its backing away from absolute return and being satisfied with lower relative returns. And even some of them, activists are backing away from that now and saying, well, forget about return. We should just focus on impact. What impact are we having? Are we really fixing the planet and achieving our climate goals? And the argument now being made is we should measure that based on how much capital we're throwing at the problem. So that clearly is a government metric for trying to focus on issues. How much money are you throwing at it? Not necessarily how you're fixing and addressing the problem. So you can see how it's slowly changing. But there is no shortage of papers. I think we're averaging more than one a day out of universities trying to prove a case for ESG, and none of them have up until now. [00:18:11] Speaker A: So we're going to turn to questions in a moment. But one more I had for you is how does the pressure on executives of public companies and private ones for that matter, to take stands on the hot political button of the day, whether that's Ukraine or gun control or abortion. How does that fit in with the advance of the ESG movement? And what are some examples of that? [00:18:36] Speaker B: So I mentioned before that ESG is a coercive program. It's a very highly pressurized system so no one is allowed to speak out against it. And I experienced that when I was working on Wall street. Typically sustainability, that policy is set by the CEO. So its very difficult to speak out against that when its coming down from the corporate suite. And this impacts both investors, Wall street firms as well as companies in terms of not being able to speak out. And I would argue that many CEO's, I mean you have a number of liberal CEO's who actually believe in a lot of the CESG agenda, but I think there are far more CEO's that are just afraid to speak out and offer a contrarian view. Because again, the threat being held over everyone's head is that you're going to be denied market access. You're not going to be able to raise capital when you need it. So you have to, if you're a CEO, you have to support the entire progressive ESG agenda which includes every goal that's embedded in it. And sustainability is basically a way to reframe every progressive goal over the last 100 years as a business strategy goal, as an investment goal. It basically gives it eternal life because its a future argument. You cant really debate about whats going to happen in the future with the other side. No one really knows. But thats what theyre arguing, that this will make companies and investment portfolios sustainable. If you just follow this progressive list of goals. I think its more fear that drives CEO's than anything else. Because if you speak out you become the next target. And we've seen that in terms of flash mobs at your headquarters building or your annual meeting, it's very easy to become the target of the ESG agenda. So that's why I think you've seen a lot of these very curious actions by CEO's coming out around hot button issues, almost third rail political issues like abortion to basically voice support for the left side of the argument. [00:20:42] Speaker A: Right? [00:20:43] Speaker B: And no CEO comes out and offers a conservative view. Right. It's always to the left of every issue. And you see that with abortion, with voting id, transgender education, CRT, everything. It's always to the left. And I think that's out of fear. There's a pressure not just to be silent, but also to actually speak out in support of it. So it's a very coercive system. We have to figure out a way to relieve the pressure on everybody. [00:21:11] Speaker A: All right. On X, Alan Sharp. Sorry, my modern Galt, he beat you this time. He is asking, where do you think the biggest push for renewable energy is coming from? Is it the government? Is it advocacy groups? [00:21:26] Speaker B: Well, I think there are a lot of activists within government. [00:21:29] Speaker A: Right. [00:21:29] Speaker B: So I think we need to acknowledge that. And clearly, if you look at the Biden administration, who is running the EPA, the Department of Energy, really almost all of the 14 major agencies, you have climate activists embedded in all of those, and the same over in Europe. So I think we need to acknowledge that there are climate activists that are pushing this program. And you see that in terms of the regulations coming now, which not only promote driving capital towards renewable projects, and there are a lot hydrogen, carbon sequestration, renewable natural gas, we need to drive capital towards all of those green initiatives. But at the same time, we also have to take capital away from oil and gas. So clearly, there is a green agenda here, and it's targeted at also causing fossil fuel production to decline. So they mean it when they talk about getting to net zero by a certain date. And that necessarily means that we have to shut down oil and gas production in the developed world. Another thing to remember about ESG, it's a two tiered system. Different rules apply to the industrialized world versus the emerging markets, and that's to level the playing field. But that only becomes level because we're taking down the western world. [00:22:51] Speaker A: Okay, my modern Gault on Instagram asks, how do we explain companies that double down on wokeism even as they are losing revenue and supporters? Does the pursuit of the message outweigh financial stability? [00:23:09] Speaker B: Yeah, and actually, the other company example from the previous question about speaking out, bud light. Good example. And I think that speaks to this question why? But clearly misstepped in terms of their marketing decision around Dylan Mulvaney. That was a year ago, and still, after losing market share and significant revenue, they haven't been able to write the ship. And that requires them to come out and actually admit mistake and to be more honest about it and get back to their core customer base. But they're afraid to do that. I think part of it is also that they have a european parent, InBev, and in Europe, ESG and sustainability and climate is all, it's ground zero for all of these movements. So that may be part of the problem. But I think even though they're losing money, again, fear is driving them not to do what they need to, to turn it around. I mean, when the, you know, they had the ad during the Super bowl, that would have been a great form for them to use humor to make fun of themselves about the mistake. But they were afraid to do that because, again, they don't want to get cross sides with anyone around the ESG agenda. So I think fear is a big motivating factor. [00:24:28] Speaker A: Fear is the mind killer, as Frank Herbert would say. And fear is also a market killer. All right, also on x. Whoops, sorry, Candice didn't want to skip over you on Facebook. She's asking, Paul, what areas of the market do you think are most influenced by ESG today? Energy industry, entertainment, medical? [00:24:54] Speaker B: I would say that the primary target of ESG is the energy industry, no matter who you speak to. And again, the ESG list of. [00:25:06] Speaker A: Of. [00:25:06] Speaker B: Action items within each pillar, Es and g, it's a chaotic system, and a lot of them are actually negative for the fundamental value of the company. But everyone agrees on climate change because they've been conditioned not to disagree around climate change. So if you look at all the net zero groups that are proliferated, clearly oil and gas is the main target. The other side is not just interested in trying to raise money out of the industry from a carbon tax. We move past that. They meet it when they talk about shutting down oil and gas. So they're using an all above strategy. So energy is the main target after oil and gas and the hydrocarbon producers, then it's heavy industry. Anything with a big carbon footprint, petrochemicals, steel, you cant decarbonize heavy industry. So they will be the next target along the line. So really, the companies that are the best companies to lend to, the best credits that have physical assets and collateral value, those are the ones being targeted by ESG as so called unsustainable credits. Again, another amazing argument. [00:26:22] Speaker A: Question for you. How much of this is actually objective standards and how much is political? I seem to recall that Elon Musk said that Tesla was not given a good ESG score that it got. I mean, even though it's leading the way with electric cars and innovation and power walls and paneling. So, you know, is there an extent that you could even have a company that was a pioneer in so called sustainable energy, but if your politics are wrong, you're still going to get a bad score. [00:27:02] Speaker B: Yeah, I mean, there's a lot of inconsistency in the entire ESG market. And if you look at all the ESG scores and ratings out there, they are all inconsistent. And so as an analyst, and I experienced this over the tail end of my career, you're spending endless hours reconciling all these different ESG approaches in terms of how they score and how they rate companies. Everyone does it slightly different. So it's a chaotic, again, subjective, morally subjective system of analysis, and you get a lot of anomalies here. I mean, I would throw out a bigger anomaly with Tesla. Clearly he makes EV's, right. But if you look at the carbon footprint about what it takes to make each of those EV's, it is not a non polluting carbon emitter. [00:27:47] Speaker A: Right. [00:27:48] Speaker B: So I think thats more of an issue. But Exxon and Chevron, two companies that have been around for 140 years, they are deemed unsustainable because of their carbon emissions. But you have banks, regional banks that are focused on ESG policies, and then they fail. We lost a number of them last year fully on board with sustainable policies, and they took their Iortha bowl and they were acquired because they couldn't manage interest rate. So the whole argument that this will lead to a sustainable company implying solvency and a going concern is false. It's a false argument, but there are a lot of inconsistencies if you go through the nitty gritty. And I think that's one argument that's being used, why we need regulation to kind of standardize this whole thing. But at the same time that they're going to standardize it, they're going to make it mandatory for everybody. And that's the bigger fear. [00:28:50] Speaker A: Okay. On X, Jackson Walker, speaking of Elon Musk on his platform over there, asks, with family who have lost jobs due to the LGN pipeline, pause. Paul, do you think bears any hope for the field to be revitalized? Will it take a change of election, a change of leadership in November to reverse the Biden administration's decision? [00:29:20] Speaker B: Are we talking about just oil and gas pipelines? [00:29:23] Speaker A: Yes. [00:29:24] Speaker B: Okay. So it's going to take a change in administration, right. Because clearly the Biden administration and the Democrats. Right. And we shouldn't shy away from acknowledging that this is a political discussion. This is politics at play with ESG. There's a reason why Democrats uniformly support it and why Republicans not so uniformly, which is unfortunate, but tend to oppose it, at least more at the state level, I think. So it is a political issue. [00:29:56] Speaker A: Right. [00:29:57] Speaker B: And it's all about control of the markets. Right. It's not going to save the planet. It's not going to improve society. But I think with the Biden administration, clearly, they are anti oil and gas, and they have taken an all of the above approach with their regulatory agencies to go after the industry. And one of them, as the question acknowledges, has been basically shutting down and not approving pipelines in this country. And that's a trend that goes back even during the Trump years, where we haven't been able to build natural gas pipelines to take gas out of the Marcellus in Appalachia. And so it's basically being stranded. And we actually yesterday had another pipeline that was canceled here in the New York City area, which would have taken gas from New Jersey out to Long island, where it's needed to replace heating oil. And Williams, which was a sponsor on that after years of trying, finally gave up and withdrew the certificate because of the opposition. And we've canceled a number of other gas pipelines across New York state, down in Virginia, across New Jersey, where I'm living. So there is clearly the federal government could clear the way and make these blue states get out of the way because this is an issue of interstate commerce and national energy policy. But they're not doing it. And there are a whole host of other ways that they are going after the industry in terms of trying to box it in and curtail production. I think that gets worse during the second term of Biden, if there is a second term of Biden. [00:31:36] Speaker A: All right. On Facebook, Georgie Alexopoulos asks, do you think a financial collapse is part of the plan, or are people in ESG not cognizant of the damage being done? So you were just talking about the Biden administration. Clearly, higher prices at the gas pump hurts them politically. Do they see the connection between these mandates and the restraining of oil and gas and political unhappiness as a result of higher energy prices? [00:32:13] Speaker B: Well, I would distinguish between ESG. Its really not a bubble because its really not impacting prices in the market. Right. And youve seen that with the oil and gas sector significantly outperforming in 2021, 2022. Right. And there is a strong investment case to be made to stay with a position around oil and gas because climate policies will drive commodity prices up going forward. So the fact that ESG is not impacting prices right now means that theres not a bubble that will pop that will naturally lead the market to correct itself like we had back in 2008. So thats not something to look forward to. But I think the issue, and what I get at it in the title of the book is that if the defunding of oil and gas succeeds, if ESG succeeds in its priority goal between now and 2030, which is an important date, then that has negative implications for the US economy. Energy will be more expensive, everything will be more expensive. So inflation over the last two years will look like childs play, it will restrict peoples mobility. A lot of these mandates where you cant buy a gas powered car over the next few years, which thats at the federal level, and a number of blue states those will kick in over the next few years. So you'll have less consumer choice, energy will be higher, living standards will go down and our grid will be more unstable. And this I think will probably be the shock that it requires to get a change in policy. If we have a replay of what happened in Texas three years ago where the grid went down during a bad winter storm and hundreds of people died, that's coming down the road because we keep on pushing wind and solar, which is intermittent into our grids across the country and we're pushing out gas and coal and so we can't run on intermittent power. [00:34:13] Speaker A: Now speaking of that 2030 date in your book you have a startling and chilling projection based on the current industry trajectory, by 2030 the iron curtain of sustainability will have fully descended across Wall street, end quote. So what do you base that on? And why do you expect this future is closer than we might otherwise think? Yeah. [00:34:39] Speaker B: So I think the first phase of integrating ESG into Wall street happened over the last ten to 15 years after the 2008 crisis. And I think what facilitated that integration was the fact that during the crisis, obviously Wall street was blamed for what happened with the great recession. The industry was looking to fix its image and ESG and sustainability clearly plays to that need. You also have the government putting all the blame on people on Wall street. And actually the truth is much different because if you really dig into what happened in 2008, which I do in chapter four of the book, you can see that it was a problem with government policy, first on the mortgage side and then by not providing regulatory support to an industry. That clearly was teetering, right? So there was a lot of blame to go around there. But moral duress and moral pressure is whats been used up until now. And now going forward its going to be regulations that make it mandatory. And you already see that in Europe in terms of their Green deal, their EU taxonomy, where they classify every economic activity as being either sustainable or not, and they're passing corporate sustainable disclosure requirements. How much capex you spend on every economic activity sustainable or not. And then investors have their sustainable finance disclosure regulations, which they have to disclose how they're allocating their investment dollars. [00:36:10] Speaker A: Right? [00:36:10] Speaker B: So it's all to pressure and direct capital away from oil and gas and towards green initiatives and so called sustainable activities. In this country. The SEC has passed its climate disclosure rules, which have been state right now because they're being challenged in the courts. That is basically going to be the first step towards making it mandatory. Once you can have companies disclose what their carbon footprint is, then investors can start directing capital away from it. And that clearly is the goal. If you look at Europe, the european banks are already doing that. We've lost five or six european banks that will no longer lend to oil and gas companies. It's roughly 15% to 20% of the market. So the goal of these so called regulations to standardize and improve disclosure is to drive capital away from the industry. [00:37:02] Speaker A: And as a result, these banks, you're saying that are not investing in energy, that they are failing? [00:37:13] Speaker B: Well, I mean, they are backing away from a perfectly profitable economic segment, right. And at least in this country, that is illegal. The OCC requires every bank to make a credit specific decision when it comes to lending. You cant arbitrarily say, im not going to lend to this industry or this sector. So theyre violating bank rules and bank guidance up until now by basically making a moral judgment that it's immoral to lend to an oil and gas company because of the issue of climate change. So they're not failing, but they're being politically manipulated by activists to direct their business elsewhere. Will it be more profitable? I would argue that you make more money as an investor, and even as a bank, lending to oil and gas, it has higher returns than clean energy, which is more of a utility like business. It's a very crowded space. So, yeah, they're actually sacrificing economic return by capitulating. [00:38:16] Speaker A: Let's talk a little bit about Klaus Schwab, executive chairman of the World Economic Forum, one of the main cheerleaders, designers of ESG investing. I had been aware of his fawning admiration for chinese authoritarianism and his call to exploit the pandemic to shift global priorities towards his vision of sustainability as he set out in his great reset. What I hadn't been aware of, and that I learned about in your book, was his personal lineage and how his father worked with the Nazis. Using jewish slave labor from the concentration camps in his factories and being involved with the nazi atomic weapons program shed a little bit of light on some of the early influences that might have shaped a younger Klaus Schwab and why his modern day vision of stakeholder capitalism actually bears a closer resemblance to fascist wartime policy. [00:39:26] Speaker B: It's interesting digging into some of the public documents here, and he obviously, in all the books that he's written, has been fairly cryptic about his early years and his family history, but it's all publicly available. So when his family, his mother and father moved back to Germany during the thirties, right when the Nazis were already in place, they were Swiss, they moved there. And his father ran the factory run by the swiss company Escherich vice in Ravensburg in southern Germany. And he did that under the Nazis. And that factory produced military equipment and armaments for the Weimarch. That's a fact. That factory was awarded and recognized as a model natural socialist company under Adolf Hitler. While he was running it. Was his father a member of the nazi party? I don't think that matters. There's been a lot of speculation about that. But clearly his father, through his work and his job, supported the war effort. And the company, Eser Weisz, they separately away from what was going on in Ravensburg. They were involved with the heavy water experiments, and that was the atomic program. And obviously the Germans thankfully, didn't complete that first. But that is the truth of his upbringing. He was born in 38. He was seven when the war was ending. But after the war ended, his father went through the de Nazification process, which basically was, frankly, a rubber stamp, and then transitioned back to civilian life. So World War Two during his formative years, really was not, you know, as an oppressive experience for him. And Ravensburg was never bombed. It was in the southern part of Germany. The Red Cross was located there. Perhaps that was the reason. So he didn't really experience the horror of war during World War Two. And I think all of our early years form our life view. And so it was interesting, as he became an adult, he became an engineer as well, just like his father. And in Germany and the rest of Europe, corporatism was the economic model that developed in the post war period, which basically says that companies need to be run for the public welfare. The government and labor should have seats on the board. It's a very collaborative effort, which, if you look at a lot of the argument, is identical to fascism. It's identical to what was going on in Germany as well as Italy in terms of how the private sector and industry was being co opted by the government to serve the public good. [00:42:20] Speaker A: All right, I'm going to switch back to some of these questions that we've got coming in quite a few. Scott on YouTube is asking is quote unquote, risk adjusted return. Is that an excuse for ESG essentially caving to a protection racket? [00:42:39] Speaker B: Yeah, I think it's a concession that you can't consistently outperform on an absolute basis following an ESG agenda. And that's intuitive, frankly, because a lot of the arguments and the policy tenants like unionization, I would argue that having a highly unionized workforce is a negative from a credit perspective because it's a more rigid workforce. It costs more. You have perpetual problems when the contracts are renegotiated every few years. So given a choice between the two, I would argue that having a non unionized workforce would be better. But again, that's counter to the ESG argument. And again, spending money in terms of diversity programs, sustainability personnel, which is a duplication of a lot of functions, all of that is costly and those are immediate costs for a financial promise somewhere down the road. And you never actually get down the road. So I think risk adjusted return again, is a way to tweak the argument and hopefully get it by more people. But it's a weak argument. I think another nuanced way of pushing risk adjusted return is that if you take certain companies out of the index that you manage to, then you can pretend that they don't exist because every investor typically has a benchmark that theyre gauged against. Theyre also gauged against their competition. But if you have a benchmark and you take oil and gas out from it, then you dont have to worry about what the performance is of that sector. You just pretend that it doesnt exist, and then you can outperform your market. And I do think thats going to be the tack going forward. If you look at what was done with Russia, how quickly after the invasion of Ukraine, Russia was kicked out of every major stock indices. I think eventually we're coming to that with oil and gas perhaps as early as 2025, and then everyone will be able to pretend that they're outperforming because they're just manipulating the benchmark. [00:44:46] Speaker A: All right, ready for some pushback? We've got a question here on YouTube from MKB, who says it's stupid to even claim that ESG will destroy capitalism. ESG includes the non monetary price and consumers can use the information or not. What do you say to that? [00:45:05] Speaker B: Well, there's a difference between consumers and financial investors. And as I go through in the book, clearly ESG is targeted at financial investors because it's the goal is to defund oil and gas first, but also to direct politically the allocation of capital in the market. Right. So were talking two different things, consumers. Yeah. I think if you put a sustainable label on your company, whatever it is, or something green, which weve seen over the last ten to 15 years, it tends to sell. [00:45:38] Speaker A: Right. [00:45:38] Speaker B: Depending on what the product is, sustainably produced, coffee or whatever. [00:45:42] Speaker A: Right. [00:45:43] Speaker B: So I think it resonates with consumers. But the bigger issue here im talking about is whats going on in the financial markets, which is not as transparent, I think, to the, to the public, even if you are invested in the market. [00:45:55] Speaker A: All right. Alex Stein on Facebook asks, did ESG play any role in influencing what businesses were closed during the COVID lockdowns? Seems like the government was very happy to let big box stores succeed while shuttering small business. So I don't know if there's any link to that. But it also relates to another question I had, which is that we have certain donors and trustees who say that these lockdowns and mandates were really a trial run address rehearsal for climate lockdowns and mandates. So any thoughts on comparison between what we experienced during the pandemic and what we might be seeing coming down the road? [00:46:39] Speaker B: Yeah, I would agree that there clearly was a differentiation made in terms of what companies were shut down during the pandemic. So big public companies were allowed to stay open. Amazon in the main Walmart, Home Depot, and smaller privately owned mom and pop retail restaurants, they were all shut down. It was a completely inconsistent argument being made, at least from a health perspective. But clearly there was favoritism show, and ESG is all about favoritism. I think you saw that, and I make this point in the book. When the COVID vaccines were rolled out, a lot of those public companies, certainly in the finance industry, were the first to start pushing vaccines on all of their employees, even though it was still in a trial phase on emergency use and it had been rushed to market. [00:47:36] Speaker A: Right. [00:47:36] Speaker B: So that, I think was some way returning the favor to the government again for policy that we're seeing now some of the side effects from some of these vaccines. So there clearly was favoritism showed during the pandemic lockdown. And I do think that is the template for what may come with climate related lockdowns. And I think that could come in as early as 2025 if you look and read what the other side is saying. And here I would focus everyone on the International Energy Agency, which has been captured by the climate left. This is an institution that was set up back in the seventies to help the developed world, US and Europe, manage energy security after the oil price shocks of the 1970s. That was their original mandate. And now that has morphed over the last decade to they are pushing clean energy and they are telling the world that we need to stop producing fossil fuels, stop investing in fossil fuels starting next year in order to achieve our 2030 goals. So I think the declaration of a climate lockdown, a climate emergency is coming. And I think that will give them more regulatory powers to be more aggressive. And as we saw during the pandemic, there truly is no limitation on what they may do in terms of some of their aggressive steps. So I do think that's coming. I think that's another reason why this year's election for president is pivotal. [00:49:15] Speaker A: On X Conover nine asks, what do you think about the push for Texas to abandon its independent power grid? Is there something malicious behind this? [00:49:28] Speaker B: Well, I have issues with their. I mean, they are an independent power grid, and they have mismanaged it over the last 20 to 25 years. Right. And I think this goes all the way back to when Bush was governor. [00:49:40] Speaker A: Right. [00:49:40] Speaker B: Got worse under Perry. But they have pushed a lot of renewables into the grid, and we saw the problems with that in 2021. [00:49:49] Speaker A: Right. [00:49:50] Speaker B: And so I think even a red state like that, that controls its own destiny in terms of not being dependent on other states for its grid, has been sucked into the clean energy argument. So hopefully sederheads reversed that and we start putting more natural gas into the generation mix in Texas. But for them to link up with some of the neighboring, that would just be basically as a. As a fail safe if there was a problem. [00:50:21] Speaker A: Right. [00:50:22] Speaker B: So I think that would be acknowledgement that they clearly have created problems for themselves with how much they aggressively gone into renewables. [00:50:32] Speaker A: All right, I'm going to wrap this one into one of the questions that I had for you about solutions. Randall Starling on Instagram is asking, what is the best way to stop the ESG movement? He's also wondering, is it a grassroots movement by people like in Australia, where consumers didn't want to consume Qantas, the airline, and Woolworths, a supermarket chain? So, yeah, I mean, I think your last chapter of the book is a 2030 exit plan. And in that, you argue that the ESG pushback represented by those red states withdrawing pension investments, with companies like BlackRock leading the ESG charge, that strategy is more superficial and symbolic than the all out strategy necessary to roll back the ESG tide. So how so? And what are some of those more fundamental strategies that are needed. [00:51:36] Speaker B: I mean, one of the reasons why I wrote the book is because even though there's been anti ESG groundswell over the last two or three years, I think somewhat of the focus has been misplaced. We focus too much, I think, on what's going on in the corporate boardroom and some of these more woke issues, not to diminish them. I mean, they're clearly serious issues, especially if you have young families. [00:51:58] Speaker A: Right. [00:51:59] Speaker B: But the bigger issue around ESG, again, is climate change and what's happening in the financial markets in terms of starving the oil and gas industry for capital. So I think that needs to be the focus in terms of how we push it back. I think we have to take an all of the above approach. I think consumers control their own dollars, so they should not patronize any company that doesn't align with their values. And it will change certain company behavior. Some maybe won't, but you control your dollars. So that clearly is something we should do. And the same argument goes for whoever manages your money. If the investment manager or your advisor actually agrees in some of these work policies or is just doing it out of fear, you're in the same place. So take your money elsewhere. So I think that's a given. But given that we're dealing with something that has been more than 40 years in the making and it's coordinated and it's been put in place through non democratic means, we need to use the same tactics aggressively to reverse it. So the judicial system, the regulatory agencies, and that's going to take a lot of government resources. [00:53:12] Speaker A: Right. [00:53:13] Speaker B: So we need Republicans, hopefully at the federal level, but clearly at the state level, to lead the charge in terms of suing and reversing a lot of these ESG and climate regulations that are now coming, and we've already seen that process start. So I'm hopeful West Virginia versus EPA is a great precedent. We turn back the clean power plan, but the precedent there about major questions doctrine can be applied to every ESG and climate regulation that you're seeing. So we need to continue that. And then we can't stop. We have to go back, keep going, and address all of these climate regulations that have sprouted out without a public vote and also without the Senate ratifying either the Paris agreement or the Sustainable development Goals, both of which are economic treaties. So the first thing that the next Republican in the White House needs to do is submit those treaties to the Senate. It will not pass because it requires a supermajority and that should cut out the legs for a lot of these climate change initiatives. Right. We also need to go after the endangered findings. It's the basic blocking and tackling legally to go after it, which is not pretty. It's not as showy as attacking Larry Fink in public. I mean, at a minimum, that keeps the issue out there about ESG and hopefully more people become aware about and ask questions. But even if you got Blackrock and Larry Fink to capitulate today, and they haven't done this up until now, I think everything theyve done is tactically to retreat because the heat has gotten so bad. But even if they did retreat, its not going to change the behavior of every other investment management firm because everyone else is more motivated out of fear rather than following Blackrock because theyve discovered this new way to outperform. [00:55:08] Speaker A: Right. So you also argue as part of the solution that oil and gas companies should stop trying to placate the ESG crowd and instead take the lead in defending their product and debunking climate alarmism. In that light, how do you interpret BP british petroleum or as they tried to rebrand themselves beyond petroleum, their recent reversal of their pledge to cut back on oil and gas production? Is that a positive sign of things turning around? [00:55:42] Speaker B: I think that's a good modest sign. I think the problem you have with a lot of the european integrated BP, Shell, total Eni, they were all formally state owned. I think there's still some of that government DNA embedded in those companies. And you've seen a lot of them up until now, in the last few years try to embrace net zero and sustainability, which as an oil and gas company, the only way that you can get to net zero is to cease to exist. So they danced around it. But they have tried to placate some of the member governments in Europe in terms of their goals, and it's gotten them nowhere. Shell has been endlessly sued by children, by old women, every class, because they're not doing enough around climate change. So the Europeans tried it and theyve invested more in green energy, more utility power businesses, wind and solar. And that has hurt their multiple. [00:56:43] Speaker A: Right. [00:56:44] Speaker B: So I think BPS announcement is just an acknowledgement that US energy integrated are trading at a much higher multiple. And theyre trying to play catch up. So I think its a good sign on the margin. But what the US industry, and I think the US industry is more able to speak out publicly, they should be more aggressively just challenging the climate premise, the data, which is flawed, the science which has been conclusion driven, for decades, the models, what they've been saying, which have been consistently wrong, they haven't done that. They've tried to bargain with the other side. They've tried to position themselves, if they're more focused on natural gas or if they're a bigger player, that they're going to be the last one standing. So it's been a divide and conquer strategy that's been very effective against them. They need to consolidate and I think find their voice, because who wants to work for an oil and gas company if everyone is telling you that their assets are going to be stranded over the next ten years? We already know that their capital is being cut off from them. We see that happening in the bank market, happening in the private market. I think european investors, probably starting next year, will stop investing both equity and debt in oil and gas companies. [00:58:02] Speaker A: Right. [00:58:02] Speaker B: So thats already happening. They are the main target. I think they need to acknowledge that and use the science that they have. The argument for suing them has always been that you knew about climate change. I agree with that, but I would twist it that they know that there is no climate emergency. [00:58:19] Speaker A: Right. [00:58:20] Speaker B: They need to articulate that more aggressively. And if they do that, I think you'll get more people more comfortable to speak out about it vocally. [00:58:29] Speaker A: Right. [00:58:29] Speaker B: And hopefully more lawmakers feel emboldened. So I think there's strength in numbers. [00:58:34] Speaker A: Okay, one last quick question, because we've got just two minutes left. You end the book with this exhortation, which will warm the hearts of many in our audience. Quote, until and unless the many good people working on Wall street rediscover and embrace some of the core tenets of Ayn Rand's philosophy, including her view that capitalism is based on the ruling principle of justice and holds integrity and trustworthiness as cardinal values, and her belief that a free mind and a free market are corollaries, then they're asking for the industry's destruction, and the ESG joke will be on them. So my closing question to you, Paul, is, are you optimistic that your former colleagues can and will wake up and rediscover these values? We're doing our job. We're doing our part. [00:59:29] Speaker B: And one of the reasons why I wrote the book is because I do think that we can turn this thing around. And the first step in fixing a problem is acknowledging the scope of the problem. That was one of the many motivations. But also in writing the book, I know that I speak to a view that is held by most people working in the industry. They just can't speak out about it. There is a silent majority, the rank and file, that disagree with this. But again, if you speak out, you become the target. You won't get paid. You'll eventually lose your job. The coercion is real, and that's one reason why you haven't seen a lot of people publicly come out and offer a contrarian view. So my goal with the book was to do that. We need to figure out how to relieve the pressure and the coercion on everyone so they can be free to speak out more openly about it. But I have no doubt that more people on Wall street who are not, again, making money off of the sustainability trademark, who are fundamental people in their regular jobs, agree with my argument. We just need to attack the regulations that now is coming down on the. [01:00:43] Speaker A: Pike, and I'm confident many more people will do that. Everyone, we put the links in the chats. So please. I can highly recommend this wonderful book, the race to zero, how ESG investing will crater the global financial system, with a lot of good suggestions of what to do about that. So Paul, thank you so much for joining us and for this magnificent achievement. Where can we keep following you? [01:01:13] Speaker B: Follow me on LinkedIn or Twitter, and my website is under construction, so that's coming down the road a few months. [01:01:22] Speaker A: Okay, terrific. And thanks to all of you who just gave us some fantastic questions this past hour, and to all of you who joined us who enjoy this program. If you enjoy the other programs and content by the Atlas Society, remember that we are a nonprofit and we rely on donations from people like you. So please consider supporting [email protected]. Donate and make sure to join us next week when clinical psychologist and bestselling author doctor Chloe Carmichael will join us to discuss the mental health epidemic among young people. What's driving it? What we can do about it? See you then.

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