Capitalisn’t: The Smoke and Mirrors of ESG Investing

Tariq Fancy: ESG basically allows people to sort of say . . . It’s kind of like neoliberalism with moral satisfaction draped around it. I think it makes it hard for people to understand that there’s going to be some hard decisions that are going to cost some money, and the people who can pay the most, and understand and believe in the science, may have to—for the future of the country and their own children—step up.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: This is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: I discovered on the internet a pamphlet by this guy called Tariq Fancy, who used to work for BlackRock. In fact, he was a chief investment officer for BlackRock. He decided to leave BlackRock and decided, actually, to come clean, at least in his view, about what ESG investment, in BlackRock and in general, is about.

Speaker 8: A provocative new op-ed from BlackRock’s former CIO of sustainable invest-ing claims, “The financial-services industry is duping the American public with its pro-environment, sustainable-investing practices.”

Bethany: Tariq’s criticism is focused on some of the mechanisms of ESG investing. ESG, as you all probably know, stands for environmental, social, and governance.

Speaker 9: ESG, of course, has become a buzzword on the Street as companies face pressures from investors to be more transparent—

Bethany: It’s this relatively new idea that we should apply nonfinancial metrics to gauge the appropriateness of investments, and that by doing this, we can essentially make the world a better place. That we can take into account all these factors that are important to us social-ly.

Luigi and I have had this discussion before that we’re a little bit skeptical of ESG, and particular-ly as I see the Wall Street marketing machine rolling into full gear to convince people to put their money into ESG investing, I wonder, well, is it really doing what people say it’s going to do?

The recent news that US authorities are investigating Deutsche Bank’s asset-management arm after the firm’s former head of sustainability said it was overstating how much it used sustainable-investing criteria to manage its assets . . . I mean, you could unpack that sentence for hours. What are the sustainable-investing criteria? How are they overstating it? Why didn’t anybody notice? I think the whole area is ripe with important areas to discuss.

I thought it might be interesting to start with a pretty simple question, which is, what do you think ESG means to most people, and what do you think it actually means?

Tariq Fancy: ESG, to most of the world and the public, means social impact in some way, shape or form. Creating social impact with your dollars or Wall Street, whatever. I think to a subset of investment managers and ESG people who are actually inside the system and know that you have to operate according to fiduciary duty, they have convinced themselves that ESG means higher returns, or ideally higher returns and social impact.

The products, because of a lack of any kind of rigor or regulation on what is ESG and what’s not, and what’s an impact and what’s not, have gone in a direction where everything is being sold as ESG because it’s a race to the bottom.

At some point, if no one is telling you what is really ESG or green or not, as an asset manager, if you leave them a gray area, they don’t leave money on the table. They’re going to move quickly and start occupying that space and realizing that they could just put a green label on most things with a tiny tweak and do it.

That’s led to a space where the majority of products being sold as ESG have little to no measur-able impact. I would argue they endanger capitalism. At some point, we have to accept that mil-lennials . . . Over 50 percent of millennials don’t believe in capitalism.

I think it’s ridiculous when I hear boomers blame it on millennials. They say, “Oh, well. They don’t get anything,” or, “They don’t get it.” I’m like, “No, no, no. You don’t get it.”

They’re seeing a system that clearly, every year, claims it’s doing all these great things, ESG as-sets are increasing, what I call “sustainababble” is increasing, and it’s increasing alongside carbon emissions and inequality, because the way they’ve built these things, there’s no link between one or the other. It’s just marketing to preserve the existing system.

That’s what I saw on the inside, and I don’t know that everyone who is in ESG has really figured that out. You have to have some sense of how the markets work and investing works. When you actually put it all together, it strikes me that it purports to be positive, and, in fact, it’s just a dan-gerous placebo that’s slowing the overdue action we need.

Luigi: Let me try to make the opposite argument. Not necessarily that I believe it, but I think it’s useful to voice the opposite argument. Suppose I’m Larry Fink, and I’m not a political leader. I have a fiduciary duty to maximize the financial return of the assets that I have under man-agement. What can I do differently to improve the situation?

Tariq Fancy: That’s a really good question. The answer is, you should be honest, I think, about the limitations of what you can do. If business goes out there, and they say, “The answer to market failure is stakeholder capitalism,” I think they do an enormous disservice to the public. When you feed these people these messages, there’s a significant difference in terms of how they view the role of the private sector versus the role of government. What I saw was that instead of us actually looking to the referees to come and fix the game, we were expecting the players to do it. That’s just never going to work, because their incentives aren’t aligned around that.

To me, what I think Larry Fink and other business leaders should be doing is being honest about the limitations of what they could do in a system that’s built this way. What they’re instead doing now is they’re weaving a narrative that the system is going to fix itself, and stakeholder capitalism is the answer. You look at it and you say, OK, the business community is the one hand holding off taxes and regulation. We know that that’s what the incentives are built to do. It’s much cheaper to market and lobby, market yourselves to be wonderful and lobby to keep the system gummed up so you can continue your profit engine.

They’re holding off taxes and regulation on one hand as there’s growing social angst that noth-ing is being done about these problems. People are marching in the streets with Greta on climate, they’re marching on racial and wealth inequality. Financial firms are actually turning around and saying, “Well, why don’t we exploit this social angst by selling people a bunch of green products,” that, in reality, the only difference with them, for the most part, is that they have higher fees.

The vast majority of these impact products that are being sold by Wall Street now are public-market products that are just moving around baskets of already-traded secondary shares. The mil-lennials buying them and paying more fees almost certainly believe that they are creating some impact that would not have otherwise occurred. Otherwise, why would you buy and pay more in fees? That’s, of course, not what’s happening.

I would look at it and say, look, right now you’re delaying what the experts are telling us we need. Into the resulting void, you’re selling a bunch of products that I would argue are misrepre-sented. I think the answer is that, at some point, they have to be honest and say, listen, we have experts on the economic side, also. It’s not just a scientist saying we need to bend down the curve. It’s economists telling us how we need to do it. They’re ignoring them because it’s inconvenient to their own short-term interest.

My question is, how can you possibly be standing on a stage and doing that under the guise of responsible business? I mean, it strikes me as being arguably the opposite and really just unfair to your own employees who are in their 20s and 30s.

Bethany: Do you think they’re being deliberately dishonest, or do you think they’re lying to themselves, too? In other words, is it a convenient fiction that we can create all this change, and so we’re going to pretend to ourselves, too, that we’re not playing a double game? Or do you think people are actually cynical enough to understand what you’re saying and be doing it anyway?

Tariq Fancy: That’s a really good question. I can’t tell you that they know and they’re doing it cynically, because I can’t possibly know that. What I do think has happened is that they are in groupthink. I think, in 2021, they have to be disarmed of this nonsensical thesis, and I think the way to really drive that is, number one, point out that there’s no impact of any of this, which is what I saw. Number two, point out that it’s becoming a dangerous placebo that’s slowing the re-forms that we need from government. Number three, and this is arguably the most important, is to point out to them that they can’t have it both ways. They can’t argue that we need government action to bend down the COVID curve, but we don’t need government action to bend down the climate curve, when in both cases, the experts are telling us we do.

Here’s the kind of fascinating thing if you look at climate change. With COVID-19, there’s a sci-ence consensus. There’s virologists and there’s infectious-disease experts that are saying, here’s how it spreads, through aerosols and so on.

Now, look at that same dichotomy on climate change. The scientists are telling us we’re creat-ing this, this is caused by humans. They’re saying we need to bend down the curve. All the business leaders are saying, “We agree with that.” But they’re not agreeing with the second part, which is the economists like William Nordhaus, who won the Nobel Prize in economics three years ago for something he’s been saying for decades . . . There’s a very clear consensus that you need a price on carbon, and there’s a clear consensus that you need to set up other reforms that are obviously driven by government, because a market failure is not going to self-correct itself. That second part is the one they’re not listening to.

I think the COVID-19 bit is an important point, and that’s why I wanted to spark a debate in the wake of the pandemic, because before memories fade, we have to look back on the fact that we can’t treat a slow-moving crisis as someone else’s problem and a fast-moving one as one where suddenly we need government action, and not acknowledge that that has to do something with the fact that the interests of the people promoting that argument are all skewed towards the short term.

Luigi: You’re making it a little bit too simple. Number one, Emmanuel Macron tried to pass a carbon tax, and he had the gilets jaunes invading the squares in Paris for weeks and weeks, and it took COVID, basically, to defeat them, because otherwise, they would still be there protesting politically, and we’re not talking about Total or some big oil company blocking that. We’re talking about, literally, the man on the street fighting against this. The political economy of the carbon tax is not that stride forward as you make it to be, number one.

Number two, even in COVID, the experts would greatly differ on how to tackle it. There are still people that would like to go to a zero-COVID world in which we are like New Zealand, and every time there is one case, you shut down the country for six months. Other people say we need to learn to live with it and accept some level. There is not a universal consensus on what to do for COVID, let along for climate change.

Tariq Fancy: Both of those points are correct, and yet both of those, I would argue, are easily addressed. The first point is around the idea that there’s no political consensus. It’s very dif-ficult for a politician to do it because people don’t want it. You’re right about that. Right now, if they tried to do that in the US, people would be out in the streets, or a lot of people would be out in the streets. But that just reaffirms the point.

If it were true that every single business leader was out there saying to the public, “Listen, we can’t solve this problem. Let them pass a carbon tax. That’s what our experts are saying,” and then people were out in the streets saying, “We don’t want to do it,” then we could have this conversa-tion about it.

Right now, if every single business leader is out there, frankly, they can’t turn around and say, “Well, don’t look at us. Macron can’t get the carbon-tax price,” because I’d turn to them and say, listen, in the world we live in today, you have outsized influence, particularly after Citizens Unit-ed, to be able to influence the system. You probably hold more of the cards than the politi-cians do, because, A, they’re super short-term-oriented, just like the business leaders.

But the difference is, they’re begging for money, and the business leaders have the money. At least the business leaders, you can implore them on some sense of being responsible and doing the right thing and say, listen, you need to go and tell the public also, because if you’re going out there and saying, “I can solve this problem. Stakeholder capitalism is the answer,” you can’t turn around and say, “Well, the public doesn’t want government action,” because you’ve effectively condi-tioned them to say that.

The second point, on COVID-19, I don’t disagree at all. There’s absolutely no consensus on the level of government action that you need. But what there is a consensus on is the fact that you need some government action.

Let me give you an example. Imagine we’re driving from Boston to New York. Halfway through, the driver is a guy called Donald Trump, and he doesn’t know how to drive the car. I’ve heard peo-ple say, “Oh, how can you expect the government to . . .” I say, listen, separate the driver from the vehicle. If we stop the car two hours in because he’s not driving very well, the answer isn’t that we should drop the car and walk the rest of the way. The answer is you switch drivers, because we have to accept that this is the vehicle we need. Well, government is the vehicle that we need.

Bethany: I think it’s a fair point. One of the things Luigi and I have talked about in this podcast before is that, in a sense, a free market is an illusion anyway, because everything has rules. There are rules that govern the foundations of a free market, if you think about it, in the United States, bankruptcy rules. There are always rules that are set by government. The idea that it’s just a free-for-all is not actually true.

I also think it’s a fair point that these ideas of stakeholder capitalism and ESG are providing fig leaves that make us think we’re doing something when we actually aren’t. I do worry that you’re giving the deeply divided American public a little too much credit in the sense that being able to see this rationally might then spark some sort of agreement. I worry that if you want the leadership to come from America, and that requires the agreement or even the majority of the American pub-lic, I think we might be in trouble.

Tariq Fancy: I don’t disagree. There are so many other pieces to that challenge, also, with respect to political polarization that gets you talking about the media, and then, even worse, tech. There’s no question that it is very difficult, but I do think that . . . I’m not convinced that red states and Trump-voting places would not be OK doing something about climate change, and I think that you need to set up the deal correctly.

If you think about it as saying, well, we’re going to need to spend a lot of money and build a lot of new things, let’s put that production in the areas where, frankly, people don’t believe in climate change, and have been eviscerated by trade and automation in recent decades.

You might find that actually, you build a political foundation to do it, because I have no doubt that they’ll say, “I don’t believe in climate change,” and you’ll say, “How about we build a factory to employ 10,000 people building solar panels?” “Yes, I believe in climate change. Let’s do it.” Do you know what I mean? If you make them the right deal to do it, that’ll work.

But there’s a challenge. The challenge is that if that’s the deal that happens, who’s going to pay for it? It’s clearly going to be the rich, latte-sipping liberals on the coasts. But people on the coasts who are the liberals who want to fight climate change, they’re probably going to have to pay more for it.

I think until that acceptance comes, which I don’t think comes if you have ESG, because ESG basically allows people to sort of say . . . It’s kind of like neoliberalism with moral satisfaction draped around it. I think it makes it hard for people to understand that there’s going to be some hard decisions, and it’s going to cost them money, and the people who can pay the most and un-derstand and believe in the science may have to—for the future of the country and their own chil-dren—step up and do what they need to do to make it happen.

Luigi: When I ask you about what Larry Fink could do, I was surprised that your answer was not, “He can actually vote all the shares he has in one particular direction.” As you’re writing your essay, BlackRock owns at least 5 percent in basically most of the companies that matter on the planet, and not just in the United States.

If BlackRock were to vote systematically at shareholder meetings in favor of environmental propositions and replacing directors in favor of more environmentally concerned directors, it could make a difference. We saw what happened with Exxon when Engine No. 1 made a proposal and was able to get a qualified plurality and get representation on the board. We are missing a big oppor-tunity here.

Tariq Fancy: Yeah. I mean, I’m glad you brought up ExxonMobil and Engine No. 1, be-cause I think it’s largely a distraction from what needs to be done. I’ll explain to you why. I’ll give you an example. When I was at BlackRock, I helped advise on certain share voting. I don’t think Lar-ry did the wrong thing on that. I think that they’re voting the shares exactly as they should be be-cause they’re a fiduciary. They have to focus on shareholder return.

I’ll give you an example. It’s like some kind of beverage company or something, and there was a proposal that they should spend a lot of money to make their packaging recyclable and more envi-ronmentally friendly. Fine.

Of course, it costs a lot of money to do that. I’m sitting there trying to advise on these shares. I have to wear two hats. What is good for the world? Clearly, they spend this money, and they start doing responsible packaging. What am I supposed to say as a fiduciary? Well, if there’s no one pe-nalizing them for the cost of that garbage that they’re dumping in the world, as a fiduciary, you don’t do what’s good for the planet. You do what’s good for shareholder returns. Even Larry can’t justify voting . . . How could he vote in favor of all these kinds of regulations to do the right thing for the environment unless someone is going to internalize that externality? He can’t do it because it’s good for the world.

This brings me to the challenge of Engine No. 1 and ExxonMobil. It’s one of these things where I think you get on the board. Good news. Now you’re a fiduciary to shareholders of an oil company. I don’t need to do the math to figure out that the oil company’s best profit is to keep extracting fos-sil fuels, and certainly far more than we need for it to happen as a society. It’s clear that that’s ob-vious. Maybe they believe a bit more in renewable power, but the favor we could do ExxonMobil’s directors to get them to actually reduce their emissions footprint over time would be to put a price on carbon. Because then you have actually made it less profitable to do fossil fuels, and they may actually start to direct and invest more in renewables.

But ExxonMobil versus Engine No. 1 seems to have become another placebo, where it actually, I would argue, is lowering the impetus for a carbon tax, because we’re being fooled into believing that the answer is putting different people on the board of an oil company where they have a fidu-ciary duty to shareholders. You have to stop and think. It’s like, how can the answer be a good hedge fund to fight the bad ones? If you think of the amount of press that happened around that, to use a sports analogy, it’s kind of like everyone’s on the field, and they’re trying to find every so-lution possible that’s not, let’s get the damn refs in here to do their job.

Imagine now we’re playing soccer, and I’m kicking players, and then I’m going and scoring a goal, because it’s definitely easier to beat defenders if I can kick them and run past them. At some point, someone’s got to come in and give a red card.

Frankly, there is an unacknowledged amount of privilege in the people making this debate. Look, everybody in finance talks their book, to be honest. They talk their book. They’re going to do what’s in their interests. Everyone in the investment-management space for sure does that. Fine.

If you took one of these people who are arguing that ExxonMobil versus Engine No. 1, that’s the way forward, and they’re joining the board, I’d say, OK, great. OK, I see what your book is. Let me see what your incentives are. Let me see your fund. Are you fundraising? What are your fees? OK, great.

I just changed everything. Your book is no longer that. You don’t run a private-equity firm. Now, you’re an eight-year-old girl in Bangladesh. Do you think they’re going to prescribe the same solu-tion? Zero percent chance. I would argue that there’s a zero percent chance that they would. They would suddenly look, and they would say, “Oh my god. We need a carbon tax. Yes. This is not going to work.” They understand finance.

Everyone is acting like we’re all in it together. Well, Larry’s risk tolerance and the eight-year-old girl in Bangladesh’s risk tolerance are not the same. He has a very high risk tolerance, because he gains from the current system and is not at risk of the consequences of inaction. The eight-year-old girl in Bangladesh, we don’t need to look at her book. She has no carbon footprint, and she doesn’t gain from the status quo and is going to bear the consequences of inaction.

Bethany: I think you have a point. We talked to Chris James for this podcast and pushed him on that, and he was very clear that in the end, his goal was fiduciary duty and was mak-ing money, and that he was going to do whatever . . . I was thinking, as we were talking, that there might be a deeper problem here, which is, underneath the Larry Finks of the world is the hypocrisy of the investing public.

Even if fiduciary rules were reformed, if all of a sudden you did have the Larry Finks of the world choosing to lose a billion dollars because it was good for the world, and we had to say, “Oh, this ESG stuff actually doesn’t produce great returns,” you would make a lot more money by doing things that weren’t ESG. I wonder if a lot of the allure goes away. In other words, it’s a lot easier to believe in the allure when you also appear to be making a lot of money than it is to be making that choice to not make money because something is better for the world.

I wanted to get to something else which I was wondering about. Is the heart of your critique essentially that buying shares of existing companies does nothing because that’s not the funding metric? Essentially, that this public-market ESG approach is ineffective? Or is your argument that the metrics are simply insufficient? In other words, would you distinguish between public-market ESG investing and venture-capital green investing?

Tariq Fancy: 100 percent.

Bethany: OK.

Tariq Fancy: 100 percent. What is good about the ESG space and what’s bad about the ESG space, because I’m not saying we should just throw the whole thing out . . . People say, “Don’t throw the baby out with the bath water,” and all that stuff. I’m not saying that. What is good about the ESG space are three things. The people. I think that there’s a lot of human capital that’s being brought into industries that, what needs to exist are people who are passionate about sustainabil-ity, and they care about it, and they want to make a difference. The tools, by which I mean in-crease the ESG data and disclosure, and the standards are useful. We need to be able to measure these things over time.

I absolutely do think businesses should focus on stakeholders. It’s the right thing to do. I just don’t think we can rely on that to solve systemic crises. That’s where ESG becomes damaging. A private VC, like a climate-tech type of fund, can argue they’re an impact product that absolutely adds value. If there were more of those, it would be great if all of us invest in them, because they can at least make the argument that they’re providing primary funding to innovators that otherwise would not have had access to that capital and would not have built some carbon-capturing storage or renewable-power thing that we need.

The problem is that with no rigor around the industry, ESG means all things to all people. You have a subset that’s really a small minority of funds like that that are getting lumped in with a bunch of big public-markets vehicles and, frankly, ETFs. ETFs have faced decompression for years. It’s just a volume game. As you go more and more into these liquid products and the public-markets ones that are under fee pressure, they are the ones that cannot show there’s any real impact. They also are under significant decompression and have a particular incentive to go out and paint them-selves as green. Absent any kind of rules around doing it, the people will keep moving in that di-rection, because, again, they don’t leave money on the table.

Luigi: Let me try to decompose the various pieces of your argument. The first one, you say carbon pricing would be the right solution. I think that every economist will agree on that. The second is that there’s a lot of posturing in the industry. We call it posturing not to call it fraud, but we agree. Then you said that divestment is not the right solution, because, of course, there is very high elasticity of demand for stocks, so you’re not going to impact things. You differentiate be-tween a boycott, where losing 10 percent of your customers can have an impact. Well, if you lose 10 percent of your most liberal shareholders, you can get 10 percent of the most conservative and substitute. Not only do they substitute, they get actually a higher return for substituting, so you actually subsidize the other side.

So far, I follow you. Then you make, or at least I think you make, but feel free to disagree, one last step that is somehow a theory of change that you’re not at least putting forward, or I do not see you put forward, that, basically, so much worse, so much better. It reminds me a bit of the old-fashioned Marxists that were saying, “Oh, we cannot actually improve the condition of the workers because we want capitalism to fail, and anything you do to improve the condition of the workers will delay the eventual failure of capitalism, so we should actually sit on the sidelines, let the sys-tem collapse, because so much worse, so much better.”

That’s the part I’m not following, because I agree with you that voting or Engine No. 1 are not representing the first best solution. I agree with you that if I care about my shareholders, I choose a level of extraction of oil which is certainly superior to what is optimal from a societal point of view.

However, it is also possible that Exxon is so much on the other side of the spectrum that at least what they’re doing is something in the right direction. Is it possible that you could run a company, or you run a company that is not for profit, but imagine that you were to run the compa-ny for profit . . . I think that you probably will not run it to maximize profits. You’ll run it to maxim-ize your utility, which is a combination of how much you get from profits of the company plus some other stuff.

My claim is, if you are Larry Fink and you represent the Tariqs of this world, why do you have to only look at profits? Why can’t you take into consideration other aspects? After all, in Europe, the fiduciary duty is defined in a different way. Of course, it varies by country. If you are a pensioner in California, is it really my fiduciary duty to maximize profits and make sure that you cannot live in California anymore because it’s on fire, or should I put weight also on climate change? I grant you that this is below what is optimal from a societal point of view, but it’s better than zero.

Tariq Fancy: The better-than-zero argument is one that I always hear, and I wonder to myself, because it’s sort of anecdotal, not statistical. It’s the old trick of sort of exploiting the avail-ability bias, or something similar, where you’re just feeding people stories.

Of course, there’s been progress made in the last 10 years. It would be impossible for us not to have more renewable power and more electric vehicles than 10 years ago unless we were insane. The concern I have is the speed of that progress. It’s not sufficient. It’s clearly not sufficient. Unlike the Marx example, we have a scientific consensus, and there’s a bunch of numbers and graphs, and we know what we need to do.

Of course, there’s gray areas woven in that, but we certainly know directionally, without any question, that the progress we’re making is far too slow. Is Engine No. 1 versus Exxon and a whole set of other ideas based on the free market, are they helping us or hurting us? You might argue that they’re helping us, because you’re saying, “Well, we need to make X amount of progress every year. These guys are making 0.2 or 0.3X, but, hey, it’s better than zero.” I would argue that that’s insufficient, because we know we need to make a lot more progress, and we know exactly how to do that. The consensus for doing that is being undermined by the entire thesis and all the actions that surround the 0.2 or 0.3X.

It’s like saying we’re playing in the Sunday soccer league, you and I are playing in the park on Sunday, and there’s no referees anywhere, and that’s not an option, because it’s Sunday afternoon, just a few of us kicking around the ball. Then, I would argue in favor of incremental things. I would say, bring out those things, because we don’t have an alternative. But when we have an alterna-tive, and when we have an expert consensus on it, it doesn’t make sense to me that we would spend our time on a set of solutions that clearly are inadequate.

Bethany: I think we’re going to run out of time soon, and I wanted to close on a ques-tion, which is, you could have stayed inside this system yourself. What was it? What was your mo-ment in time that made you say you were instead going to go from being one of the ultimate in-siders to being an outsider and tackle this in a way that was bound to make you enemies?

Tariq Fancy: I’m not worried about making enemies, frankly. I think it’s more important to speak truth to power. I would be an enemy of my own self and be very unhappy if I didn’t speak out on an issue like this that I feel very strongly about. I had come to the conclusion there wasn’t much impact out of this. But I wasn’t going to try to start a debate and potentially throw egg in the faces of people I used to work with, because on a personal level, I know a ton of people there. I got along with them. They’re great. I’m still in touch with them. But if they’re going to go on stage and talk about social purpose, and fighting climate change, and this, that and the other, I mean, these are important social imperatives. That has to be subject to an open and honest debate in a democracy.

If they have a good answer, and if there’s a great answer on the other side, that’s great. That’s why, Luigi, I really appreciate. I don’t know, I suspect that you’re playing a devil’s advocate role, and in a very effective way, I would add, because these are questions that need to be debated. I don’t think they’ve been debated yet. I haven’t really seen a response coming out of the titans of business who have put their names on the Business Roundtable statement, or really anyone on that.

I wouldn’t tell them they have to sit back and accept and just say, OK, government’s the an-swer.” It may be hard to get done politically, and they’re going to say that. “Oh, how do we get it done? The system’s gummed up. Therefore, we are the solution with our green products.” But you really can’t make that argument if you’re not being, A, clear with the public about the fact that you have limitations on what you can do with the way the system is structured. And, number two, if you’re also half the time supporting those same politicians.

It’s not like they’re saying, “We’re going to use our lobbying efforts to push for climate legisla-tion, because that’s what we know the experts are saying to do. By the way, we’re going to also stop supporting any politician who denies climate change.” I haven’t seen them saying that. If they say that, then I think they would have at least done what I would say was responsible business. Even if it hurts a little bit of near-term shareholder value across the economy, over the long term, it is in the public interest, and, frankly, long-term financial returns, for us to deal with these prob-lems sooner than later.

Bethany: Well, thank you so much for coming on the show. I think we’re out of time, but we really enjoyed the debate and discussion. Best of luck to you.

Tariq Fancy: So did I. This was a really good one. I really enjoyed it. I thought it brought up some really interesting issues. Thank you, guys, for taking the time.

Bethany: Did something surprise you, Luigi?

Luigi: Actually, half of it surprised me, half of it did not. The part that did not surprise me, but I think was useful to hear from an expert who left the industry, is how much money is made there without much of a substance. I actually feel very much vindicated by the fact that he agrees with the point that I and others made that divestment does not really make a difference, because the substitution is so easy that it saves your soul, but not the planet.

Bethany: Will you pause on that for a little bit to explain why that’s true, why you think that divestment doesn’t make that much of a difference?

Luigi: Tariq makes this point in his diary very effectively. He wants to distinguish be-tween divestment and boycotting. It’s much easier to replace 10 percent of your shareholders than it is to replace 10 percent of your customers. Shareholders are just in search of returns. If I lose 10 percent of shareholders and my stock becomes a bit more appealing, I have a lot of other people who will buy more of it.

On the other hand, if 10 percent of people buying furs stop buying furs, it’s not that the others are going to substitute and buy twice as many furs or three times as many furs. Boycotting of furs is much more effective than boycotting the stock of fur companies, if you want to stop animal killing. I know I touched on a sensitive topic for you.

Bethany: For sure. I want to get back to what did surprise you, but I wanted to pause on this point for a minute, because isn’t there a tipping point with this if everybody divests be-cause they have to care about ESG metrics? Then doesn’t the idea of there’s always another willing shareholder who only cares about how profitable the firm is to come in behind the one who has decided to divest because of lack of ESG metrics . . . Doesn’t that change at some point, and isn’t that part of the argument of ESG people that if you make this a broadly applied criteria across the board, and you reach a tipping point with it, then it still may be harder to find more customers, but it becomes less and less easy to find other shareholders?

Luigi: No. It’s definitely true. The question is, how much of this should you control, and how much of an impact will you have, and at what cost? In fact, in a paper with two coauthors, I’m trying to assess how big that should be, and it’s quite large. It’s very hard to have an impact un-less that mass is massive. One of the things we find, it’s always less than proportional. If 30 percent of investors don’t buy, you’re going to have much less than 30 percent of the impact that you ex-pect. That is precisely because of this substitutability. Look at it another way. If we all divest from Exxon, the Koch brothers would buy Exxon, and we actually do them a service, because the price of Exxon is going to be low, and they’re making money.

Bethany: We enable them to get even richer. Oh, my goodness. That’s an interesting way—

Luigi: I think that it’s different when you talk about large loans. Unfortunately, the market for loans, especially large, syndicated loans, is relatively concentrated. Whenever a market is concentrated, then the power of, if you want, boycotting or divesting, might be more influential. But it’s more boycotting there. If you can convince, for example, banks not to lend to large infra-structure projects in oil and gas, then when it comes to projects of billions and billions of dollars, you probably can count the number of banks in the world willing to do that on two hands.

Bethany: I wonder, though. It would actually be an interesting thing to look into, if the rise of CLOs, if the rise of the leveraged loan market and of CLOs and the ability to take these loans and chop them up into thousands and thousands of pieces that are sold to other investors, if that starts to make it less effective as a means of not lending, because you’ve broadened the investor base so much beyond those original banks that . . . Anyways, it’s a little bit off topic—

Luigi: Sorry. But they are still organized by the banks.

Bethany: They are still organized by the banks, but they are now, because they are of-ten packaged and sold in the same way mortgages are, you’ve broadened the investor base for those loans. In a super-low-yield world like we’re in today, you have no shortage of takers for, par-ticularly, anything slightly risky that might carry a higher yield. I wonder if that argument has changed a little bit today with the broadening of the investor base for these types of loans. But whatever. That’s a little bit beside our topic. Just might be interesting.

Luigi: No, it’s an interesting question.

Bethany: Let’s go back to what it is that did surprise you. If this is what didn’t surprise you, what did?

Luigi: It’s how strongly minded he was that this is necessarily in every form a bad thing to do. Take the case of Chris James. He was very clear in saying that he sees that as a net negative, based on the idea that this necessarily is a substitute for other activities. I stick to my analogy of the old Marxists that were waiting for the revolution, that they wanted things to get worse so they will get better soon.

Bethany: I still disagree with you on that. I actually think his diagnosis was pretty com-pelling. I remember when the Business Roundtable came out with this statement, whenever it was, a couple of years ago. I’m in COVID time now, and I have no idea when things happened pre-COVID, but I think it was a couple years ago when they came out—

Luigi: Yeah. It was August 3, 2019.

Bethany: Thank you for having a better mind than I have, or at least a better memory. Anyway. When they came out with that statement, I thought, “Well, this holds them to nothing and does nothing.” It’s a way of making them sound good and palatable to millennials, millennials in their workforce, millennial investors, but it actually doesn’t necessarily accomplish anything. I think allowing people to think that they are accomplishing something when they’re in reality ac-complishing nothing other than accumulating assets that will help make the banks rich, I think that might be worse than nothing. I don’t agree that it’s a little bit better than nothing. Where I got sort of concerned—

Luigi: Sorry. Can I stop you there?

Bethany: Yes.

Luigi: First of all, I am 100 percent with you vis-à-vis the Business Roundtable. In fact, I remember the time, because I remember where I was when I read that, and I wrote a piece for the Washington Post saying—

Bethany: See, good memory. Look at that.

Luigi: No, it’s just an associated memory . . . saying exactly those things. Maybe be-cause I see through this, I don’t see this as so necessarily devastating. I don’t fall for the marketing, so I don’t see as sort of so negative. Where I was taken aback by was him saying that even the im-provement that Chris James was trying to bring to Exxon, that was negative. He said that even that was negative. That’s where I found it more difficult to follow him.

Bethany: You’re right. You’re right. That’s fair. That is a parsing of what he was saying and a parsing of what’s actually happening out there that I think is right. He might be underestimat-ing people’s intelligence in the sense that there might be a lot more people out there who see through it. Although then, again, based on the incredibly rapid accumulation of assets in ESG and ESG funds, I’m not sure that many people do see through it. I think he might also be overestimating people’s willingness to put their money into real change if there isn’t a return there.

In other words, I’m not sure if you tell people that instead of making a 20 percent return on their ESG investment, because it’s a win-win, and you can win by doing good, that if you tell them, “Well, actually, you’re going to give your money to us, but you’re going to lose 10 percent a year when the market is going up 10 percent a year, because we’re going to choose to do things with your money,” I don’t know how many people would actually make that choice. I’m a little more skeptical of people’s willingness—

Luigi: Bethany, that’s not the trade-off. I don’t think that anybody wants to lose 10 percent. I think that the idea is, are you willing to have a slightly lower return? The question is, how much are you willing to give up? I am 100 percent with you that funds should be more trans-parent and say, “Look, we are paying a price for it, and maybe in the short term we don’t because we are part of a trend, blah, blah, blah, but we are such a committed capital that we are willing to pay a price.” Not a 20 percent price like the one you describe, but—

Bethany: Well, I’m exaggerating it to make a point.

Luigi: Of course. Of course.

Bethany: I stand by my point. I don’t think many people would give up that much. They might give up one or two percentage points a year. I’d be surprised if people were willing to give up 5 percent.

Luigi: Five percent, especially these days, is a lot. But willing to give up one percent a year, is it gigantic? The only evidence I know is that they asked Dutch pensioners whether they were willing to give up some in order to improve. The overwhelming majority said yes.

Bethany: Yeah. But they’re better people than we are. I’m just kidding.

Luigi: It is a fact that in Europe, there is much more sensitivity on this than the United States. I think part of it is because Europe is much smaller, and so we don’t have the luxury of space. In the United States, there is so much space that you think it’s infinite. In Europe, you can-not have that illusion, especially in the Netherlands, where you’re bound to go under anyway.

Bethany: Well, that’s a broader interesting point. I wonder. I think Americans do be-lieve in the infinite. Maybe just because of our geography, and the sense of the infinite, and the oceans on both sides, and the Great Lakes, that there is this sense of expansiveness and infinite that we don’t believe we should have to be reined in. Whereas if you live in a more circumscribed geography, perhaps you’re more willing to accept that there are limits. Anyway. Sort of interesting.

There were two points he didn’t make that I think are interesting on the subject of ESG. I’m not criticizing him for not making them. Then I actually got quite worried about his execution or his desired execution. The points he didn’t make were, one, how real are the sustainable-investing criteria? What actually are these criteria? Do they matter? Then, are green things really green? I mean, when you think about the environmental damage done by solar panels, or when you think about the human-rights violations that are increasingly being caused by rare-earth mining needed to make many of our green equipment. I’m not an expert on this, but to me, that’s a whole fasci-nating area, which is, how green is really green?

I’m still enough of a child of the ’80s or skeptical enough of the idea of big government that the idea that the government should forcibly impose climate-change policies . . . I was joking with a friend recently that I would write a dystopian novel coming out of COVID that people are going to say, well, we shut down the world—exactly as Tariq did—we shut down the world in order to save COVID. Climate change is a bigger issue. Why don’t we shut down the world in order to stop cli-mate change and save humanity?

He’s right. It’s a very easy step from one to another, but to me, that’s not an easy step that we should make. That’s an easy step that makes me say, whoa, because then what happens? I mean, do you want the government deciding, rationing whether you get to travel or not, handing out vouch-ers for who gets to get on a plane or who gets to use an automobile in order to go see their family? I know I’m overstating it, but putting governments in charge of changing people’s behavior in the name of preventing climate change can be taken to a pretty scary extreme.

Luigi: But actually, to his credit, he was proposing a carbon tax, which is not necessari-ly big government. In fact, it might be a better way to raise taxes than the income tax.

Bethany: I wasn’t clear if that was all he was proposing. If it stops at a carbon tax, OK. You see my point.

Luigi: What I am fascinated by is the fact that he has in his mind a view of the political consequences of actions and says, if you do this, the political consequences will be negative. He’s not factoring in the political consequences of his own action. Now, I might be a little bit conspira-torial here, but the degree of attention that his pamphlet received is quite impressive. It was quoted by The Economist, I think, by this, by that. Whenever something comes out of the blue and receives so much attention, I use the old-fashioned Latin sentence cui prodest. Who benefits from it? Because, generally, this kind of free publicity is given to somebody who plays a positive role in the interests of somebody else.

I think that what he’s doing is a fantastic service to people like Exxon who are terrified. You know that Chevron went and talked to Chris James in advance, because it was afraid that Chris James would play the same trick with Chevron. Big oil companies are, sorry for my French expres-sion, peeing their pants about what is going to happen, and this diary of Tariq Fancy is music to their ears, because . . . It’s useless, in fact, it’s counterproductive, we should go back to the old world and wait for Big Brother to play the role.

Bethany: Now, that is a conspiracy theory that had not occurred to even my conspira-torial brain. That’s impressive. I’m not sure whether your conspiracy theory or my dystopian fantasy of governments handing out passes to allow us to drive our cars is more believable. Actually, I’m going to go with yours.

I doubt that it’s deliberate on his part, but you’re right that you can certainly see it as serving the interests of big companies that don’t want to have to change by saying, “Oh, well, well, well. We don’t have to do anything at all. Make the government do it.”

Luigi: Sorry, sorry. I’m not saying it’s deliberate on his part. I’m saying that if he’s so concerned about the political consequences of what you’re doing, he should be the first one to realize the political consequences of what he’s doing.

Bethany: Yup. I understand. I understand that point. If you were to take his point of view to a logical extreme, you would say, “Companies, just stop pretending at all and just go back to the old world of whatever makes money.” That does bring us back where we started, to your point. Maybe, then, that is actually worse than allowing the status quo to continue. I guess I’d say they both have costs, and I’m not sure which costs are worse.

Luigi: I agree on that.

The other thing that surprised me is that he didn’t push more for Larry Fink and other big in-vestors to vote the shares they control. That is potentially a big, big thing that will change the world.

Bethany: I hear his argument that the concept of fiduciary duty doesn’t actually allow you to do that. I don’t know if that’s true, and I don’t know if then, the issue is that we should re-define what fiduciary duty is, when that fiduciary duty isn’t only doing the thing that’s going to make the most money. Maybe fiduciary duty encompasses some leeway for doing something that you think is right for the world. But I heard his argument on fiduciary duty. The threats of lawsuits and the legal system coming down on top of you for that, I think it’s real.

Luigi: I agree, but what is funny is that this is exactly the position of Larry Fink. He’s so revolutionary on one end, but so conservative and traditional on the other. Many years ago, I shared a panel on the periphery of Davos. You know, in Davos there are the people who are insid-ers and people on the outside.

Bethany: I’ve always been such an outsider that I’ve never been invited.

Luigi: Yeah. The people on the periphery are indeed the people who are not invited who run things on the side. I was an outsider running a panel, and Larry Fink participated in the panel. We were in a discussion very similar to this, and he cited fiduciary duty. I said, look, you control, at the time it was, what, eight trillion dollars in assets? If you want the Department of La-bor to change the standard, you could have it done tomorrow. Don’t tell me that you are bound by a fiduciary-duty rule that is a rule of the Department of Labor, because you could change it tomor-row if you wanted to.

Bethany: What did he say in response to that? I’m not sure that’s true.

Luigi: He was very frustrated, which I think is true. I have to say, but this is very self-serving, I think he has not read Hart and Zingales properly, where, if he read that, he would under-stand that you can have a broader fiduciary duty, because your goal is to maximize the welfare of your investors, not necessarily the return, the financial returns.

Bethany: Yeah.

We decided to discuss as today’s capital-is or capitalisn’t the expiration of extra unemployment benefits.

Speaker 10: In MoneyWatch, federal unemployment benefits are expiring for millions of Americans.

Bethany: I think the original enactment of the extra unemployment insurance was ab-solutely a capital-is. It’s appropriate for the government. That’s what a government should do. Whether it should expire or not, I’m a little torn.

Speaker 11: Listen, for those millions of Americans, this is going to be a big shock to the system. However, there are over 10 million open jobs, meaning jobs available in this country, and that number is only going up.

Bethany: On the one hand, I would like to see the labor markets change in a way that is responsive to people’s options. Part of inequality has been far too many people trapped in really low-paying, menial jobs. People now have the opportunity to say, “No, I’m not going to take that job unless you pay me more.” That, in some ways, seems like a positive. I’d be willing to pay a little bit more for my latte to have a better society. On the other hand, I have talked to so many people, from restauranteurs, small-business owners, who literally can’t find workers.

Luigi: It’s funny that Andrew Yang, in his presidential campaign, was saying that we all are going to be unemployed, and we need to have a universal basic income in order to make up for it. It seems the other way around.

Bethany: Matt’s shaking his head.

Matt Hodapp: It’s creative destruction, right? Maybe there shouldn’t be that many restaurant jobs in the market because they’re terrible and don’t lead to the creation of much of anything other than getting to eat four different types of sandwiches instead of two different types of sandwiches.

Bethany: I, for sure, am sympathetic to the arguments that a lot of these jobs either shouldn’t exist or need to pay people a lot more money, and that something had gone fundamen-tally wrong in our labor markets, whether it’s a question of oversupply, or whether it’s a question of lack of unions that have forced this enormous divide. I’m not unsympathetic to that point of view. I just don’t know how I feel about anything approaching a universal basic income, because of the dystopian possibilities of it.

Luigi: The other thing that is not trivial is, where do you set the level? Because there is no doubt that a minimum wage set at the proper level will actually push innovation, precisely because if you cannot pay people, you need other ways to be more productive to do things. When I was in the Italian Army, there was still mandatory conscription. I spent a day of my life carrying sheets from the ground floor to the third floor because there was no elevator, and we were cheaper than the elevator. The Army was not paying for the elevator because of the free labor to bring things up.

I think having a cost, a minimum cost, that will push for innovation is good. However, how do you determine whether you are pushing too high and you have a lot of people that cannot work because they cannot produce at that level of wage? In the Scandinavian countries, they did this quite well until they started to open up for immigration. Why? Because they were investing heavi-ly in education. All the characteristics. All the workers were highly productive, and so they could maintain a very high minimum wage and a very low level of unemployment. That was fiscally con-sistent and so on and so forth.

The moment they had massive immigration, then the productivity was much lower. They had two choices. Either to give up the minimum wage, or at least at that level, or bear a very high level of unemployment with all the consequences, social and fiscal, that this comes with.

I think that it is, in some form, a good idea. Whether we can implement it in that form remains to be seen. Whether this particular form is the right form, I have doubts.

Bethany: I would sum it up by saying that the enactment of the original, extra unem-ployment insurance was for sure a capital-is. That’s exactly what the system should do at a time of crisis. Its continuation now, I think, is a capitalisn’t, because I think if we’re going to have a funda-mental discussion about welfare reform and universal basic income, then let’s have that discussion, to the extent our country and our politicians are capable of actually having it, and let’s enact a plan and not just continue to blindly throw money at something.