 Good morning, ladies and gentlemen, and welcome to the second day of our program. We have many wonderful sessions prepared for you today, starting with the Henry Havlitt Memorial Lecture, sponsored by Harvey and Mel Allison. Allen Mendenhold is Associate Dean and Grady Rosier Professor in the Soros College of Business at Troy University, where he also directs the manual age Johnson Center for Political Economy. His books include Literature and Liberty, essays in Libertarian Literary Criticism, The Three P's of Liberty, Pragmatism, Pluralism, and Polycentricity, try saying that fast. And most recently, shouting softly, you like alliteration here, essays on law, literature, and culture. His novel A Glooming Peace This Morning is scheduled for release in 2023. His academic writing has appeared numerous peer-reviewed journals and law reviews, including The Journal of Jurisprudence, The Independent Review, Libertarian Papers, Quarterly Journal of Austrian Economics, and The British Journal of American Legal Studies. He's edited or he edited a Southern Literary Review for over a decade. Dr. Mendenhold holds a BA in English from Furman University, MA in English from West Virginia University, JD from West Virginia University College of Law, LLM in Transnational Law from Temple University, and PhD in English from Auburn University. Before joining Troy University, he was Associate Dean and Founding Executive Director of the Blackstone and Burke Center for Law and Liberty at Faulkner University, Thomas Good-Jones School of Law. His popular writing has appeared in Newsweek, Fox News, Fox Business, The Wall Street Journal, The Washington Times, among many, many other media outlets. His topic today is ESG Enroute to Etautism. Well, thank you, Dr. Salerno. I remember being a graduate student at Auburn and seeing all the different luminaries who would come up to the mic at Mises Institute events and being somewhat in awe of those people. And so it's an honor to be here. I wanna thank Harvey and May Allison for making this lecture possible and for the wonderful dinner we had last evening. As Dr. Salerno mentioned, I'm a lawyer with a PhD in English. So the world of capital markets was not something that was familiar to me until recent years. Somehow I managed to find my way into a business school despite my background, but it wasn't so long ago when I couldn't explain the difference between a mutual fund, an index fund, and an exchange traded fund, and all that kind of stuff. So I've sort of had to learn this world of ESG. I originally thought as a graduate student that I would be teaching Robert Frost or something like that, but I've solely drifted in different directions. So what is ESG? ESG is an acronym that stands for environmental, social, and governance. It's notoriously difficult to define because of its different applications and different contexts, but you can understand it in sort of two ways. First, as a framework or strategy, the individual corporations undertake internally. And second, as the non-financial standards, metrics or factors that asset management firms, financial institutions, and institutional investors, among others, consider when they allocate capital or assess risk. So the first I'd like to call micro ESG, and the second I'd like to call macro ESG. These are not the official nomenclature. These are just terms that I think help us ease understanding. So macro ESG consists of governments, central banks, NGOs, asset management firms, finance ministries, financial institutions, sovereign wealth funds, and a global consortium of institutional investors that collaborate to operationalize ESG at the micro level among different private companies and particular publicly traded companies. So the combined entities comprising macro ESG exert enormous pressure on the private sector. And these entities manage assets and financial instruments from currency and loans to stocks and bonds. So they sort of control capital flow throughout the world. Everybody and every company seeks to bank and seeks to invest. So we're talking about the control of investment and banking. Macro ESG involves the use of finance to exert pressures on companies at the micro level to institute ESG. And micro ESG consists of numerous corporations from all industries responding to major incentives and changes at the macro level. Both forms of ESG micro and macro attempt to repurpose corporations according to alleged social obligations rather than profit maximization. So ESG sort of began in this 2004, the first sort of clear articulation of it was in 2004 there was a conference called Who Cares Wins? Sponsored by the United Nations, the International Finance Corporation which is an arm of the World Bank and Switzerland's Federal Department of Foreign Affairs. And this conference sought to mainstream ESG and to integrate ESG value factors in financial market research analysis and investment. Subsequent to this conference, a report was issued. It was funded by grants from the governments of Italy, Luxembourg, the Netherlands and Norway. So this to me does not sound like an initiative of entrepreneurs seeking private solutions to problems. And initially ESG didn't quite catch on but we had this 2008 financial crisis, right? The banking crisis and we had the trouble asset relief program and all these bank bailouts and banks were looking for good PR. They were the bad guys after this risky behavior and people were calling for executives to be put in jail and no one was and so ESG became a really convenient PR technique for these financial services institutions. There was this perception that absence shareholders, shareholders that didn't engage in sufficient oversight or engagement with corporate boards and governments contributed to this financial crisis. And so after the financial crisis you see a lot of foreign governments coming up with stewardship regulations. The United Kingdom instituted a stewardship code in 2010 for asset managers and others who invest capital on behalf of beneficiaries. So ESG constraints on investments, they're not moral, they're not good. There's little verifiable data showing that they accomplish the goals they purport to pursue. Their alleged benefits to society are immeasurable and they may not be effective at all except at excluding certain political and religious views from corporate culture. Nor do they steward money according to traditional principles of fiduciary duty. ESG makes certain CEOs feel pretty good about themselves as they get rich but it doesn't achieve in practice the objectives it promotes in theory. Economic shows us that the private public distinction collapses as powerful corporations, lobbyists and special interest groups wield the apparatus of government in the name of ESG to gain competitive advantages through laws and regulations because corporations seek subsidies and privileges, tax breaks and incentives, barriers to entry and all the rest, they will continue to advocate new government ESG regulations to dominate an industry or reduce competition. Meanwhile, the government's going to try to pick winners and losers favoring certain industries or companies over others, certain industries that are ESG friendly over others. So the E is pretty easy, environmental. What are we talking about here? Factors like greenhouse gas emissions, conservation, biodiversity, water consumption, solar power, climate change disclosures. The S, we're talking about social causes whether they're pro-abortion policies, LGBTQ rights, diversity, equity inclusion, transgenderism, critical race theory, black lives matter and the G, we're talking about this shift principally from the shareholder to stakeholder model. The governance piece of it has some things that are actually not so bad, like we think it's okay for corporations to have more transparency and things like that but really what this is about is the shift from the shareholder to the stakeholder model. Milton Freeman wrote a famous essay in the 70s in the New York Times about how the purpose of corporations is chiefly to maximize profits for shareholders and that if corporations maximize profits for shareholders they indirectly benefit society at large and that's how corporations do good. They don't need all these other social causes. The business round table which my friend Scott Shepard refers to as a lunch club for CEOs in 2019 came up with a new definition for corporations where they sort of tried to repurpose corporations to align them with social good and vague terms like societal impact. Well, what is a stakeholder versus a shareholder? Some stakeholders it's easy to say, well, your customers, your employees, your suppliers, those are stakeholders that are easy to identify but what people are now trying to define as stakeholders is society at large or the public interest. These terms are vague enough that they give executives a lot of wiggle room to get away with bad behavior. For example, if the purpose of your corporation is to maximize profits for shareholders, well, it's pretty easy to see whether you're doing a good job at the end of the year. It's a matter of accounting. You look and see, well, did our revenues exceed our expenses? Yes, oh great, we're doing the right thing but if your purpose is to maximize social well-being, how do you measure that? You can't measure that. So corporations that may not be doing as well can then say, well, our profits were down this year but we instituted diversity quotas in our executive board. We have new board members who represent all types of ethnic diversity and so we're accomplishing our goals but if you think about it, what does it mean? It's sort of a shift in power from the stockholders, from the owners of the company to these managers because if you're talking about stakeholders being in control of the company, who's gonna set your board meetings and who's going to determine what the agenda for a board meeting is, if it's some vague society thing? I mean, it doesn't even really make a lot of sense but that's chiefly what this G prong of ESG is about is the shift from a shareholder to stakeholder. So I wanna talk about asset management firms because they are central to this narrative of ESG. About a third of the private wealth in the world is in investment management. We're talking about the few hundred largest asset management firms having assets under management that exceed well over $100 trillion. The big three are BlackRock, State Street and Vanguard and they together have over $20 trillion of assets under management. BlackRock is the world's largest asset manager. It has a little over $10 trillion dollars in assets under management. BlackRock and State Street are among the top 10 shareholders and 90% of the FTSE, the Financial Times, Stock Exchange, 100 companies and BlackRock is the largest shareholder in almost half of those companies. Before the pandemic, BlackRock was attracting about a hundred billion new client money every day and the big three, again, BlackRock, State Street, Vanguard own roughly 20% of the shares in the S&P 500. They're the largest shareholder and 90% of those companies in which they own shares. So what these asset management firms are doing is influencing the culture in two ways. You talk about why are companies going woke? This is one way that they're going woke is first, the investment strategy. So they're investing in, for example, exchange traded funds in which resources are pooled into companies that favor, typically leftist political causes and they're excluding politically disfavored groups and these exchange traded funds. So that's one way. The second is by their shareholder voting and proposals. So when these asset management firms go out and buy large amounts of shares in publicly traded companies, they then engage. So if a company's doing things they don't like, like historically, if people own stocks in a company and companies didn't do things you liked, you just divested. You withdrew your money and you took it somewhere else. That's not what these asset management firms are doing. They are engaging, which is their strong alarming and bullying these boards of corporations to do whatever they want them to do to move these companies to the left. Historically, the goal of asset management was really to maximize your value on investment while mitigating risk. Now risk has been redefined under ESG to include things like climate change. So you might say that, okay, long-term investment. You'll notice that when people talk about ESG investments, they always emphasize long-term. While it's important for the long-term to take into account climate change, they'll say, well, available resources will diminish over time because of climate change or will have weather changes. Our supply chains will be affected by hurricanes or whatever. Well, the reason I think that people emphasize that long-term is not actually because they are really looking at the long-term. If they were looking at the long-term, they would look backwards as well as forwards to a future that is unknown. But they emphasize long-term because in a year, or in two years, or in three years, when circumstances haven't manifested the way they predicted, they can say, well, it just hasn't happened yet. This is long-term. Things still haven't occurred. You just be patient. Eventually, the climate change will destroy the world and all these things, but you just keep waiting. The other thing is these asset management firms emphasize regulatory risk. And they'll say, well, there's all this potential regulatory risk involving climate change that will be coming down the pipeline. Meanwhile, they're lobbying for regulations. So it's a self-fulfilling prophecy. They're like, watch out for these regulations that might come away. And by the way, we're paying all these people to try to get these regulations in place. Now, there was a study published by researchers at Columbia University in London School of Economics, not exactly home for a lot of great free market thinking. But they found that these ESG portfolios had companies that had really terrible track records with the environment and that these companies, this is from kind of a leftist perspective, these companies don't treat their employees well. They're environmentally bad companies and all these kinds of things. And that's just sort of interesting because on the investment side, these asset management firms are assuring investors that these are the best companies there are. ESG ratings are these private ratings agencies out there. And some of them employ artificial intelligence. And what they do is they issue scores for publicly traded companies, ESG scores. And they'll say, typically they're in quartiles. Like if you're 0 to 25, you're not doing very well. If you're 50 to 75, you're OK. If you're 75 to 100, you're great. There's one CEO of a ESG rating company that said, look, we need these private ESG ratings to save capitalism because if private industry doesn't start doing this ESG rating, then it's going to fall to government. Governments are going to start doing it. And in fact, these ESG ratings agencies are kind of all over the map. And there's no consistency among them. And there are accusations of greenwashing and woke washing, which are when companies that are reporting their data to these private ratings agency, they're giving false or misleading information about their dedication to either woken the social causes, whatever, or to environmental causes. The other thing that's kind of interesting about these ESG ratings, and first of all, I love fast food. I love Diet Coke. I love all these things. But if you look at Coke and Pepsi products, I mean, I think it's pretty safe to say they contribute to diabetes, obesity, heart disease, things like that. But they earn really high ESG ratings. I'm pretty sure Coke and Pepsi aren't just changing the world for the better by our consumption of that product. Mandela is international. It's a food and beverage confectionary. Its portfolio includes Oreo, Ritz, Chips Ahoy, Tang, Cadbury, and others. I'm pretty sure those products, the consumption, the fact that we're eating a bunch of chocolate and things, is not really changing the world for the better. But they have really high ESG ratings. They do really well. The SEC had a report analyzing these different ratings agencies. And the SEC sort of said, look, they're all over the place. And the left is looking at that saying, this is why we need the Securities Exchange Commission to now make uniform standards. Now we need the SEC to step in and have its own ratings agency. So we have one standard that everyone has to comply with. And it's clear. And it's government mandated. And so the left is trying to push that. A lot of people will say, well, ESG doesn't. It seems harmless. It seems like a lot of private companies just wanting to do what they want. Why don't we just let companies, if companies want to do DEI and if companies want to do all these things that are harmful to their business, why don't we just let them do it and fail? Well, I would encourage those people to look at an executive order from President Joe Biden from May 20, 2021, in which he ordered basically all federal agencies to figure out how to institute ESG within federal agencies. And that included environmental stuff, net carbon emissions by 2050, diversity, equity, inclusion measures. So this is just a little list, a short list. It's just a sample of some of the people that are affected. The National Economic Council is supposed to do this. The National Climate Advisor is supposed to do this. How many of you even knew there was a National Climate Advisor? The Secretary of the Treasury, the Department of the Treasury, the Chair of Financial Stability Oversight Council, the Federal Reserve Board, the Securities Exchange Commission, the Commodities Futures Trading Commission, the Federal Insurance Office, the Secretary of Labor and the Department of Labor, the Federal Attirement Thrift Investment Board, the Secretary of Agriculture and the Department of Agriculture, the Secretary of Housing and Urban Development and HUD, the Secretary of Veterans Affairs and Department of Veterans Affairs. The Federal Acquisition Regulatory Council, the Office of Management and Budget, all these different federal agencies are directed under this executive order to figure out how to institute ESG. Well, what's like, how does that work? Well, the Federal Reserve Board has partnered with six of our biggest banks, Bank of America, City Group, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo to monitor and measure climate-related risks. So you have this weird sort of private public partnership here. And why would the president seek to institute these, to encode these elite preferences in federal agencies? Well, we all know that traditionally, government was supposed to be three branches in the United States. You had your executive, your legislative, and your judicial branch. But we have this thing called the administrative state that is sort of arisen as a fourth branch of government. And within it, it has three branches of government that are unaccountable to our legislative processes, right? These administrative agencies have administrative law judges. They're your judicial branch. They promulgate rules and regulations. There's your legislative branch. And they have executive agency heads. There's your executive branch. And those executive heads enforce the laws. So you've got an entire administrative state that's rising up that has as much power as the other three branches combined. And there's no accountability. So if you can encode elite preferences into that, if you can start instituting ESG into the administrative state, well, then it's embedded in the system and it's here to stay. What's so interesting about ESG is if we already have a Clean Air Act, a Clean Water Act, Title VII, Title IX and Civil Rights Act, the Sarbanes-Oxley, Dodd-Frank, Wall Street Reform, Consumer Protection Act, you name it, we've got all these things. And banks already require hurricane and flood insurance and other forms of insurance related to weather. Why is all this other stuff necessary? You really shouldn't need all this stuff being embedded in federal agencies. Well, it's being embedded in federal agencies because they want that power. This is really concentrating the power in a few select banks, a few select asset management firms that are basically revolving doors. You can look at BlackRock and see the executives that jump out of BlackRock into the Biden administration and jump back in. It's very nefarious. Now, another way that you're seeing ESG being instituted is through this phenomenon called debanking. So you may have heard people saying that one day you may go to the bank and the bank, you may be seeking a loan and the bank may say, well, what's your ESG rating? And you say, well, I don't have an ESG rating. You know, I'm a family-owned company. Well, sorry, your ESG rating doesn't qualify you for a loan with us. You have to go somewhere else. And some people think that this is just a scare tactic. The left will say, oh, that's just a scare tactic. That's not something that's actually going to happen. Well, go ask a Canadian trucker what he thinks about this. And we have examples of this stuff happening here in the United States. J.P. Morgan Chase closed the account of the National Committee for Religious Freedom. Chase Bank terminated the accounts of some activists and some proud boys members. And whatever you think about those groups, you can say it's probably not going to stop there. It's going to continue to spread as the definition of whatever is politically undesirable expands. The Bank of America refuses to fund some oil and gas companies. The Citibank has restricted credit for gun manufacturers, J.P. Morgan Chase, Citigroup, Bank of America, Wells Fargo. They've taken measures to undermine the firearms industry, which we all know the firearms industry is fiscally responsible and credit worthy. And it's like the most heavily regulated industry already. But nevertheless, Visa MasterCard, American Express, they've created new merchant category codes for firearms, gun shop sales. So they're no longer in the general merchandise. They're now going to have their own category so that people can track who is buying and selling guns. PayPal has closed the accounts of individuals associated with the January 6th capital riot, as well as groups that the Southern Poverty Law Center deems hateful. The Alliance Defending Freedom, for example, is somebody that has been targeted by PayPal. So the trend is to characterize debanking as eliminating risk as financial institutions purport to disassociate from groups or ideas that could harm their reputation, but it's actually far more nefarious than this. Now, you'll see a lot of big companies, big banks, asset management firms, but also a lot of big publicly traded companies coming out and supporting ESG. Why would big business support ESG government mandates? Why would they say, yeah, we actually think we should have these SEC regs, we should have these new Department of Labor regs, we should have all these things? Well, the first reason is that small businesses can't afford to comply with complex ESG regulations. It's costly. Large corporations can absorb the cost of ESG regulation while gaining advantages over smaller competitors and local business that can't afford regulatory compliance. The wealthier the business, the more it can lobby politicians capturing rents and legalizing anti-competitive measures, and in this way, corporate executives re-gains for their companies at the expense of wider society. Another reason is that the threat of government coercion incentivizes businesses to support positions that are otherwise against their interests. So although ESG would not make them better off, businesses might embrace or pursue it if the consequences of non-compliance with government mandates or regulation would make them even worse off. So in other words, government distorts incentives for businesses anticipating future regulations or complying with current regulations. Another reason why big businesses may support this is that ESG has empowered special interest groups, namely among doctors and lawyers who have developed a veritable cottage industry regarding compliance with new or potential regulatory requirements. There's also an entire industry of high-powered consultants who some of them own stock in the very companies that they're advising and they're making a lot of money on ESG. If you think about it, in a competitive market, private companies that self-impose ESG regulations would fall behind their competitors that remained apolitical and sought purely to maximize profits for shareholders because those companies would be alienating half the... If you say that half the country's conservative socially and half the country's on the left socially or whatever, well, you would automatically be alienating half the country. Well, so how do you make up for that? You have to basically get systemic buy-in because if everybody starts buying into it and everybody starts valuing portfolios based on ESG, then all of a sudden, that becomes the system and then it does contain value. So the more you can exclude the anti-ESG crowd from capital markets, the more you can push people out, the more you can control the flow of capital through financial institutions, the more you can dominate as a big company. One last point about these asset management firms not only is there a problem with fiduciary duties because what they're doing is, let's say in a state, you've got state retirement systems that are investing their pension money through asset management firms. So these asset management funds are getting very wealthy off state pension money. That's what they're investing. They're investing state pension money. They're investing university endowments. It's not just like high-network individuals. They don't care about even wealthy individuals. Your money's so insignificant. They're looking for these big institutional investors and they're investing that money. But when they invest state pension money and they're putting them in funds on the basis of non-financial factors, on ESG factors, they are supporting political causes with which those beneficiaries may disagree. So that's a flagrant breach of fiduciary duty. I don't know how many public school teachers might be Christian conservatives and they're unaware that they may be supporting Planned Parenthood indirectly because their pension money is going into funds that support Planned Parenthood. Also, these asset management firms, I mentioned that they own shares in all these publicly traded companies. Well, they sometimes own shares in competitors. And so they're getting proprietary information about different competitors and exercising their proxy voting power and pushing companies in one direction or other with all this insider knowledge about the internal workings of these different companies. And that's also a flagrant conflict of interest. So you've got all kinds of serious legal problems with these entities. So I began with this reference to Robert Frost. I joked about how I thought one day I would just probably be teaching Robert Frost. So I'll actually end in probably with Robert Frost. So you have to picture the narrator of this poem. He's an old man, sort of an avuncular figure, maybe a white bearded man in the woods and he's walking around somewhere in snowy, no England and narrating this poem. And the poem goes like this. Whose woods these are, I think I know. His house is in the village though. He will not see me stopping here or watch his woods fill up with snow. My little horse must think it queer to stop without a farmhouse near between the woods and frozen lake, the darkest evening of the year. He gives his harness bells a shake to ask if there is some mistake. The only other sounds the sweep of easy wind and downy flake. The woods are lovely, dark and deep, but I have promises to keep and miles to go before I sleep and miles to go before I sleep. It's a beautiful poem, but sometimes people like us in this room, we tend to despair, we tend to feel angst, we tend to think that we are stuck in the darkness and sometimes it would just be easier to give up and withdrawal and just stay in the woods. But we have miles to go before we sleep, miles to go before we sleep. So let's get out there and kick some fanny and push back on this ESG stuff.