WRFH/Radio Free Hillsdale 101.7 FM - Wall Street Weekly: Interview with Paul Tice (Part I)

Episode Date: March 9, 2024

Join Patrick and George as they interview author and investor Paul Tice about his new book: The Race to Zero: How ESG Investing will Crater the Global Financial System. 

Welcome to Wall Street Weekly, a show where your host, George and Patrick, cut through the financial jargon to keep you educated and informed about the markets that affect our lives. Enjoy the show. This is the highly informing, overperforming radio show on Radio Free Hillsdale 101.7 FM. My name is George Ackler, joined as always by Patrick Scott. Patrick, we have a very special guest on the phone today. We do. This is an exciting one.

Today we're bringing in Mr. Paul Tice, so he's going to tell us a little. bit about the work that he's been doing and the research that he's been doing and the book that he's been writing on ESG. Mr. Paul Tice, welcome to the show. Hi, guys. It's good to be with you. So to kick us off with a little bit of background, what's the short version of the story of how you came to Wall Street and how you stayed there for decades?

Sure. So I worked on Wall Street for 40 years. I started back in 82 when I was a junior in college at Morgan Guarantee Trust. and I just recently retired in 2022 a couple of years ago. I spent the first half of my career on the sell side and then the second half on the by side. And the main firms I worked at over the years were J.P. Morgan back in the 80s, Lehman Brothers, in the 90s and 2000s, and then Black Rock in the 2010s. And for most of my career, I specialized in the energy sector, first as a cell-side

analyst and then as an investor. And for the last 10 years I've been teaching down at NYU Stern a course on energy and infrastructure. Okay, that's interesting. So you were at Lehman Brothers during the collapse? Yeah, I had a front row seat. You can really think of it that way when they went down. So in the book, there's obviously a chapter talking about the 2008 crisis and, you know, it gives, you know, kind of an insider view of what happened with Lehman and how that impacted the entire industry. Yeah, that was interesting. I just read that earlier today a few hours ago, actually, so looking forward to talking more about it.

To get into the book, this is something that I sort of picked out from Chapter 1, and the question I had was, how did Progressivism become the platform of ESG? Well, I mean, it's a long story, and as the first chapter goes through, it kind of lays, out, you know, the history. Because I think a lot of, even people working on Wall Street, I think, really don't know where this came from. They're reacting to it. You know, they're being told what to do, and you're not allowed to really criticize it.

And, you know, that's something I experienced over the last few years of my career. So it was one motivating factor for once I did retire and no longer could be canceled. You know, the first thing I wanted to do was write this book to give that insider's view and kind of give a voice to what I think is a silent majority on Wall Street that doesn't agree with this agenda. But if you trace it back, you know, I would say back in the 80s would be when the United Nations started focusing on more social agenda items away from their original mandate, you know, post-World War II. And so then climate change and sustainable development, you know, both, you know, came together in the late 80s. And ESG can really be viewed at as the third leg of the stool. The United Nations is also leading the charge around ESG investing,

and the core of ESG is climate change, no matter who you talk to. And basically you can view ESG as kind of providing the funding mechanism for the climate and sustainability agenda. You know, it's going to drive capital away from fossil fuels and towards politically correct industries, starting with clean energy. So, you know, it's really a 40-year head start that the other side has on us if we want to reverse this. And you can also view what's happening in the financial markets right now on the same kind of

continuum as what's been happening with other parts of society. Again, going back to the 80s, you know, you've kind of had this progressive takeover of various institutions, you know, starting with education, you know, K-12 and colleges and universities and then working its way through the media, then organized religion, the arts. And I think the business sector and the financial markets are really the last pillar to go. So ESG is kind of the way of a – it's facilitating a progressive takeover of the finance industry, is, I think, a fair way to look at it. Okay, well, that's interesting.

I apologize. Let me take us back a step. We need to get a better platform of what ESG is exactly. Could you tell us a little bit about what ESG is generally? Sure. So ESG, environmental, social governance factors, and it's the view that a morally subjective set of non-financial ESG factors should drive your corporate policy as well as your investment decision-making

as opposed to, you know, objective financial metrics, you know, geared towards generating a financial return, which is how the markets have been working up until now. ESG, which goes by different names, sustainable investing, ESG investing, responsible investing. I think that all kind of shows the pension for progressive to kind of abuse language. But it's all predicated on the theory of stakeholder capitalism, which the World Economic Forum has been the main champion of that for the last 50 years. But stakeholder capitalism is the belief that companies should be run not for the benefit of their owners, their shareholders, or their bondholders or their employees, but for the good of society.

You know, for people and planet, you know, is the way that the U.N. and the World Economic Forum kind of spin it. And that's not capitalism. You know, it's basically government-directed capitalism. It's more like fascism. And in the book, you know, I kind of trace back a lot of the similarities in terms of language and argument, you know, can be traced back to Germany and Italy in the 19th. 30s. But, you know, it may be the end stage of capitalism unless we can reverse this, because if you don't have free markets, you know, then, you know, that's going to undermine

capitalism. And you can really look at ESG as the latest attack on both capitalism and fossil fuels, both of which go back 200 years, right? Fossil fuels have driven capitalism, you know, since the 19th century. And so the attack on fossil fuels, you know, getting to net zero, decarbonizing is a way of undermining capitalism. It's just another anti-capitalist approach, and it's going to lead to, you know, severe decline in living standards, increased poverty, higher mortality rates. And that's kind of the subtitle of the book, what that's implied. You know, that macroeconomic environment, which will occur fairly certainly, if we don't reverse this thing, you know, that's going to be negative for financial markets.

And that's another, you know, amazing thing about ESG is everyone just buys into this argument that markets will become more sustainable if we, you know, first off, focus on net zero and decarbonization. But no one explains why that macroeconomic scenario will be good for the financial markets or financial asset prices. And one question that I had as we continue interviewing, Mr. Paul Tice, author of The Race to Zero, How ESG Investing Will Creator the Global Financial System

on Radio Free Hillsdale 101.7F. I guess the question that I had with ESG investing is a lot of people who are pro-ESG are saying, well, it's a free market. If it didn't work, it would get priced out of the system. Can you kind of explain how big corporations are able to let this fly under the radar? Because you said that this has been going on since the 80s,

And I think most of the general public, if they know about it, have only learned about it in the last few years. Yeah, well, I think you can trace this back to the 80s and, you know, the climate change and sustainable development programs started up by the UN. But ESG investing has really only been over the last 10 to 15 years. In 2006, the UN set up its investor group called the Principles for Responsible Investment. and, you know, just going into the crisis, but then particularly after the crisis, every firm on Wall Street has joined this group. And basically now all of the assets in the market, assets under management in the market, are being integrated with ESG factors, which, unless you raise the fund and called it sustainable, you know, up front, and that's a fiduciary problem. But the financial piece, the third leg of the stool, as I refer to it, is really only been coming on strong over the last decade, I would argue, because coming right out of the crisis, Wall Street needed to kind of signal its virtue and work on its image. And, you know, ESG and sustainability came along.

And, you know, that was kind of the siren song that was being promised to the industry. If you come here, obviously, you can work on your image. But the problem is that everyone's been suckered into this trade, and now you can't find the exit. door. And over the last 10 years, the requirements have changed for ESG. Originally, you could do whatever you want. You know, you could focus on financial return, if that was more important to you, whatever ESG factors. However you implemented it, you know, was kind of very aspirational bespoke approach. And that now has changed since 2015 when we passed the Paris Agreement and we pass the UN's Sustainable Development Goals for 2030, and now it's become more prescriptive.

Now you'll have to align with both Paris as well as the 17 SDGs. There's no debate about climate change being the priority ESG gold. And the problem is, even though we've changed the rules of the game, we've moved the goalpost, we've moved the whole stadium, frankly, around this thing. Companies are not leaving because they can't, because it really sends a bad signal if you join an institution to signal your virtue, and then you get kicked out or you leave and say that the whole thing was a scam to begin with, because obviously that calls into question your investment expertise.

And the more this goes on, every passing year that Wall Street firms do not criticize this, it becomes that much harder for them to kind of backtrack on it. So it's a very coercive system. if you speak out against it, either individually or as a firm, then you become the next target. So it has a fairly totalitarian approach. And I think that's one reason why you've seen nothing coming out of the industry up until now, criticizing ESG investing, even though it's changing the markets, it's changing the DNA of the industry, and still people don't speak out.

So it's not a fad. We didn't just discover this over the last 10 years as a way to make money, You know, people are being pushed into it. It's a coercive process. And the risk going forward now is that we've got regulations coming that are going to make all of this required. And that's really the first line of attack if people want to push back. I guess kind of following up to that. So if people are still, let's say they're not convinced or they don't understand why ESG goals,

which I think on the surface sound very great, can be harmful in the industry. You kind of talk a little in your book how the ESG rating says. as far as like sustainable returns going forward is pretty weird and how it's almost become like a pay to play with these agencies so that you get a good rating. Yeah, well, it's not analysis. I wrote the book and I tried to keep it free from financial jargon that.

Hopefully I accomplished that so people can understand. But, you know, ESG, even though it has this quantitative patina around it because it's got so many different metrics, they're all morally subjective. And as I go through the book, as someone who's kind of experienced as first ten, you really can't make heads or tails out of it because, again, you know, you've got companies in different industries, you know, they have different ESG factors that are more important, again,

more important based on what third-party activists are telling you, not because they're going to impact asset prices. I think that's the other important point to make about ESG. even though we've been integrating it up until now, particularly over the last nine years since 2015, it's still not impacting prices in the market. It's not a driver of relative value. And all the research that's been published by mainly the academic world has failed up until now to prove that it's a positive catalyst.

The other side has been arguing that it can lead to the creation of value over the long term. if you follow this ESG program. They never tell you how long the long term is and when do you get over the horizon. And there's been no data actually proving it historically that it works, right? And part of the problem, as you mentioned, is that, you know, you've got different facilitators

that have sprung up to try and make money off of this. And we've got, you know, various scoring companies and rating companies and advisory companies around, you know, the proxy process. the consulting firms all have their own ESG verticals now. So there are a lot of people out there trying to make money off of helping you to think about ESG. But if you just look at like the scoring and the rating agencies, every one of these new companies scores things differently. MSCI is one of the big ones.

Sustainal Linux is the other big one. You can't reconcile the ratings between companies between those two agencies, right? And good luck trying to reconcile that across industries. It's not like a typical credit ratings that everyone uses the same language. And you've got three major rating agencies, Moody's, S&P, and Fitch, which I think your viewers should know those names. And they all use kind of a similar scale and rating approach. They look at the same metrics, and their ratings are fungible, both across companies as well as across industries, right? You don't even come close to that when it comes to ESG, which just adds to a little.

lot of the confusion. You know, so it's created a very chaotic system. And the only thing that everyone can agree on, and part of this is because of the messaging over the last 40 years, is that climate change bad, right? So, you know, if you poll anybody, really, and you can do this with the public, too, you don't have to be involved with the markets. You know, they would say probably climate change is the most important priority because that's what the media and everybody else has been repeating for years now. So a lot of firms on Wall Street, even though they can't make heads or tails out of all of this, they may just focus in on the big stuff to make their life simple,

which would push them towards the climate change net zero. And I think part of that is by design, right? Again, the priority here is we're going to defund oil and gas and fossil fuels, and then we'll figure out everything else in terms of what other ESG factors to focus on next. So I think that's an important message for everyone. It's not just a lot of these woke issues that you may be reading about in the paper. It's really climate change, and it's what's happening in the financial markets to focus on. Yeah, that's really interesting how it revolves around climate change.

If you're just joining us, you're listening to Wall Street Weekly on Radio Free Hillsdale 101.7 FM, where we're interviewing Mr. Paul Tice on his book about ESG. So let's talk about the other side real quick. In my financial management class, we were talking about, you know, what is the ultimate goal of a firm? Is it to maximize shareholder profits, or is it something else that we're talking about nowadays, like ESG, environmental, social, and governance factors? So why is acting solely on behalf of the shareholders not only the profitable thing, but also probably the socially beneficial and perhaps even moral thing?

Well, when, you know, Milton Friedman was viewed as the Orthodox view when it came to business ethics. That's obviously changed a lot. And stakeholder capitalism is antithetical to the Milton Freedom approach, as you're probably aware. I would argue that businesses, you know, investment firms, they're already, you know, moral entities, frankly. I mean, a company that provides a product or a good at a fair price or an attractive price that meets a demand by society, that employs people, you know, that gives business to various counterparties, suppliers, and whatnot, you know, I think they're ticking all the boxes that they need to in terms of contributing to society. And if they pay their employees well, which they will, in most cases, if they want to keep them, then those employees

can use that wealth that they have and they can give to charity or set up their own business. So that's always been the case. You know, there's been 200 years of attack on capitalism using the fact that it's immoral, I think, is an old argument, but it's been refreshed here now with ESG. But I don't think companies can do more. And in fact, I don't think CEOs are equipped to solve the world's problems. I think we will all agree about that. And frankly, a lot of the problems captured by ESG on the environmental or social or governance side, they're the domain of politicians and governments, right?

So if anyone should be solving these problems, it's really the public sector. it's not the private sector. So I think what E.S.G. and stakeholder capitalism is doing is trying to change that and blur it. And I think it feeds to a lot of the historical antipathy against businesses and against Wall Street, right? And frankly, if businesses and Wall Street firms, you know, aren't willing to stand up and defend themselves, which I don't think they have adequately over the last several years, then they're going to become an easier target. Yeah.

One thing that really caught my attention in your book is you were talking about ESG investing. You brought in Europe and other things. But what was most interesting to me was the idea that while this is just starting now, the younger generation, specifically our generation and probably millennials too, have been much more infatuated with ESG investing than the older generations. And obviously, as those people come into positions of higher power within the coming decades, Do you think there will be or could be an event that would make people sour, especially the younger generation, on these ESG issues?

Hold that question because I want to just add one thing to the previous question. So is there anything wrong with a company deciding that it wants to change its mandate and have more of a social purpose? I would say no. And the same goes if you're working on Wall Street and you want to raise a fund to go after whatever social or environmental goals that you set. There's nothing wrong with that, right? As long as the risks, if you're raising a fund, as long as you disclose all those risks

and the fact that you may, you know, lose performance and you're okay with that, then that's fine, right? You know, there's roughly $3 trillion of sustainable funds that have been raised, both debt in equity up until now, right? You know, a fairly small percentage, less than 5% of the overall AUM in the market. But those were, you know, raised with proper disclosure. and, you know, they're going to execute on whatever their investment strategy is. That's fine. And the same for a company. If you want to change your mandate or set up a new company to do whatever social purpose,

Ben and Jerry's would be a good example. Everyone knows what you get with them and how they're going to, you know, use their cash flow. The problem with ESG, though, is we're trying to change companies and investment assets after the fact, right? You're using coercive pressure, first moral arrest and now regulatory pressure to force companies to comply. That's where the real problem comes in with ESG. But there's nothing if you want to do it starting fresh, nothing to limit that, right? And with that we'll wrap up part one of our interview with Mr. Paul Tice, author of The Race to Zero, how ESG investing will crater the global financial system.

Of course, we also want to thank you, the audience, for sticking along with us today. If you've missed any of this conversation or any past episodes, you can find those on Twitter at Wall StreetPod. And more information is available about our guests today on Twitter at Paul H. Tice. Thank you for listening to Wall Street Weekly on Radio Free Hillsdale 101.7 FM.