Mitt Romney had earned his Fortunes in that field private Equity can be a cruel business and Romney received a lot of criticism for some of his conduct over the years and we invited Professor de motoron to shed light both on how private Equity works but also on its moral dimension were the Democrats right to cast Romney in such a Negative light turns out he wasn't such a bad guy we've invited uh the professor back to talk about ESG because here too it's worth examining this phenomenon from both a practical and moral angle we all want companies to act in ways that benefit all of society especially in terms of the environment climate change and the social consequences of their actions but is ESG really the best way to get us there further is support of ESG a moral imperative are those who oppose ESG bad people I'm sure that many in the audience will disagree with much that he has to say and I know that he will be delighted to field questions from the audience we have two microphones lined up please simply stand near the microphone make an orderly line and ask a short and concise question and I guarantee that we will have an engaging discussion so please welcome Professor aswat the motor on to discuss the difficult truth about ESG question part I'm going to make things a little easier because walking up to a mic is an act that sometimes scares people you don't want to get there it takes a while so why don't you ask me the questions from where you're sitting and I'll just repeat the question that way would save ourselves the traveling time to the mic to ask questions I mean I'm a teacher and the last thing I would want in the classroom is for students who stream up to a mic and that's a good place to start this class I'm a teacher I describe myself as teacher I'm not a professor that sounds so incredibly pompous and pedantic yeah you know introduce me I'm Professor so and so okay I'm not an academic the word fills me with Dread I'm a teacher in fact um I'm glad the introduction said the last time the first time I came to Baruch was 20 years ago I think I make this a once every 10-year event you know I try to avoid this part of town most of the time unless I have to go to an Indian restaurant on Lexington Avenue um but 20 years ago the topic I did was about teaching how do you teach what is it that the the craft of teaching did any of you that session you probably retired if you were at that session that session was carried on was picked up it was recorded it was put on YouTube and I was just checking the YouTube views it's got 250 000 views not bad for a Baruch session recorded with a bad camera 20 years ago but I'm going to set the stage here about 20 years ago I had I would say a midlife crisis but a midlife decision-making point and I made three decisions and I've kind of stuck with them one is I said I'm never going to dress up for anybody ever again now you called me to a meeting of CEOs I'm going to come as I am I'm not going to wear I'm not a you know trained monkey to get in a three-piece suit and show up just because you know and let's face it they're going to be spending far more on their suits than I am so the notion that someone wearing a suit signals to the world that you're serious we gotta let that go the second thing I promised myself was that it's never going to write an academic paper for the rest of my life why because you're asking questions that nobody cares what the answer is you spend five years of your life no going on and on and on you finally published the paper it gets published in a journal that nobody reads and I said Life's too short I I don't want to do that doesn't mean I stop writing but I write for a very different audience and thirdly I lost my filtering mechanism I just say what's on my mind what's the worst can happen and why you can fire me but I live in La Jolla and two blocks from the beach you fire me I'm gonna hang out at the beach all through the air so I'm going to tell you up front that I have zero desire to tread lightly in this space I'm going to say exactly how I feel and I feel really strongly and if you want to push back I would welcome people who disagree with me in fact a few weeks from now I'm supposed to be on the panel with blackrock's head of sustainability I can't wait wait she's getting cold feet let's see if she shows up but I can't wait three months from now I'm supposed to be on the panel with a McKinsey head of ESG I can't wait so I'm going to say up front what I think about this concept so you're in no delusions that I'm going to give you on the one hand and the other hand here's how I describe ESG this is a concept born in sanctimony nurtured with hypocrisy and sold with sophistry that kind of puts puts all the cards on the table you know where it was born right it was born out of a U.N document that Kofi Annan put together in 2004. I would like you to think about anything good that has come out of a U.N document in the 75 years the UN has been around and already you're on shaky Grant nurtured with hypocrisy I have never seen a space as filled with hypocrisy as the space a few weeks ago I was asked to talk at an ESC conference I know why they keep inviting me because I piss everybody off and this was in I think Oslo they said will you fly out and I said are you guys out of your mind you might get on a plane create how much of a carbon footprint I don't know till I get to Oslo I'll stand in front of but I decided to do it on zoom and the first question is over a thousand people is where did you guys come from and 95 percent of them in flow from somewhere to get to Oslo to tell us how that they cared about global climate change and the way they were going to show it was by creating a car carbon footprint the size of a small country and then tell the rest of the world look no this is what you should be doing and sold with sophistry this is a gravy tray there are Consultants making money there are Bankers making money their investment funds making money you know who's not making money all the companies are advising he said this is going to make you good you know who's not benefiting supposedly the society that they're claiming to save if a concept can be both toxic and empty at the same time it's kind of tough to pull off right to be toxic you got to have something ESC has managed to pull it off in 20 years so you know where I'm coming from so I'm not going to hold back and as I said I will present you with the facts you're welcome to push back you can hear everything that you know if you teach a class on the sci field sympathy for you but I'd welcome your pushback on what you think I'm missing in this space now I've been in this business of valuation and corporate finance for 40 years now and I've learned to become cynical along the way why because we teach about fundamentals we teach about cash flows but the reality is this is a space filled with what I call Weapons of Mass distraction you don't remember weapons of mass destruction you do the numbers on a project or an acquisition it doesn't fly but you really really want to do it what do you do you bring out a weapon of mass distraction it's strategic most dangerous whatever invented in business right you know what it means the numbers don't fly but I really really want to do this a strategic deal it's just a really stupid deal but you want to do it a strategic part is exactly the buyer you want to find if you're selling your business because they've already made up their mind and how much to pay before they show up who does that but the words keep rolling on right it's strategic and China for a while if you had you know I wanted to add nectares zero to your value you know what he said we're in China or extra zero in your value now you with from Tech you got this whole set of buzzwords web three I have no idea what that even means the metaverse it's a space but it's not a business and ESC kind of fits in that space it's become this weapon of mass distraction that you pull out he said you know what this is a terrible product but it's good it'll make our ESC score go up so I'm going to kind of compress what I'm going to say for the rest of the class and list out the five big questions I want to address and on each one as I said I'll take what ESG says I look at the evidence and say show me so here's the first one you know the ESC promise and this I think has been at the core of its destruction is it's gone around promising good stuff for everybody with no downside I mean if you're in business you know that everything is a trade-off right I've never seen something in business but it's an unalloid good you do something there's always another side you can choose not to look at it so what Drew my attention to ESC in 2019 was I was curious I said how can something create all this good stuff with no it's cake without calories let me explain you had ESC Consultants going to companies and saying if you're good you'll be more valuable Larry Fink was saying this right yeah goodness is automatic they were going to invest anything you want to make more money you can be good no just just buy ESG funds and of course the society the sales because if companies all follow the ESC rulebook we will all be better off as a society now suspend the the questions about DSC for a moment think about human history through the history of humanity is it being easier to be good or to be bad I mean it's just it's a generic question it was easy to be good you never need the Ten Commandments right you wouldn't need religion because we would all take the good path it's always been more difficult to follow the good path and of course they hold the price you know you do this you're going to go to heaven you do this you're not going to go to hell you can either do the carrot or the stick but you hope the combination will keep you on the path goodness has always meant giving up something and he and she kind of cut against the core of that very human phenomenon he said look you can be good but it's no consequence for you and that to me is at the heart of why ESC is where it is now because it's been sold as all good no bad all upside no downside you can be charitable and there's no consequence and we're reaping what we sow so let's get the show on the road there are five questions I'm going to ask first I'm going to go to the court what the heck are you measuring with the there are five Services now at the minimum that measure ESC an ESC score sustain analytics does it s p does it they come up with a number what are you measuring I happen to be on the panel with the head of Morningstar sustainability group I don't think it's going to show up in a panel again I said I'm just curious what exactly are you measuring if you're an outsider looking it must be measuring goodness right I'm going to start with the premise that ESG is trying to measure something that is not measurable on a global scale and there's a simple reason if I went around this room and ask you to describe what a good person is to you I'll wager I'll have 50 different descriptions right why because it'll reflect where you were born what your culture is what your religion is what your background is we each have our own measure of what goes into goodness for some people it might be as simple as if a person goes to church every Sunday or the temple every Friday that's my definition of goodness for other people it might be how good they are today so each of us has our own measure of goodness how the heck did sustained analytics develop this Dalai Lama like capacity to measure goodness for all of us already I'm a little suspicious that any entity I don't care how smart people are is able to take something that is a personal measure and come up with a global measure you're going to see how this plays out in the actual escorts for companies because you're measuring something that it's not that it's subjective or it's it's personal so guess what you're going to see if you have five Services measuring the goodness of a company you're going to get five different measures depending on what they put front so we're going to start with that and it's a feature not a buck because people talk about convergence you're not going to get convergence on this this is not like measuring default risk right because we know what it is and we can get convergence on it this is a measure that is basically going to be different thanks to different people I'm going to start with that question second question I want to take on Larry Fink he stopped talking now good for him he should stop talking about three years ago on this topic he asked me but for a while he got away with saying hey being good it's why ESG is a factor in BlackRock you're now in my territory I live in valuation I talk about value so my reaction when I heard that was show me where is it higher growth is it higher margins is it lower risk and I looked at the collection of what passes for ESG research I'm going to say something incredibly mean about the space but I mean every word of it it's horrendously bad in terms of its Collective impact in fact this is the only area of research in finance where people use meta studies you know what meta studies are rather than quote one study they'll take an average of 500 studies you know why you do that because each of it's like the law of large numbers they're all crappy if I take the average somehow the average is going to tell me something about what happens I'm going to take the evidence and I'm going to argue that much as ESG research claims that being good is going to make you more profitable that nothing nothing in the evidence backs up a proposition I'll give you one little glimmer of hope on risk and a certain kind of catastrophic risk but that's really advice on don't be bad not don't be not try to be good so we'll talk about that area of research and why you don't need ESC to get there so I'm going to talk about the connection of ESG to value and the basic bottom line is some companies May benefit from a good image because they're customer base likes goodness and they buy come so they actually and people and you can I let you throw out examples of companies that have benefited from good I'll give you for every example of a company you can show me that is benefit from doing good I'll give you a contra example of a company that's benefit from being bad let's have a contest let's see who created more value along the way I'm not saying this is no it's something that I approve or don't approve but I'm saying the notion that goodness is always you know improves value is this completely based on made up stuff let's take the third question investment funds have been going around selling people in the notion that if you buy an ESG fund they're investing in good companies will deliver higher returns I mean I know the Baruch has an endowment fund it's probably smaller than the NYU endowment fund which is smaller than the Harvard endowment fund we can all look somewhere else and I wish I were them but this is something that's coming from the NYU endowment fund I got a call about three years ago saying you know we want to be good but we also want to make higher returns and I said I want to eat everything I can and keep my weight at what it is today it doesn't work that way right but that's what they've been sold you can do now what makes you happy invest in good companies avoid fossil fuel I mean there are all these evil companies no tobacco no fossil fuel and you consider on a higher returns I'm okay with the no fossil fuel in the no tobacco but you're violating one of the first things you're taught in operations research right an unconstrained optimal will always be the constrained optimal this is not something I make up it's just pure math and when you do ESC what are you doing when you do EST investing you're creating a constraint by all means do so but don't tell me that creating a constraint will deliver a higher value than not putting that constraint in it goes against everything I know not about Finance but about pure math I'm going to look at the evidence on ESU and returns and for a while it looked really good you also all these charts that people used to show high ESC look at the returns you made and I'm going to go under the surface and you're very quickly going to see where those returns came from and then I'm going to ask you did you really invest in goodness or did you buy some tech companies along the way if you believe Facebook is a really good company and Exxon Mobil is a really bad company I've already lost you right because you have a definition of goodness that's based on climate change but what if my definition of goodness is privacy to me Facebook is the most evil company in the face of the Earth but I'm going to look at the returns from especially the last decade where people could go around and say look you know you can invest in ESG look you can make higher returns and what has happened in the last three years to kind of destroy the BlackRock argument of you can have your cake and eat it too reality has its odd way of intruding on these made up narratives and reality in this case took the form of Russia invading Ukraine all of a sudden the ESG story kind of blew up in your faces I didn't have the least Bit of Sympathy when it happened I love to see the contortions that ESC people had to go through to now get back on the side of goodness I'll tell you an example I'll give you an example of a new story and I want you to play the role of ESG people so you're in the business of measuring goodness so here's how the new story starts Philip Morris if I stop right there you're going to be in the good side of the bad side that terrible company Secrets right it's going to give away 500 000 cigarettes for free you're saying this is awful they're taking an addictive substance that causes cancer they're giving it away for free you ready to put in the bad story right do Ukrainian soldiers on the front lines all of a sudden it's getting a little shaky right because the word we're in Ukraine is good Russia is bad I'm not not talking about the politics of it and now you're saying is that good or is that bad you know weapons manufacturers used to be bad until about two years ago and now all of a sudden they're starting to look good again depending who they sell the weapons to do you really want this to be the basis for judging companies because it's not even that the basis is subjective it's going to keep shifting on you so this notion that you can make higher returns based on ESG just doesn't stand up on Common Sense and that data doesn't back it up the reason BlackRock head of and sustained body cannot get on a public panel now is they have a problem because if being good costs you returns right if you've got to give up returns and remember BlackRock doesn't invest its own money it's investing your money my money other people's pension money and by superimposing not those people's definition of good but Larry thinks definition of good they deliver 30 basis points less than they should be you got a fiduciary problem the size of several elephants and it's only a matter of time before that stuff hits the fan so this notion that investing in good companies is going to deliver higher Returns come on when something sounds too good to be true it's not true okay now sometimes when I do these ESC sessions they show it's not good for Value it's not good for returns the final fallback is but it's good for society really yes he's done such an amazing job on energy right you know what percentage of our energy came from fossil fuels 10 years ago before ESC took off about 82 percent you know what percentage of our energy comes from fossil fuels today about 82 percent maybe 83 percent so where's all the good stuff happening remember an engine one celebrated that famous Victory engine what is little active is fun takes a position in Exxon Mobil and it would amazing fight where it gets Exxon Mobil to sell some of its fossil fuel reserves amazing you've done a great job the key word is sell if you sell your results what's happening somebody is buying those results right I'm going to show you a graph you know how much money private Equity has invested in fossil fuels in the last 15 years about a trillion and a half so what have you accomplished with the SJ you've taken it out of the hands of companies like Royal Dutch and Exxon Mobil where you're at a semblance of a hope of perhaps developing in a more sensible way you put it in the hands of some of the least scrupulous people on the face of the Earth and then you step back and say what are good things happening and then you get the final fallback which is but I want to make the world a better place we all do this is not about do you want to make the of course we do the question is how do I do it without having ESC how did we live before 2008 we must have been what barbarians going around in the chopping each other's heads off this notion that until ESC came along virtue hadn't been invented is the implicit message right you're in a building named after Bernard Baruch the man made his money in investing in business but he gave a big chunk of it back to society right Warren Buffett and Peter Lynch have giving pledges and I know you might have issues with it and and I'm sorry Warren Buffett and um Bill Gates and he might have issues with Bill Gates on vaccinations I won't fight that fight with you but they're giving pledges during the lifetime this notion that until ESC came along nobody thought about virtue is absurd you know what he is he's trying to do it's taking decisions that used to be made at the individual level and it's trying to make it collectivist if you think that this process is not going to create a backlash you've been living in a cave and as you know in the last two years you got it's in the middle of a political mail storm right the red State savior BSG we're not going to use you the blue States is this where you want business to be but when ESC people complain about the political backlash on ESG I'm reminded of pyromaniacs complaining about the fires all over the place you brought politics into this process with that s in ESC namely one social issue but there's consensus I can't think of a single one you can try to dress it up and make it as you know non-provocative as possible but once you start digging there's going to be disagreement so how the heck does sustained analytics decide which side of the social divide makes you a good company and which one makes it a bad company so we've got a lot to talk about so let's start with the first question let me pause if you have any are there any issues so clearly I've laid out a very balanced view of ESG yeah good so means you seem to have taken the approach of equating ESG with goodness what's the basis for that because if you look back at the dimension Kofi Annan at the intention of the principles for responsible investment the six principles only refer to the fact that ESG would be taken into account an investment decision making and what was the end game what did Kofi Annan hope to get from ESC being taken so what do you think ESG measures what do you think of it whatever different things and that's exactly my point so how the heck can sustain analytics put a score on that but is that confusion ever going to go away this is as long as people have been on the face of the Earth we have different religions because you've heard of Islamic Finance right and you've also heard of the the Anna domini fund have you heard of it this is you know people old enough probably the only dominated fund was actually a fund created around Catholic principles it said we're going to invest in companies that follow essentially what we think of as goodness and you're saying how's that different from ESA well if you go back and look I looked at the prospectus for the anodominee fund they said if you invest with us you will make 50 basis points less than on the market but you go to heaven that's a bit trade-off right so basically so that that I understand so if you want to give up something for a bigger benefit you want climate change and that's why I said this problem started when they decided not to sugarcoat the cause and sell you on the plus I agree with you I don't know what their ESU measures goodness in fact when I contested sustained analytics as they said it measures risk now I said really welcome to this Arena because I live with risk every day I said what kind of risk Equity risk or default risk it's clear the Morning Star person hadn't thought about this yet he said no it could be any kind of risk I said is it risk that is captured in the financials the risk that will not be he hadn't thought about it if you're going to use risk as your if that's what's measuring at least let's start to get explicit because we get explicit then I can measure whether you're actually delivering on that risk right how do we know ratings measure default risk what does Moody's and s p do every year that lets you at least on average believe that ratings measured a fortress every year they update this they have a table where they take the ratings from 10 20 30 years ago and they track what percentage of companies within each ratings class actually default here's the good news AAA rated bonds point zero three percent Triple C rated bonds about 23.33 percent at least we can hold them accountable we can disagree with ratings agencies but the reason we use ratings is at least then if you don't tell me what risk you're measuring how do I hold you accountable you can't tell me after the fact you know you know what if you'd use DSG you would never invest in value it how do I know that in fact do you know that companies operating in Russia before the Russian invasion had higher ESG scores than companies not operating in Russia there's nothing that I've got from ESC scores that don't want me after the fact they said we're now going to bring in country risk into ESG okay every time something happens you're going to bring it in because let's play along let's say you bring China risk into ESG the company with exposed China now we're going to test how much companies are willing to pay for a higher ESG score remember how quickly companies left Russia right after it invaded Ukraine what I because companies had minuscule percentages of revenues McDonald's might have been one of the bigger exposures minus outside of oil companies and a very few no maybe service companies so leaving Russia was giving up one and a half percent so when I wrote about the Russia Ukraine Invasion I said I'd be interested to know if China invades Taiwan how many companies are going to say I'm going to do the right thing and get our Channel I hope we don't have to run that experiment in real time but when 30 of your revenues come from China and half your manufacturing is in China how the heck do you walk away as easily it's easy to make these small sacrifices say look how good I am and that's what we're encouraging come to the companies do we're putting gestures of goodness over actual goodness so let's start with you're good maybe help me out so what tell me what am I not understanding about ESG en investors which are there such as well it's true this is the E part of ESG what about the as part show me one measure of s that is stuck E I agree with you right we can talk about climate change we can talk name Me One S issue right that's still in the East that that's totally the E part of the s e is here okay so what about so okay Okay so as an investor then tell me the consequences it does it mean you get higher returns by avoiding companies like that so I yeah yeah one ESG investing material issue different sectors that have been defined by standards and yes while there is some disagreement between the different different agencies to have some differences of them right what they're mainly looking for well cover risk across when are they doing a good job Facebook the ESG Mobile in my right if it's um and tell me what investor doesn't want someone that is at faces cyber security risk to not invest in cyber insurance and data privacy measures but I don't disagree with you the question is is that measure helping actually catch that risk I would argue that nothing in the sustained analytics ESG score helps me on that Dimension that it's become a check box absolutely I have because I've seen the scores right it doesn't matter what they say look at what they do all I have to do is look at their scores and look at the companies you know that I was going to show this graph do you know that larger companies have higher ESG scores than smaller companies it's well established are you telling me the larger companies are more noble than smaller companies better run less risky I don't think so ESG has become we teach in Business Schools 20 remember 1981 Business Schools started ranked a business week started ranking Business Schools and then once they started ranking they created a gaming model that Business Schools learn to play the minute you start attaching a score to something it is going to get gained you might call it green washing but green washing is not a bug it's a feature you create a game people are going to game it and ESG is being gained like no other measure that I've ever seen so when I see sister they've given me I read the whole document of what they claim to do but ultimately you're delivering a score the test is what do your scores tell me about companies you have to put the adani group I wrote about it on Saturday I put out I put I put it posted on Saturday night at 11 PM I woke up the next morning and there were 50 people 50 000 people had watched that YouTube video the adani group is an infrastructure company in India politically connected ESG scores really high it's played the check box really well much as the services like to talk about what they'd like to measure this is what you actually put out as a score is the most revealing part of what you do I don't care how Noble you make the process look the scores don't lie and they don't measure either risk or goodness on any dimension now we can say if we can fix the scores make them less you can't fix scores once you have a scoring system people will game it it's Human Nature and guess who has the most resources to give big companies profitable companies I'm laying the foundations for why some companies often have higher scores this is very you know the direction of the causation can be both ways right our ESC companies profitable or profitable companies able to play the ESC game better so you can believe the hype that comes out of the service about what they claim to measure but you look at the actual number and he said does that measure my exposure to all these material risk and now you know from a valuation I look at that score and I said this tells me absolutely nothing about exposure I have to do my own digging to do the exposure because it's not being captured in the score so I think services are painting a picture of what they're measuring that is so fuzzy you can't even critique it because it said that's not it's you know the old um the old arguments against socialism you'd say you know socialism hasn't worked and you said but it's not being done the right way right if they just did it the way it should be done it would have worked and you get this with ESG as well which is you point out that it's not working it hasn't worked and they say if only we did it the right way okay so I'll show you the scores you can make your judgments for yourselves but essentially the notion that you can measure ESU whether it's goodness or risk at a collective level when in fact you're trying to bring in factors that are no let's face it if ESC is actually material in the immediate numbers you wouldn't need ESG right because what is material mean it's already showing up in the earnings it's already showing up in the cash flows I don't need that very notion of ESC means it's not quite material now but it could be material in the future right otherwise you wouldn't need this as an extra add-on yep the intent of having escs to make money the question was about the intent of having ESC whether it's to Foster it's a foster disclosure more than technological innovation right let's face it that's where the ESC trade is going is they want companies to disclose the disclosure leads to change afterwards we can argue but the immediate you know aim is we'd like companies to disclose right so if you're saying what's wrong with that and I don't have a problem with it I think disclosure is good but I do have a problem with the notion that more information is better than less information that disclosing more makes us more informed last year I actually wrote a piece called disclosure diarrhea because I live with 10ks I've seen prospectuses I'll give you an example you know what Microsoft went public in 1986 it filed a prospectus like all companies had to do you know how long the Microsoft prospectus was 66 pages Airbnb Uber they all went public what 2019. you know how long the Airbnb prospectus was 450 pages 50 pages of that was one of the most useless disclosures of all time it's called the risk section have you ever because it's clearly written by lawyers for lawyers it'll say things like competition might be stronger than expected our earnings will drop thank you for letting me know I never thought about that until you mentioned it The prominent disclosure diarrhea is you reach a Tipping Point and we know this from psychology we stop reading completely in a strange way companies disclose more but investors seem to know less it's almost like this process is and it's intentional they're drowning you with data hoping you don't catch the information we're mistaking data for information I'll predict and I hope I'm wrong in this that five years from now every company is going to have a 200 Page ESG disclosure it's already happening in Europe I'll also predict that two things will happen nobody would read those disclosures much as we like to talk about how much we care about them and second we're going to miss the big stuff from the store the small stuff and I'll give you one example of this in California we have this very strange system of direct democracy where people can actually change laws to propositions so you can put a proposition on and say everybody's last name should start with n I'm just picking an absurd example and if 51 of Californians vote Yes the proposition pass you can go and you know contest in the court saying this is constitutionally but they pass you know and you know people get propositions on so about 1986 it's a proposition called prop 65. it's a proposition written with the best of intentions you know what it requires companies to do if any of the products any of the inputs to their products can create cancer you have to disclose it we all agree that that's a good thing right the only problem is you pass the proposition it becomes law everybody worries but no remember some of you inputs you have no idea whether it causes cancer or not and of course a whole horde of lawyers let's remember disclosure also created I mean there's money being made there's entire legal teams being created in for so a legal team comes out and they basically start suing companies your product could so you know what companies started doing disclosing that their product I mean I want I mean I'm not kidding I walk into my taco stand in La Jolla and there's a there's a notice up there prop 65 requires us to tell you that tacos could cause cancer I'm not kidding okay what in the taco is it the cilantro he said I don't know but I just put it up there this way I'm protected but here are the consequences about four weeks after that I come out of my house my neighbor's son is outside smoking a cigarette not weed because San Diego you take a dog for a walk you come back high there's so much weed and no smoke in the air he's smoking a cigarette and I said what are you doing you know you know cigarettes cause cancer you know what his answer was everything causes cancer talk us as candid this is what happens when you mix the big stuff with the small stuff I'll tell you what's going to happen to climate disclosure you're going to get 500 items disclosed and some will matter and some will not survive advice on the disclosure front less is more decide on the three climate disclosures that you like companies make and stick with those three and I like what you said about what companies I don't want Facebook disclosing that carbon footprint I want them to focus on disclosing their privacy issues the problem is the way disclosure laws are written it's one size fits all right so you'll have 50 pages from Facebook and how little carbon footprint they have this is like when you buy meat and it says gluten free you know this is you would say gluten-free what the heck is I mean I know it's gluten it's meat I know you're not adding wheat to the damn thing but it's gluten-free same thing starts to happen when you make companies disclose things on things they really don't have you know much of an impact on so I'll present my my measurement part and I want you to go back and look at not what sustain analytics says they measure but discourse take any sector where you're familiar with the companies look at the scores and ask yourself a question is this core giving me a rough sense of which oil companies most exposed to these risks and which companies least exposed I'll let you be the judge pick whatever sector you feel comfortable pick the ESC scores so when you look at the ESC server they keep Shifting the Target on me when I said goodness the original idea was was basically going around telling people you know you you feel a little guilty about making a lot of money in this market you know buy an ESC fund and that might not have been the actual full text but that was a subtext so if you think goodness has not been part of the conversation that's a recent phenomenon the original push for ESG was not based on risk it was based on goodness they've changed their I can go back in and find you actual ESC pushes advocates in the middle of the last decade and somewhere in the last four years they've discovered that this is not defensible anymore that risk is a more defensible part we'll come back that's actually a debatable question are high ESC companies less risky yep so I fully agree on the whole ESG perspective that you're saying but you know when it comes to G the governance part you know every time we are valuing a company when we take up a growth number in our mind it it it is actually backed up by the governance right like for example with adani or with star ecosystem we were we were so you know I absolutely agree and I've always wondered why the G is an ESG and I'll tell you why it's an issue the traditional history of corporate governance is about managers being accountable to shareholders right you go back 50 years you look at the you know what the G in ESG is for that manages are accountable to stakeholders you know when people are accountable to everyone they're accountable to no one it's one of The Facts of Life because it allows you to blame somebody else right why was my stock done because I had to take care of the bondholders you go to the bond orders why is my price oh because I take care of it's amazing how I mean CEOs love this stakeholder wealth maximization is a mirage right I call it the Kumbaya view of the world you know we're going to have all the state it's absurd that that 2019 Round Table you know the Business Roundtable thing one of the worst written documents of all time as I read it I said I hope you guys never have to actually sit in your own companies and make project decisions and financing decisions because you give me a template that basically leads me to decision paralysis so when I see the G in ESG I'm reminded you guys are too young to remember there was an East Germany and a West Germany you know what East Germany was called anybody remember the German Democratic Republic there was nothing Democratic about the about East Germany there was nothing Republic about the East Germany but why did they use it it's orwellian right if I recall ourselves the German it's a People's Republic of China come on guys you really think somebody Beijing what will the people want you think that's the driving force the G in ESC needs to be removed and the strongest evidence for years he actually comes from the G part but the corporate governance part so they've actually extracted the good stuff from the governance research claim that it's in support of ESG and they say no that's a different G this is not the G that so I agree with you that governance matters but not the G issue we should have a different structure you know what you're already saying why the heck did you bundle these three together right I mean if I had my draw this I take the E and keep it separate because I think there's more consensus more measurable more disclosure you can make arguments about risk that are cleaner the S part let's get rid of it the ass part I think you're asking for trouble you're going to get you're putting yourself in the heart of politics right for some companies you might have no choice because your employees have some you might have to do it but you don't want to be drawn into Political conversations when do you really want the word to look like politics has looked here for the last decade everything is toxic every company will look like a Twitter board after this right I mean it's you know people insult and that's the S part so I think you're raising a good question why the hell did they bundle e and the S and the g in once I don't know but maybe to create something that's so fuzzy that you can't even attack it right because the attack is it that's not what I meant this is the different definition I have so the measure Point part of esj first it's fuzzy I mean if it's material you don't need it right it's material I see it in the earnings already I don't need ESC to convince me otherwise so it has to be future materiality based on what you think will matter in the long term you are forward-looking I actually had the singular misfortune of talking to 50 csos never heard of a CSO right you know what CSO is a chief sustainability officer it's a very large companies so I was just curious I said what do you guys do what is the chief sustainability officer I can understand making the the Earth more sustainable right but what does it mean when you say you make a company more sustainable is it like the Egyptian pharaohs who wanted to live forever you know what their plan was right after they died they wrapped themselves in in bandages put themselves in the Crypt and say surround me with my favorite stuff and you know what happened 2000 years later some British explorer came and stole all their stuff the notion of corporate sustainability strikes me as absurd companies grow they mature they Decline and they die let them go so I said what exactly is your job and it's amazing how much confusion there was in the room about what exactly they did so I'll give you from the most benign to the most malignant version the most belind version was forward thinking we tell the company about things that could happen 10 years from now I said did you go to the Dalai Lama School of no I mean you must be some kind of a deep thinker long term to make yourself special the second and these are the more honest people said we're like Jiminy Cricket they didn't use that word but that's what I read remember the Pinocchio movies what does Jiminy Cricket do he stands in Pinocchio shoulder and he reminds him right he's a conscience he's like with a corporate conscience okay that I can get you know so you're basically in that room and as companies make big decisions here but you need to think about it you know what Pinocchio did with Jiminy Cricket though right completely ignored him and it's only when he got into trouble you know or whatever that Island was that he went to it's that's when he said you know I what I should have listened and the third is this version of you know we're going to create companies that last forever that's terrifying that's terrifying because this morning I was talking to night I don't do Consulting but I talk to people in different companies because they're just interested in getting abused I guess so this is Weight Watchers right Weight Watchers companies been around 60 years company that's aging and I started the session by asking did you see lizzo on the stage yesterday and in a sense the reason I was bringing that up was here you have the core of the problem right which is 50 years ago when Weight Watchers started what was the end game we'll make we'll help you lose 15 pounds and we'll give you support in losing that where in a world where that might itself be off the table right so I think there's a point at which companies have to wake up and say you know what our best days are behind us and it's time to Coast to the end CEOs fight it till the better end they want to preserve they want to grow why because when was the last time you saw a movie about a CEO made his company smaller I haven't but I've seen lots of movies about Empire Builders right we celebrate people who make their companies bigger we denigrate companies people even if it's the right thing to do so ESG as and at least in its Brothers form is fuzzy it is person specific that's why I said if we go around each of us came up with a measure of yesterday our wage will be different in fact one of the tests I run is I give you know people students in my class before I give them the ESC measurement I give them 10 companies and ask them to rank it on an ESC basis from best to West guess what there's almost no correlation depending on you know what you value most you're going to you know but it's still being measured that monster is out of the gate it's not going back companies are making decisions based on that score that's a terrifying part now I talked to a student of mine who's high up in BHP BHP as you know is an Australian mining company and he said we're planning to sell off our Oil Business they have an oil business inside I said why he said because we sell it over ESG score we'll jump Five Points I said okay that's amazing congratulations for saving the word your ese scores goes up Five Points your oil business ends up in somebody else's hands at least be honest about what you've accomplished you've improved your ASG score but you did it because you think somehow that ESC score is going to deliver more returns at a higher price for you now just you don't even need this graph but what we value varies across people it varies across age so this actually came from a panel where they asked people what do you care about and what older people felt went into you know what they value it's very different from what younger people do I'd love to know what the ages of the people are at Morningstar sustain Analytics wouldn't you do you think that matters of course it does and that shouldn't right if this is truly something objective you're measuring risk why should it matter whether a bunch of 25 year olds measure it or a bunch of 50 year olds measure it but it does seem to change so here's the bottom line because you're measuring something that it's not that's unmeasurable but measurable differently by different people there is no consensus the rankings are all over the place and the definitions keep shifting so today it's risk I'll wait if risk stops working they will find something else that they claim ESU measures I'm waiting for it but when they come up with it I'm going to hit them with the data say okay let's see if in fact that's what you measuring so there are lots of research on this front where if you look at the correlation edsg scores across services you discover very quickly you know the correlation across Bond ratings across companies is like 0.97 Moody's and s p disagree but the disagreements are rare the Agreements are with ESC you're all over the place does that surprise me not in the least as I said I'd love to get all of the ESC service in one room first look at the ages and the the backgrounds of each table and I can probably predict what they're waiting in more and you're going to get very different scores and even on big companies this is not just low profile companies on high profile companies there's disagreement about whether these companies score high or low But Here Comes the most Troublesome part I talked about this as companies get bigger their ESG scores go up that makes no sense to me makes no sense to me unless in your world somehow bigger companies are creating less social costs and less exposure there is I think they actually create more but they know how to play the game better and as disclosures go up the collective ESC scores for all companies are going up this is amazing we're making companies so we must live in a world surrounded by much better behaved companies than 10 years ago right at least that's what the ESC Services seem to suggest yes no one cares the brutally honest truth is this is all the lipstick for The Branding if they don't want it to have any impact on this investment decision making on important for uh for both for social responsibility and for The Branding of the company that they're doing something that's that's what we're thinking the the what while I I hear everything you're saying sharing there's another there's a number of benefits that have come from this and I think one of the questions one of the things that I'd like to assure is where do you where do you this new industry and where do you see it involving code 510 the acronym I'd most like to see attached to it is Rip rest in peace right rest in peace I mean this is I think an acronym that needs to be throttled in the Cradle I know it's a terrible you know you know Vision to have but this nothing good is going to come out of this nothing good you're going to get 200 pages of disclosure you're going to get an ecosystem of people who will be effectively feeding into the system but I think we risk doing more damage to the society we claim to help them good because we're allowing companies the original paper I wrote in 2019 on esgs do you want to do good or do you want to sound good and unfortunately sounding good has become much more critical than doing good and I don't see anything good coming out of this space I used to in 2019 think it could be saved I no longer do I think it's got to be split up into e the S and the g Parts I think we need to be open and clear about what exactly the risks we're talking about if that is going to be the selling point is it risk in cash flows risk in earnings risk in the company might go under is it reputational risk and how it plays out and then we need to hold these Services accountable because they claim that it measures that kind of risk I'm going to come back and say five years later it doesn't look like you got any of the companies that had reputational collapses we need to hold Services accountable and for that to happen we need them to start to get specific so that's going to be my job is to nail them down so I hope that I get another chance with Morningstar and I hope I can nail them down on exactly what risk they're supposedly measuring because then I can track it and be maybe the right yeah exactly the point and do you want a score where companies which have more time to fill out boxes get higher scores than companies with less time there'll always be small those small companies get larger maybe their problems will be fixed but guess what new small companies are going to come in if you've ever worked at a small business you have so many operating things to do right you got to survive the last thing you have time to do is sit with the morning the sustain analytics you know the 15-page questionnaire they sent you and fill out all the boxes so I don't disagree with you companies with more resources will be able to check those boxes it's not like they're becoming better companies but they're I mean I'll get I'll give you the analogy with corporate governance about 25 years ago we had a corporate governance crisis in the US remember that Enron Taiko and we said we're going to solve that problem law schools are very excited about this and how do we solve the problem we sorbetoxley was passed as a law and then we had these corporate governance Services measuring corporate governance scores amazing we're in a new trajectory 20 years later I have a question for you do you have let if corporate governance historic measure is shareholders a power of a managers do you feel you have more power over managers today than you did 20 years ago and I use Facebook as my example I wrote about this four months ago what have we allowed companies to do in the last 20 years it's kind of devastated corporate governance in its core actually it's worse than that I didn't even tell you how bad it was it's worse than that I'd love it [Music] start that uh small company it's not so much small companies public companies I'll play make a prediction if we keep pushing ESG into the public company space we're going to push companies behind the code right conference about about eight thousand not the number of governments and now we're at 70 because I track it at the start of every year at 7 300 now it used to be eight thousand one hundred twenty years ago right now by itself it's not a large enough decline that you can say the world is shifted but I think that if we keep pushing this publicly trade no there are eight but seven thousand three and you're going to capitalize some are really tiny they're not listed on the exchanges but you can trade them right they're all over the counter and that destroys creativity that's I mean yeah but that's I think an argument to be had about disclosure but that's a disclosure argument right it's all about not just ESC but about corporate disclosures the burden it might put on companies but that's I think and that's what that's what my disclosure diarrhea paper was about is we're creating a system where people with resources companies with resources get an advantage of companies without resources because they can game the system better right and that's not what we want to do so I think you're on to something the reason small companies might have lower scores is because they can't put the resources needed I'll tell you smaller Business Schools have always struggled against bigger Business Schools on the business week rankings have you I actually I've never been a Dean I have no desire to be a Dean I don't even think about I have nightmares about being a team but actually my good friend was a dean at uh at Stern and he was he was given the responsibility I think he must have done something bad in a previous life of filling out those Business Week forms for the rankings you how many items there are just now how much data has to be collected how many he had a team of five working for him collecting data to fill out that and it's turned we're big enough we can have five people have nothing to do maybe 50 people nothing to do filling out the form but if you're a smaller business school you're going to have a much more difficult time going through that process so I'm not disagreeing with it but saying should you get rankings based on who has the most resources to fill out these forms are you really measuring how good a business school is right so I think that that's really what troubles me is you shouldn't be giving people a company's higher scores because they have the resources to do it yes go ahead yeah I would thank you the question is if ESC is so flawed how come so many people are jumping on the ESC bandwagon right they're not as many people jumping on now as three years ago but they were at its peak this was this was the place to be do you want to be the person when I wrote my first post on EST I said look you're going to label me as a moral troglodyte for what I'm going to say because it looked like I'm arguing against this notion of making the world a better place do you want to be at a meeting where you say you know what guys this is really not doing much of the work it's tough to be against ESG this is not like a financial argument it's an argument about virtue at its core that's why I don't think this risk argument holds up if this was just about risk it'd be a much cleaner argument but whether you like it or not goodness is in the room with you and arguing and I think that was what made the discussion so unhealthy for the first decade is people felt intimidated about pushing back I don't care now as I said I don't care if in NYU fires me and if I don't care if people don't like me I don't care if you know something but I'm lucky enough not to care if you're 35 years old and you're a faculty mentored business school it is not a good idea to make the center of your research I'm going to show that he or she doesn't work maybe easier now than four years ago four years old nobody wanted to be on the other side of this argument it's like when have you when did you stop beating your wife kind of question right I mean what kind of answer can you give to that it's a kind of question to which there's no good defensible answer so people stop talking speaking up yes internet and Twitter and all the postings all this information now becomes available to everyone so when you say this information what are we talking about we're talking about the goodness yeah you know oh Badness right or bad news right I mean what's happened is that social media Facebook all these other this would never ever ever come up 20 years ago because that wasn't that kind of communication so yeah you're posting and saying well this is not good you get 50 000 hits and all these 10. yeah maybe you'll make the argument that maybe we don't need these Services right because each of us reads a post we each make our judgment and that's good because our wager that you could look at a tweet and say that's really good news and I could look at the same tweet and say terrible I want to invest in the company and that's exactly the right response to goodness right I shouldn't be telling you how to respond to a tweet because I've defined this as good and this is bad so is is financial if you do this as your premises things will be better yep so people say oh I want to make money but if it's Financial you can hold it accountable right yeah it's just communicating things like this to a broad audience saying okay I'll invest in this I didn't even know this existence aren't we getting a little jaded when everybody tells us how good they are I mean it's a I think that's Financial Community that's leveraging no but everybody is right it's not Financial it's Consultants no but I think that that's going to be my next party is there a financial payoff to being good and as I said for something to affect value I I'm very simple proposition it's called the it proposition you know the proposition says if it does not affect the cash flows in the long term and it does not affect risk it cannot affect value what's it you name it control brand name great management so when I first looked at DSC I said where is it is it showing up as higher growth is it showing up as higher margin does it mean the companies so I'm going to go through Box by box and look at what I saw reading the evidence and I'm going to try to be as unbiased as I can about the evidence and you make a judgment on whether ESG is good for value with the Larry let's start with the growth do you think companies that score higher and EAC no matter what the definition of esgs whether it's goodness or risk that they grow faster I often ask ESG people to give me an example of a company that benefits from ESC you know how often Patagonia comes up that's a company built on goodness this Patagonia do sell overpriced outerwear to guilty yuppies let's be quite clear right I mean this isn't a comp you're when you put that 400 Patagonia jacket you could say look I'm saving the world come on this is not even beginning to save the world but when somebody brings up Patagonia I ask them a question you know how much revenue Patagonia had last year you know not one EST person who's brought a paragonia is the answer to that anybody want to guess how much revenues Patagonia had last year but 800 million so can it afford to play the goodness game you're playing to a niche Community right if I take what worked at Patagonia and put into Nike 35 40 billion dollars in Revenue selling to every part of the world I would be in devastating trouble so I'll make the statement and I'm willing to be shown wrong in this that goodness actually puts a cap on growth that maybe you have to accept the fact that you can grow only so much Etsy ran into the decision very practical terms so those of you remember Etsy was started as a benefit Corporation you are the benefit corporations right the objective is to not just maximize shareholders you're going to make the charge the benefit Corporation in 2011-12 about two years in its public existence it decided to abandon its benefit corporate status CEO quit the reason they had to abandon they discovered that to stay a benefit cooperation they had to make choices about do we want to get bigger or do we want to stay at the size we are and they decide to go back I'm not saying they made the right decision of the wrong decision but ESG to me puts a cap on growth it doesn't put up you know push-up on growth so growth no what about margins this is perhaps the argument you'll often hear in fact we have a sustainability group at NYU I know they have an entire floor and lots of people in that floor I don't know what they do but they actually didn't know they put out a paper on profitability and ESG and the paper basically it was CFA they probably had to bring in somebody from the outside to measure margins and the paper basically shows that higher ESG score companies of higher margins this is good news right and it was actually you know at the risk of simplifying the paper is basically a regression of margins against the AC scores look another the correlation is positive you know when I'm going to ask you to run a regression of how much somebody spends at Whole Foods and how wealthy they are I'm going to make a statement you know how you get rich you shop at Whole Foods yes I have an aggression to back it up there's a causation problem here you don't get rich by shopping at Whole Foods you shop at Whole Foods because you're rich so I I had a very simple question I actually wrote to a couple of these researchers and I said it's interesting that you've shown that correlation can you tell me which direction the causation runs and they said it can't be done no it can't be done you know how you do it you take changes in ESC scores in a year and you look at changes in profitability in subsequent years and if your case is right when you ESC scores go up your profitability should go up I ran that regression myself and the correlation is negative to zero a lot of ESC research is written by Advocates not researchers and that's a problem on the reinvestment front there's almost nothing that I saw in the research right because it depends on the sector you're an infrastructure company okay what they're good or bad you got to build an airport you got to build a damn airport it might actually cost you more if you want to meet all the ESC constraints I'm glad a society that you spent more on it but spending more can't lead to higher cash flows it's going to lead lower cash flows which brings me to the risk front and I'll give you the good news first there is some evidence that in one sector and I'm going to focus on the one sector that there's been a relationship between ESG and Costa Capital you know that's actress energy and here's why over the last decade we've increasingly pushed away from fossil fuel companies as investors we got endowment funds too and when you have fewer people investing in fossil fuel stocks you're going to push up the required return which is effectively a higher cost of equity and we've been very generous with green companies in terms of supplying equity and don't even get me started on green bonds because that's an entirely new kettle of fish to open up but the the that in this sector there's been but when people and I heard the Morningstar sustain analytics person say this they said and Mackenzie said the same thing on in one of their statements they said higher ESC scores lead to lower costs of capital and I said stop making up crap because that is crap at the start of every year I compute the cost of capital for every single publicly traded company in the face of the Earth 47 000 companies I could correlate against whatever you want so if you tell me that you know big companies of lower cost of capital I'll run the regression and tell you and when they said good ESG companies have you know lower cost of capital I said okay it's a testable proposition so I took the 47 000 companies only a subset of ESC scores right three thousand two thousand five hundred companies and I did a scatter plot right of ESC scores against Costa capital if you're right the scatter plot should have a downward sloping line it wasn't even close in fact the kinds of companies that ESG has kind of focused on over the last decade tend to be technology companies come in fact it's it's a system that's skewed in favor of businesses with intangible assets right because that's the only number that's a number that I have esg's course because I had to get an actual score for a company at least that's all I could find on the sustain analytics uh database maybe they have more that they don't reveal that's what I use you know I would be glad you know what they're if they give me the scores I will test it right so I can't download them for 3 000 companies right I mean I don't have the download capacity so if they were willing so you think it used okay so why don't you send me the SC scores for whatever service you think is the best service I will be willing to wager a hundred dollars that there's no correlation between the ESC scores and cost again I'd be glad right because I have the cost of capital data you give me the SG data this is a five minute job right I am not spending money for an ESG score I'll be quite honest I don't want to put more gravy in this gravy train than it already has I'm unwilling to make that investment but if somebody I mean I wrote to all the years the ESC people said send me your scores because you keep claiming the the only one that I have access to through NYU systematics I used it and there at least there's no correlation so the next time somebody tells you the company's highest G scores have lower cost of capital tell them ask them where are you getting this what is the basis for this there's one area where I think you could make the argument that not pushing because in a sense we think about ESC scores as measuring how much you're pushing the limits of what's acceptable to society or whatever front you want you could make the argument that companies that walk too close to the line risk walking over the line remember Valiant you know what Valiant did right what was its business model it would buy drugs that were that were for a small segment of society that treated that were they had been in patent 10 11 12 years there was seasoned drugs they would buy the drugs or the company that owned the drugs and after they bought them they would reprice them which is a nice way of saying they'd increase the price 54. so think of this as Martin true Kelly without the craziness right because if you go to montessor Kelly that's basically what he did it's a business model that made a lot of money but it's a business model that flirted with disaster every day right when they were small nobody noticed when you become a hundred billion dollar company and you're selling a drug for five thousand dollars that used to be fifty dollars you are going to end up in the public eye and they did and when they did all kinds of stuff came out about them the company blew up the company is now called Bausch and long they it got so toxic that they'd renamed themselves lost 90 of the market cap what's a lesson there don't be bad don't walk too close to the line I don't need ESC to tell me this you're doing it because you got greedy you you're doing this because you don't care about value you care about next year's earnings there is this subset of it there are very few investors who've actually made me I see the one small group that might have our activist investors who Target companies that walk too close to life and try to bring them back in line in fact since we're getting close to time let's talk about the link between returns and ESG so you're welcome to play with this model and say where does it show up in fact I create this I talked about religion and I use that you know there's this version of ESC where the good go to heaven is gonna very little evidence of this there's a version of ESG where the bad go to hell a little more evidence of that there's a version which is actually as a satanic version where the bad actually Ruled the Earth right and there are lots of companies that I look at and say there's that company shouldn't I mean vedanta an Indian Mining Company take a look at its insight and say you know how does a company like this get to the value that it does and you could argue that no telling companies being good is automatically good for Value might make you feel good but the reality is the truth is not just a lot grayer it could be pushing in the opposite direction somebody back there had a question yes go ahead [Music] yeah or adopting an environmentally conscious practice are more extensive the problem is if it's meaningful for Value creation it would happen right there well you sing and uh and do you need it so the question is did you need ESC for that that's it but here's why I say let's agree that climate change is the existential problem for those of us on the face of the Earth let's say we all have consensus in this room here's my question do you want companies to voluntarily decide how they're going to play the climate change game which is what happened to the AC or is this something that we need to do as a society with laws and regulation the answer is no it's a no-brainer right because if you like just publicly traded companies DSG scores have to play the game you have what did happen in Exxon Mobil at BHP it's not like the bad stuff will go away it'll get I'll make a prediction the fossil fuel business over time is going to get privatized you're going to end up with privately owned companies the sustain analytics can't reach you anymore you're privately owned you're not dependent on markets you don't care whether NYU invest in you Harvard and because you're no longer and open I'll make a prediction that that is exactly where you're going to push companies you're going to push them behind the curtain and when you look at the publicly traded company companies you're going to feel much better about what you're doing but the bad stuff is still happening behind the curtain so if we want to talk about green energy being value creating let's get real what's your turn what are the alternative energy sources you go outside for suitcase why are we soil why haven't solar energy and you know Hydro and win taken off because you need the sun to be shining and save the energy we have a battery the nature of those energy sources is they can never provide enough energy to keep the globe going unless we're willing to get rid of our refrigerators and our electrical appliances which we're very glad to lecture the rest of the world on right we're telling the Indians you know what you shouldn't be buying a refrigerator it's bad for the environment and their reaction is go jump off a cliff you've spent 80 years buying whatever you want now you're telling us I mean it's amazing how how much of the ESG prescriptions are coming out of London and New York for the rest of the world there are two and a half billion people in India and China a lot of them are not thinking about climate change they're thinking about survival through tonight we need to create a prescription that actually is practical that's why this glass Glasgow Paris this this Davos area this kind of dance that we just need to put an end to because every time they come out they put a these completely unrealistic Targets in 10 years there'll be a 30 reduction in Glo yeah fine Ten Years Later there was a three percent we missed a zero don't pick on us we put a 40 percent let's get real about what we can do and that requires that we start I mean this is the reason Tariq fancy used to head black Crocs sustainability group and Terence Kelly also used to be a lot of people are leaving BlackRock to tell the story have read their stuff because basically their question is do you want to trust Jamie Diamond and Larry Fink to be making decisions for society when those are decisions we need to make weave in a sense walked away from our own responsibilities right in terms of electing people who will make I mean we can get jaded that's not going to happen in the U.S but that already is a problem if you've given up on that the change isn't going to happen it's just not going to happen with ESG and pushing it on companies and measuring scores you know I'm willing to make bets about 10 years from now what will happen but my side is going to be a very cynical side we're going to be a lot of people making money on ESG companies are going to be doing exactly what they're doing now we're still going to be 82 dependent on fossil fuels climate change is going to be right there and we're still going to be talking about no why aren't companies behaving better yes so I'm glad you brought up you know cynically ESG is gonna keep going so you know uh you said being good is not good for companies I didn't say that I said being good can be good for some companies it can be neutral for others it can be bad for other companies just like any other dimension right the belief does nothing for companies right beliefs don't belief has to turn to actions nobody it does it creates a business model for that yeah so uh you know just as use the business weekly rating I'm sure that wasn't good for students trying to find a good college but it was good for business weekly so if you were going to invest in any of these would you invest in any of these companies like ftse uh BlackRock NASDAQ it's a good question right if you want to play a cynical ESC game the best way to play it is to buy one of the companies it's that supplies the ecosystem but here's the problem you know Blackrock in a sense was too big to play this game right it's 11 trillion and when you play this game and the backlash comes you have to if you want to start an ESG file you probably should start it as confined fund without any side cost because you can't have 11 most of the 11 trillion don't buy into your notion of ESG so I would say Focus there are some investment funds out there that are far more concentrated on ESG funds that's all they sell they don't have very much business those would be the funds that invest in BlackRock I think has bought itself a whole host of trouble with this today if you ask Larry Fink is probably sorry ever brought up ESC right and it's not just the political backlash it's a fiduciary issues that are coming up the kinds of things you can or cannot say as a BlackRock executive now and I think that um no but you're right if you want to make money into space go with the people or selling ESG not to the people of buying ESG yes okay there are two parts to that let me repeat the question question was you know price is it by demand and supply and if people are more demand for companies that are viewed as good companies or high ESC companies wouldn't their price get pushed up and your question was what about the rest of us no no you've have you taken a look at Unilever it is one of the most laughable examples of trying to force ESG on something that doesn't fit right they have an entire three pages and helmets mayonnaise is good for the world come on guys it's mayonnaise it's going to kill you no matter what you describe it as but that's what's happening ITC now is an entire section of their annual report where they tell the world you know what where and you can actually thread the needle it's amazing how these companies have learned to play the game the oil companies are getting getting better and better at this their ESC scores keep climbing because as I said it's a gaming model so by the end of this process you might see ITC with the highest ESC score of any Indian company because that's all these guys do I mean let's face it when you make all your money off charminar and that's been your cash cow you really don't have much to do as a company right he's saying that what do we do now oh let's spend you know 15 hours developing a better there's a huge amount the adani report a third of the report in fact I think it's called in the I actually title of their website is something is goodness right and there's a company that operates ports and airports it's infrastructure investment necessary for India but they issued green bonds my question is how can a comp I mean think about airports right what comes in and out of airports big aircraft think of what big I mean big aircraft are among the biggest sources of I mean I don't care how many carbon offsets you buy and how many trees you start you you put in Oregon you are creating a carbon footprint that's not fixable heck does a company like that issue green bonds tells you less about the company and more about the green and green bonds right in fact I put out a plea probably not a kind one I said I hope there's a default and I hope it happens just to the green bondholders I can't think of a group more deserving of default than people holding these green bonds walking around saying look how green I am I own green points yes no no ESC scores incentivize companies to do the things that will increase their score so let's be very clear about what ESC scores do they don't make you do good they make you do the things that'll increase the scores if that means adding 100 pages of disclosure that's what you're going to do if it means selling off your oil business that's what you're going to do so let's be very clear this is not being cynical this is being real right Google what affect us we know exactly who that someone is right it's McKenzie providing ESG advice it's people selling ESC products it's more it's Morningstar measuring your ESG score so we don't need to go looking for who's making money we know exactly who's making money right okay so you're saying the side things that you do the kind of glimpses of look how good we are we're going to help no you know you know what Amazon about four years ago set aside a half a billion dollars into a fund that was supposed to be for non-profits and charities you read about the fun about two months ago they disbanded the fund you know why they realized it wasn't making a difference they said look it's going into random places we can't measure the the impact on society it's different when Mackenzie Bezos gives them give you know runs a charitable fund and she says this is my wealth I'm giving it out there's focus a company runs a fund card only knows where that focus is going to be today and where to be a year from now so if you're doing something like that in the side that's you know companies do it and that predates ESG right now that something that companies have always done why do they do it sometimes it's for PR which gives them sometimes it's if you're privately own a business why do you do it because you feel like you want to give back to society right so I don't have a problem with that I don't think that is the issue we're talking about because then we're talking about tens of millions we're talking about the hundreds of billions of dollars that are being spent trying to improve ESC scores and asking where's the payoff in that yes I wanted to switch I know yeah I just want to know what your opinion is of equities [Music] were held by individual investors that's now switched to 2019 I think it's even more because I just said do you see any problems it could be right the question is about passive investing's rise and as you all know in the last 10 years ETFs and index funds we think about the collective money that's invested are now more than 50 percent of the markets right the active investing portion with its institutional individual has dropped below 50 why do you think that's happened well the problem is active investing is just a really bad business right remind me again how much the average active portfolio manager beats the market by each year it's minus 1.5 percent it's the strangest business on the face of the Earth it's a I mean the analogy I would like is starting a plumbing business called floods are us and here's what you do you have a leak in your house I come and leave a flood and I insist you pay me for the longest time that bad performance it's always been true but in the 60s we invest in a mutual fund you got a statement once a year right it told you what the fund did you had no comparison you made 9.3 you felt pretty good higher than the CD that you invested in today on your phone you're checking your fund you're checking what everybody else is doing the the bad performances it's become visible to everybody invested so that's the first app the second is we now have a lot more Vehicles if you want to be passive right you know people talk about disrupters you know the biggest disrupter in investing was Jack Bogle Jack Bogle of course created the very first Index Fund so when I talked to these fintech disruptors I say get real you want to see a real disruptor in action see what Jack Bogle did because he opened the index fund and it started as an S P 500 Index but now you have index funds that pretty much capture everything you have ETFs so the combination of Revelations about bad performance and the available so that's what could that be a consequence absolutely and here's the consequence imagine a word where there's only passive investing first momentum will become even stronger right because money flows the largest companies the larger you get the more money the flow in second nobody's doing any kind of research anymore because you just buy every company in an index so there is this nightmare scenario you'll wake up but the way I think about markets is they ebb and flow so as the number of passive investors increases fewer people are doing research the chances of you finding screw-ups gets larger the pay because in a sense active investing as it is it's just too big it's not finding women but maybe we made the business smaller and more focused so my view is you're going to see passive investing Rising but you're going to hit a point at which there is a payoff to being an active investor I think it's going to be closer to 75 passive 25 active be quite honest the reason is simple we live in a flatter world it's a flatter word right everybody has the data everybody has models everybody has you know so 40 years ago if you were a new york-based analyst you already started with an advantage you're at a locational Advantage the SEC office we're in New York and you were in Des Moines God help you right how the heck were you going to get to an SEC filing today the world is flattened out and this is true not just in the US but across markets which means what active investors bring to the table is become more and more pottery and I include hedge funds and I include all the neat stuff and then what active investors hope is right what will save them AI which my response is if everybody has it nobody has it right it's like I say t scores right you know 40 years ago you took an SAT you just walked in and took the damn test today there's an entire infrastructure and what has it accomplished it's weaponized the whole like mutually assured destruction right everybody's prepared but guess what you're measured on a relative basis the way the SAT scores reflect the fact and I think with AI that's what's going to happen everybody's going to have ai but if everybody has AI the only people are going to get richer the people selling the AI stuff and God help them no but if you think this is going to bail out active investing I think you're barking up the wrong tree yeah the last few questions I think we're very closely ahead yeah does that mean that EIG is only a prospector and it's only going to increase if it's a cost factor and it's not doing anything to your risk then it'll lower your value right but if it's enforced by the government everybody's value below that's what a regulation or a law does right it passes the cost through environmental regulations the problem with ESC is it's not across all companies you know the gresh you know gresham's law bad money drives out good money you'll have a version of gresham's law bad companies will essentially game the system to essentially win out against good companies because good companies will try to follow the little script right but bad companies don't feel constrained last question [Music] but maybe if that metric wasn't there any nothing to do or not but then it should show up in some macro number right so we should have less fossil fuels being so I think no matter what path you take there is an accountability question right so if you really believe that ESG is making a difference and look at the number that you think of make a difference in and if it doesn't change then you know what it's telling you right people are walking the walk but they're not I'm sorry talking the talk but they're not walking the walk so is it making companies more conscious of social costs I have no idea is it reducing those social costs nothing that I see on the social cost macro fund shows that the costs are decreasing over time I mean but let's face it much of the focus for the last 14 years now it shifted was on the climate change portion right you don't need research if this was working then why are we 82 depend on fossil fuel still right I mean if you read every every fossil fuel company especially publicly traded companies we should be like at 60 percent but we're not that's why I said it's going behind the curtain not going away yes how did we invest before ESC came along did we Factor virtue with our decisions absolutely right I remember 30 years by valued Monsanto found it undervalued I told my wife should we buy Monsanto she said only if you want to get divorced because she's a environmentalist to the core and she felt that Roundup was going to end the word and she said you can buy Monsanto you can stay married to me now and I made my choice and I'm still married so through time we've always so and this is the part that I find troubling about ESC they seem to think that they invented virtue in 2008. now I'll give you a final point I've known a lot of good people in my life you know the one thing they share in common they never told me how good they were ever think about your own experiences Mother Teresa I grew up when she was active or no you'd listen to I listened to her four or five times never once did I heard say look I am a good person because he did good things right when you do good things you don't go the fact that you need a megaphone to tell the world you're doing good makes me extraordinarily suspicious Samuel bankman freed it's very unfair to bring this up but what is the thing that that he talked about so I would he's saying right he did it for the good the right reasons what did Elizabeth hopes keep talking about I'm going to make the world a better place by giving away by Blood do you notice something every gigantic scam in history the front man talks about how much good they're going to do for the world I am extremely suspicious when a company puts up ESC flags all over the place and talks about how much goodness they do my question is what the heck are you hiding so I know it's it's not it's not the kind of evidence you can say that's but keep tabs on scams over time and that you'll get your lifetime of scams if you live long enough keep dab on the people who push these scams and look at how they talk about goodness in society and you're going to notice a theme the more talk there is the more you should worry so they said no it's I wasn't going to hold back and I don't think I did but no I you know if you find evidence to contradict anything I said I'd love to hear it okay because it's ammunition that I that I will take into account next time I run because I do these about four times a year with every conceivable part of the ESG ecosystem so thank you thank you thank you thanks to the audience uh thanks very much I won't uh insult you by calling you Professor uh demo Duran uh what can we take away from this perhaps we we all want to exist somewhere between Mother Teresa and Sam Sam Beckman freed uh in terms of the moral impact we make uh it's hard to say uh will your slides be available publicly since we didn't get all the way through them we'll we'll are they already available to everyone uh so you can see what you missed uh because there were so many really excellent questions we we didn't get all the way through all the slides uh but again thanks for the great questions and and your attention [Applause]