Chelsea Follett: Joining the podcast today is Todd Zywicki. He is an expert on financial markets, a Professor of Law at George Mason University, a senior scholar at the Mercatus Center, a Senior Fellow at the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics, among other titles and accolades. He was also previously a senior fellow here at the Cato Institute, in the Center for Monetary and Financial Alternatives. He is a frequent commentator in the media, including in the Wall Street Journal, New York Times, Washington Post, and many other outlets. And he joins the podcast today to discuss the importance of financial markets to innovation and prosperity, the trends toward ESG, and the potential threat that government-imposed ESG mandates pose to progress. Todd, how are you?


Todd Zywicki: I’m doing great, Chelsea. Great to be with you.


Chelsea Follett: So let’s start with the big picture. What exactly is ESG? We’ve all heard the term at this point, but what’s it trying to achieve? And where did it come from?


Todd Zywicki: A great question to start off with. ESG stands for, it’s an acronym that everybody knows about now, but often forget what it stands for: Environmental Social Governance. And the idea here is to kind of do good for the world, and the role of corporations in particular in pursuing these so-called Environmental Social Governance goals, rather than just focusing on financial returns. To the extent that ESG is aligned with good business practice, for example, it’s completely uncontroversial. Corporations have done it forever. So to the extent that treating your workers well helps them to be more productive, makes the company more productive, that’s great. Being good people is good business. Conserving energy to the extent that that saves money and makes a corporation more profitable, that’s completely unobjectionable.


Todd Zywicki: So in some sense, corporations have been pursuing ESG-type goals for a very long time. And just by treating their workers well, being good people in their community, having responsible social, corporate governance practices that don’t promote fraud and the like, this has been around forever. Where this has become a flash point over the last decade or two, is the potential for those goals to come into conflict where corporations or arguably corporate managers, not the corporations themselves, are pursuing goals other than goals that can pretty directly be mapped on to increasing the value of the company, increasing the returns for shareholders. And so that’s where we’re getting all these fights right now, as ESG has emerged.


Chelsea Follett: So financial regulations strike a lot of people as kind of esoteric and irrelevant to their lives, but this latest flash point as you describe it, ESG, has been described as a kind of battlefield through which proponents are attempting to transform the economy and financial markets and the country. So how big of a deal is ESG? How could it end up affecting ordinary people’s lives?


Todd Zywicki: It’s a big deal, and it’s a big deal to the extent to which it’s operated through the financial system. And it’s precisely because as you said the financial system, the operation of the financial system is opaque to most people, you could see, a company that provides you goods and services, whether they’re shampoo and shoes, or whether it’s something more controversial like fire arms, you can deal with those companies directly. What you don’t see is what lies behind that, which is the entire financial system that supports that. So for example, in order to be able to receive payments to receive checks and the like, a company must have a bank account, in order to get access to the payment process in the United States, you have to have a bank account. So if, for example, banks won’t give a firearm company, a gun company, a bank account, then they effectively cannot do business, right? And that is essentially right now a decision that’s completely un-reviewable, if banks just decide, we don’t want to give people a bank account, or if the government leans on them.


Todd Zywicki: Or payday lending or all these different completely legal activities that can either be blocked by what they do at the financial system or just made more difficult. And so some viewers and listeners will recall President Biden’s initial nominee to be the head of the office controlling the currency Saule Omarova, at one point had said that she would plan to bankrupt the fossil fuels industry in the United States. Now, how would they do that? Well, what they can do, and what they’re probably doing already is the financial regulatory bodies can just say, well, you have any of those, that those are riskier investments. And so as a result, if a bank makes a loan to a fossil fuel company, then they have to hold back greater capital reserves. It’d be more expensive to lend to one of those companies than it would be to say a company that invests in green energy.


Todd Zywicki: And so through this lever of the financial system and the ability to direct capital throughout the entire economy, whether it’s through banks, whether it’s through BlackRock and what they’re doing with respect to stocks and that sort of thing, you can systematically advantage some industries and companies and disadvantage others. And so that’s the way in which this very opaque process ends up affecting each of us every day, in the amount we pay for gas, the amount we pay for energy, the amount we pay for food, you name it, somewhere in there. Is all there.


Chelsea Follett: Right. So the effects could be very far reaching. Could you describe the importance of financial markets to prosperity and innovation, and give our listeners a sense of what is at stake?


Todd Zywicki: Yeah, financial markets are sort of the infrastructure of the economy, so it’s easy to see, for example, the way a road is… When we talk about infrastructure, and we talk about these infrastructure bills, we talk about things like roads and airports and electricity and stuff like that. But there’s some extent of the financial system that is also a system of infrastructure, and it’s because it’s where businesses and individuals get the fuel to be able to operate, to be able to drive the economy. Ayn Rand once famously said, “Money is a form of frozen energy, and when unthawed it explodes.” And that’s the idea. Finance is a form of frozen energy, which you tap into so that you can start a company, build a factory, buy capital equipment, pay your employees. To do all these sorts of things. And so in that sense, having a well-functioning financial system is essential to economic growth. And sitting behind that is things like the rule of law, contracts, those are the things that are necessary for this to happen.


Todd Zywicki: And so countries… it’s pretty well established now, empirically, the countries that have underdeveloped rule of law, don’t enforce contracts very well and the like, end up also being less developed in their financial markets, which leads to being less developed economically, because of the role of financial markets providing investment capital to expand the economy, but also resilience in the event if things go awry. So that the economy doesn’t basically get shut down, if there is a downturn in the economy or some unexpected crisis, like we’ve seen three times in the past 20 years with 9-11, the financial crisis and the Covid crisis.


Chelsea Follett: So obviously people should have the freedom to put their money toward whatever they want, but some proponents of ESG are pushing for government mandates, various mandated disclosures. Could you talk about some of those regulations? What are the proposals being put forward?


Todd Zywicki: Yeah. And so we can sort of think about ESG initiatives as sitting in two different buckets that raise two different issues. One would be private ESG actions. And the debate there is a little bit different, and a lot of people say, well, it’s just private activity, that sort of thing. But it’s not exactly clear, if you, for example, participate in an employer-sponsored retirement plan, you really don’t have much say over how your money gets invested. And so there are some concerns there I think that are worthwhile, and if you saw the Congressional Review Act Initiative which was just passed by Congress, this will relate to the government thing. But it related to the ability of financial companies to pursue goals other than profit maximization, or returns for shareholders. So it didn’t say you have to pursue ESG goals, but what it did was basically say the fiduciary duty of a company will be satisfied even if they don’t act in a way that furthers the interests of their beneficiaries who are the pension companies. That raises an interesting set of issues, I think, and sort of the way that private capital is used because of the very attenuated way in which people can actually personally control how their money is invested.


Todd Zywicki: The larger grok question, the easier question is where the government is leaning on or mandating the use of ESG criteria with respect to investment activity and that sort of thing. So I gave the example earlier where the government could and perhaps very well might be, weighting the risk of investing in fossil fuels differently from the risk of, say, investing in green energy. Or like in California where under this sort of “Governance,” the G aspect of ESG, perhaps “Social” as well, they’re requiring boards, they were going to require boards of directors, or maybe, I guess this was a NASDAQ rule… No, it’s actually required by the state as well, would require boards of directors to have sufficient diversity of race, gender, sexuality, everything, on their board, that under the heading of “Governance.” And there you really do have a problem of essentially commandeering private companies and commandeering the individual assets, people’s money, to pursue blatantly political goals. That’s what they are, they are political goals. You can pretend like they’re not political, but everybody knows that they’re political. And what’s the problem with that? The most obvious problem is one that Milton Freeman famously pointed to a few decades ago, which is, there’s two ways you can run this ESG thing.


Todd Zywicki: You could either allow the companies and the managers of the companies to spend your money on whatever they want to spend your money on, right? And if you think that Jamie Dimon’s worldview is aligned with your overall view and you want Jamie Dimon to be spending your shareholder money on things, more power to you, but the alternative is what? Give the money back to me, rather than filching it away on the things that the CEOS of these companies think are good ESG, or the government bureaucrats, give it back to me the shareholder as dividend. And I’ll decide what I think I should do with it. I’ll decide whether I wanna give it to some non-profit organization or whether I wanna save it for my kid’s college, which I think is a pretty worthwhile goal as well. And so these are the questions people don’t really wanna talk about, which is the alternative is not ESG or nothing, the alternative is the company spends your money, or the government tells the company how they’ve got to spend your money, or you give it back to me as the shareholder, and I spend it on the things that I think are worthwhile and more in alignment with whatever my individual and social values are.


Chelsea Follett: Right. And the effects of this could potentially be very far-reaching. Sri Lanka had an almost perfect ESG score, they earned a score of 98.1 out of 100, almost a perfect score, right before its crisis that began last year and is still ongoing. It was attempting to transition to all organic farming. That was one factor, not the only factor, but one factor in the unrest and also a factor toward its having such a good ESG score, because I guess organic farming is one of the factors that goes into that. Is that sort of an example of what can result when we distort markets in the name of utopian priorities and ideology, and what lessons, if any, can we learn from Sri Lanka’s tragic situation?


Todd Zywicki: That’s such a sad story and it shows exactly what the problem is, and I will add, for those of us who… My generation will remember the great Enron fiasco, the great Enron meltdown. Enron was held up as a poster child for ESG. They won multiple awards for ESG. Because they were basically invested in alternative energy markets and that sort of thing. Meanwhile, we know that basically they were running a Ponzi scheme. And so ESG only looks at these surface things and categories and that sort of thing. But what you point out, points to the big issue here, which is, there is no free lunch, that some way or another, either everybody individually, their choices matter in the way they spend their money and they choose to live their lives, or somebody’s going to coerce them or effectively coerce them through tilting the balance of the incentive structure to do one thing or another. And I think it is completely valid, and I think it is hard to argue against the conclusion that what ESG represents, Sri Lanka being a good example, is elite preferences that discount the ordinary struggles of ordinary people around the world. That the leadership of Sri Lanka wanted the esteem of the so-called global community, call them the Davos crowd, if that’s a shorthand for it, that they wanted to get a pat on the back for doing all this sort of thing.


Todd Zywicki: And who was suffering? It was the ordinary person on the street. When you drive up the cost of energy, who suffers? Well, it’s the guy who has to commute an hour to work because that’s all he can afford, to live in the suburbs. He’s having to pay $6 a gallon for gas, for example. Energy usage, for example, is what we call in economics “inelastic,” which is that you can only set your thermostat so low in the winter and so high in the summer. And so poor people are going to end up paying a higher percentage of their income to meet these requirements on energy than the other environmental goals and that sort of thing. And that’s just in the United States, a working class person who’s trying to make ends meet, who has to pay more for everything, because elites think these goals are more important than their ability to live comfortably. But think about the rest of the world, Chelsea. We talk about Sri Lanka, but there are millions of people in this world who still live in huts and burn animal dung, yak dung, for fuel for indoor cooking fires. They’re burning animal dung.


Todd Zywicki: And according to the World Health Organization, the WHO isn’t always the most reliable source we’ve learned, but according to the World Health Organization, this is one of the leading causes of childhood asthma and other diseases around the world, which is indoor cooking fires using animal dung-burning wood, all these sorts of things. And so when you drive up the cost… There’s always a cost, there is no free lunch. When you drive up the cost of energy or make energy less reliable or pursue other goals, then impose them on other people, that has real consequences and it has the worst consequences for the people who live on the economic margins. Who have to pay more for everything, who can’t get access to low cost energy and the like, and it’s just really a tragedy. And personally, I think it’s appalling that people justify this in the name of morality, that the moral thing to do is to do this. And I’m not necessarily saying it’s inherently immoral, but I think it’s a heck of a lot more complicated than simply saying… Beating yourself on the chest and saying, I’m concerned about the environment when the people who are doing that aren’t necessarily the ones who are paying the price, and they’re enforcing it on a lot of people who are living in poverty throughout the world and on the edge of poverty in the United States.


Chelsea Follett: Right. Profit-seeking has kind of a bad rap, but the prosperity that’s created from that is transformative to people’s lives. And once you take into account something besides profit, these other goals, you’re going to probably perform worse than if you are seeking profit, right? So how badly are these ESG funds performing relative to others, and if they are performing so badly, why are the inflows into them still so robust? We’d be expecting people to take their money out of these funds if they’re performing badly. To what extent is this just ideologically driven and to what extent is it actually government putting its thumb on the scale and pressuring people to put their money into these funds?


Todd Zywicki: Yeah, these ESG funds in general… The evidence is muddled on this, I think it’s hard to draw a conclusion over the other, in general, once you adjust for the added cost of ESG funds, it seems like they generally under-perform the market. The other thing we see is that they are much riskier, so when the market turns, they tend to suffer much larger negative returns basically because they’re not as diversified as a standard investment portfolio. And so it’s more risk for probably no greater return on average, right. But if you take the risk times, they expect the rest times on return, they’re effectively under-performing the market. And that was sort of the point they’re making in the Congressional Review Act thing that was passed yesterday by the Senate, but there’s more problems beyond. And so what’s going on. So partly it may be government, as I said, it’s a combination of the government forcing it, but the government also using a law to attenuate the traditional fiduciary duties of investment managers and corporate leaders.


Todd Zywicki: And one of the things we see that’s quite striking, we see a couple of things, which is… And this is an article I wrote with Sanjai Bhagat, who is one of leading finance professors on this… posted an article In The Hill where we talked about the thousands of studies THAT have been done on this. What you find is that companies that invest in ESG do not outperform companies that do not. What you also find is that if a company makes a higher return than other companies, they are more likely to then invest in ESG, which suggests that the ESG is not actually making the company more profitable, but we are new, what that suggests is it’s a so called agency cost for the manager, which is that if the company happens to make more money, the manager basically can throw it all away on whatever he wants, which is maybe he gets a nicer private jet, maybe he gets a nicer office, or maybe he starts doing ESG things give him esteem in the media, because they get a lot of esteem in the media when they do this.


Todd Zywicki: So it’s pretty clear, it doesn’t really increase returns, but that it does seem to increase so-called agency cost for managers and we see this in a variety of other ways, which is… Sanjai refers to a study, and he’s talked about this. Where one of the studies they’ve done is they find that managers who under-perform are more likely to mention in their next shareholder letter all the good ESG things that they’ve done in the past.


Todd Zywicki: So they basically use this as an excuse to cover when they’re under-performing for the shareholders and when managers actually do a good job, they talk about the returns that they have for shareholders. And so what this does is allowing them to pursue these multifarious goals. Attenuates the accountability for corporate managers and allows them basically to get away with underperforming more easily, if you’ve got multiple goals, it’s hard to hold you to any of those particular goals. And I think a great irony of this to me, Chelsea, as somebody who has been watching us for a long time, is back in about a century ago, there was this famous book written by Berle and Means, about the corporation, where they talked about this problem of agency cost. And what they said was, corporate managers were too often pursuing their own interest at the expense of shareholders, that became the charter for progressive reformers to reform corporate governance over for the next several decades, the way the securities and exchange commission operated everything else. What I find so ironic right now and kind of bizarre is the progressives, the so-called people who are foes of corporations are the ones now instigating and justifying and rationalizing allowing the CEOS of big corporations to basically pursue their own goals.


Todd Zywicki: To spend shareholder money on things that they deem to be good, which is I think kind of a wacky sort of thing, but points up a final aspect of this that I find very troubling, which is the anti-democratic nature of it, which as I said earlier, a lot of the money is in retirement funds, and people don’t get to vote on corporate policy with respect to the money that’s in their retirement funds. Can’t just take it out of your 401K and invest it somewhere else. Most people’s money is essentially limited by what their employer offers them, what funds are allowed in that, and they don’t really have much control over it. And so there’s an anti-democratic aspect of how the money is invested, how the corporations are run. The goals that they pursue and the like, and the inherent trade-off, social trade-offs associated with pursuing these goals versus other goals, that I think are more properly things are appropriate for people to vote on as part of the democratic process, what should we do between economic growth, for example, in economic stability versus pursuing these goals.


Todd Zywicki: And I think we shouldn’t delude ourselves into thinking that shareholders are democratic in the sense that so much of people’s money is not under their control, if they’ve got a defined benefit pension plan, for example, or even under their 401K, they have a limited ability to control how their money is invested, their companies basically give you the menu of options that you have.


Chelsea Follett: Who decides the criteria for ESG? Are there clear criteria? What separates an ESG firm from another one?


Todd Zywicki: There is not, and this has given rise to this idea called greenwashing, where companies… You can call almost anything ESG. And it’s an incoherent idea, so I’ll give you an example, which is say that there’s an automobile company like General Motors or whatever, right. And they decide they’re gonna start making electric vehicles. Well, we know a lot of things about electric vehicles, which is first, they have these batteries that use minerals that have to be taken from all over the world, often in the worst places in the world, tyrannical dictatorships, all that sort of stuff.


Todd Zywicki: So that’s the first thing, which is to mandate… that is basically mandating increasing the wealth of some of the nastiest dictators and most oppressive regimes in the world, right? That seems like a relevant consideration here to take into account, for example. But even once you… And then you’ve got the fact that electric vehicles are very heavy and they’ve got to dispose of all these toxic materials and that sort of thing, which isn’t to say the alternative is great, but there’s always trade-offs. But then say you decide you wanna start making electric cars, how does this work for ESG? So electric cars, it turns out are much easier to make than traditional cars, and need a lot less labor. And so if ESG says you are supposed to pursue environmental goals and make electric cars, but also pursue labor goals and protect workers and protect their jobs, what do you do in a situation where pursuing… Do you continue to make old cars, which preserve jobs for workers, or do you make new cars that need a lot less labor to make and pursue some green goal, right.


Todd Zywicki: And so in that sense, it’s completely incoherent, and what you see when you start looking at these ratings systems, you referred to the one that Sri Lanka did earlier, is there isn’t really any yardstick for it. And so what we see again in this article I wrote with Sanjai Bhagat, what we see is that when ESG goals are voluntary, they don’t… And this goes back to the point, there isn’t a lot of obvious evidence that there’s a big economic cost to that, why, because of this green washing phenomenon, which is you say you’re pursuing ESG goals and then you just choose the rating system that’ll give you the stamp of approval. Where however, it moves from being optional, where you can basically gerrymander your review system to require, then we do start seeing substantial negative economic impact on a firm’s profitability, return for shareholders and that sort of thing. And so the subjectivity of what counts as ESG gives rise, I think accurately and appropriately gives rise to this idea that there’s an insincerity here about how they use it. And so the response would often be well, then we’ve gotta make it more binding, but then what we’re gonna see is the free lunch goes away completely at that point, and then we really get into the weeds, when it actually starts to bite, ’cause then you’re gonna have clear standards, pick one, hold people to it, and that’s gonna be much more of a problem.


Todd Zywicki: And if you look at the SEC’s proposed rule-making on this, for example, it’s pretty clear that what they want to do is push it in the direction, it would be more mandatory and really probably would have some bite, at least as the rule is initially proposed, at least that’s what it looks like to me.


Chelsea Follett: How widespread is the trend towards ESG in its current incarnation? How powerful is this trend?


Todd Zywicki: It’s very powerful, and it’s very powerful because it is a powerful political force, and a lot of this is just old fashioned public choice economics. On one side, what you have are government regulators who want to increase their power and basically want to basically force companies to pursue their ideological agenda. Again, I’ll refer to Professor Omarova and our idea of using the financial system to bankrupt the fossil fuel industry, so through the regulatory process. So you’ve got regulators, you see this as an opportunity to increase their power and increase their influence in order to pursue their ideological goals. You see now, the left and progressives who see this as a way of accomplishing through anti-democratic needs and the regulatory state things that they can’t get enacted through the democratic process, which is basically to force through an environmental social agenda that they could not force through if it were put up to the public and then sort of…


Todd Zywicki: Especially those are sort of elites who are using their power to do this. And then you just get good old-fashioned progressive interest groups, and the progressives who just see this, again, as a way of commandeering the power of corporations to pursue goals that they can’t enact through the political process. And finally the managers themselves, who see this again on this agency cost relationship as a way of using the corporation’s profile and prestige to raise their own brand basically, to be known as do-gooders, basically on the shareholders money.


Todd Zywicki: And so what you have are regulators, you have well-organized and powerful interest groups, you have elites who are backing this agenda, and you have the corporate managers themselves. And what you have on the other side are just ordinary people who are trying to make ends meet. Trying to put gas in their car and save for their kids education and save for their retirement, who are living their lives relatively unorganized, and have little incentive or ability to organize to be able to do much about this in the day-to-day events. And so from that perspective, it’s a very powerful force that likely, even if it isn’t preferred by a majority of the people, the way in which those in favor are able to organize, the incentives they have to organize, they’re outsized the rule and being able to control the flow of information in society and the like, provides a lot of cover for them to do this while the costs are borne by all those other people who are basically effectively voiceless.


Chelsea Follett: So you don’t see this as just a temporary trend, you think there’s a large risk that this becomes entrenched through the regulatory process?


Todd Zywicki: I do, yes, I believe that there is a very large risk of that happening, and I’m glad to see that so many people are sort of waking up to it, but there is a sort of imbalance in the political process. And as I said, this is what we call public choice economics, which is known for a long time, the well-organized interest groups can often benefit in the political process at the expense of the dispersed public. And this isn’t sort of the standard kind of scenario of sugar price supports or trade barriers, but this is basically the same thing, but with a new veneer on it, which is common during the power of these companies to use their economic clout to pursue these goals in a way that hasn’t been done in the past.


Chelsea Follett: If ESG does become legally entrenched, what do you see as the ramifications for global development and global poverty?


Todd Zywicki: Yeah, it’s certainly not going to help alleviate global poverty, the question will be how severe it is and how dedicated are they to sticking with it. As you referred to that horrible experience in Sri Lanka and what we’ve seen over and I even followed these closely, but we’re seeing real chaos breaking out there. We see chaos breaking out in a lot of parts in the world, whether it’s farmers in Europe, they are going after people’s livelihoods the way they’re doing this. And if it comes to people’s livelihoods or it comes to children starving, people aren’t gonna take that sitting down is what human experience seems to tell us, and so if they are… And I say they, because I think they really are they. There’s a group out there of a elites, who are hell bent on going full steam with this and forcing the rest of us to bear the cost.


Todd Zywicki: If they’re gonna keep pushing and pushing and pushing, they are pushing us towards more immiseration of a lot of people on the margins, and human experience tells us that at some point people say enough, and it just depends, I think, to some extent, on how arrogant they are, how aggressive they are by continuing to push this or do they throttle back to the way it had been, which was kind of window dressing, kind of something around the margins. And let me be clear, the traditional, what we think of as ESG, treat your workers well, be a good community citizen, have good corporate governance things, those are all completely un-objectional, those are salutary. But what we see now is weighing in and using their accumulated power bite to weigh in and direct in an anti-democratic fashion. Some of the most urgent and core ideas of society that go well beyond the expertise of any corporate manager or any corporation, and that migration towards interjecting themselves into all the flashpoint issues of modern society today throughout the world. So it’s a very concerning development that if they continue down that path, could I think lead to increasing friction and chaos throughout the world. And so yeah, one scenario is it leads to starvation and immiseration, another scenario is that people respond to that in non-peaceful ways that spawns chaos throughout the world as a response to this effort to do what they did in Sri Lanka.


Chelsea Follett: Right. That’s kind of the nightmare scenario. And of course, it doesn’t have to be that extreme, there are other possible negative effects. You mentioned rising prices, you mentioned a bunch of different problems that could arise from this. Are there any additional problems you’d like to mention that maybe you haven’t gotten to yet?


Todd Zywicki: Yeah, I think that’s a big problem. Fundamentally, we focus a lot on the economics of this, and economic issues are important and fascinating. But at the core of this, I think, is democratic legitimacy, which is, this is being done really against or without the effort to try to get a buy-in through the democratic process. And we also have to appreciate that what’s going on here is we have to frame this as an economic issue, and a lot of it is economics, but it’s also a political issue, right? Which is to say that these have society-wide effects to go beyond just a particular firm. When corporations weigh in on this issue, it’s not just a matter of politics telling corporations how to behave, but the corporations are obviously using their outside force and influence to try to overwhelm the political process in a way to have a bigger voice than any of those individuals have as an individual.


Todd Zywicki: And I think this is really giving rise to real questions of democratic legitimacy and really escalating public distrust in governance institutions, in political leadership that spurs conspiracy theories, that spurs all kind of things when people are basically having their lives so dramatically… Their standard of living and the democratic process being basically so overwhelmed by things that are completely out of their control. And I think that the elites who are imposing this agenda are just dismissing that for whatever reason. I think someone might be waking up to it. But I think that’s a really big issue, is the threat that this is posing as it goes forward to democratic norms, to the rule of law, and to people’s trust and faith in our governance institutions, when this is basically being done by and running the governance institutions, is a problem that I think people need to really wake up to.


Chelsea Follett: Right. So the idea behind some of these ESG regulations is to funnel money toward causes circumventing the democratic process by which taxpayer money would normally be funneled towards those causes. And of course, there’s the question of how people define things. Like you said, if this is voluntary and people can define ESG the way they want, it’s not as much of an issue. But if there is a set of criteria, who sets those criteria?


Todd Zywicki: Correct.


Chelsea Follett: Because people disagree on all of these things. Environmentalists disagree on the best way to promote clean energy. Some environmentalists are in favor of nuclear energy, some are not. So, who gets to decide what is ESG and what isn’t, what is good for society and what isn’t? It’s taking those decisions out of the hands of individuals and making it less democratic, as you say. Is that correct?


Todd Zywicki: That’s right. And I think the example of nuclear energy, Chelsea, is a brilliant one. It shows right on, which is the world is complex, and fundamentally, the world is trade-offs. The world is trade-offs. As I said earlier, I don’t know… People are gonna have different opinions, but I don’t think there’s any absolute standard of value that says, aggressively addressing climate change is absolutely 100% always more important than lifting people out of poverty and giving people more educational opportunities and more economic opportunities, not to mention the fact that what we know is, wealthier societies are cleaner societies. So lifting societies out of poverty, so that they’re not burning animal fuel, that they’re not going out and leveling the rainforest to be able to get wood to burn, to keep themselves… To keep their families comfortable.


Todd Zywicki: Organic farming, Yeah, it’s great in some sense, but it’s a lot less productive than traditional farming, which means you have fewer plants, fewer crops per acre, which means you have to clear more land. These are all questions of trade-offs, complex moral and economic trade-offs. And so to come down on one side of that and say, “This is the only moral way to do this, this is the clear way to do this,” without thinking about those trade-offs especially at the margin, I think is very problematic. I’m sure many of your viewers, sophisticated viewers and listeners, I’m sure they’re familiar with the Copenhagen Consensus, Bjorn Lomborg’s initiative, where they list all the… We’ve got crises all over the world today, all kind of things we wish we could do better, and there’s inherent scarcity, so you’ve gotta decide how you trade off those goals. And it’s not clear to me that just because you happen to be running a company, for example, or just because you happen to be a regulator at the Federal Reserve, that you somehow know morally what goals are more important than I do, or you do, or any person listening to this interview has their own views about how to weigh those trade-offs. And I don’t know the best way to do that, but I’m certain that not the best way to do that is to just have some unelected bureaucrats deciding what they think is… What is more important than something else.


Chelsea Follett: I think you raised a really interesting point there about some potential unintended consequences, because we know that prosperity is positively correlated with, at the country level, better environmental protection. We also know that prosperity and less poverty is associated with other social goals, better social equality for women, better gender equality… More tolerance, often. Richer societies tend to be more tolerant. There are all sorts of positive things that come with rising prosperity. So if you slow down the economy in the name of these other goals, you could actually… It could be counter-productive. You could be in fact harming protection of the environment, you could be in fact diminishing the likelihood of reaching some of these social goals that ESG purports to promote. Is that correct, that that’s a risk?


Todd Zywicki: Economic growth is the best ESG program we’ve ever invented. There’s nothing like economic growth, like you said, that has improved the environment, that has improved the social status of women, that has improved social equality, and allowed lower income people to be able to get education, to lift themselves out of poverty. Economic growth is the best ESG program we’ve ever created. And we imperil that golden goose at our own risk.


Chelsea Follett: That’s a great summary right there, but just as the last question, how much of a threat… You’ve already worded this in various ways, but just succinctly, how much of a threat to the economy and to progress, those are very related, does this kind of ESG regulation pose?


Todd Zywicki: Great question. And I would say it’s hard to tell at this point. From a regulatory perspective, if we think about this as being social regulation, which it really is, we as economists always tend to think of the margin in sort of a semi cost-benefit analysis type goal. The problem here is, is that you’re fundamentally weighing incompatible goals, which is, it’s clear there is a trade-off here to trade off the say economic prosperity and freedom on one hand, versus pursuit of these other goals like reducing greenhouse gas emissions or whatever the case may be. And how you weigh those two goals is not easy. Now, why does that matter? Because that means that there’s no logical built-in stopping point for pursuit of ESG. When is enough? When have you accomplished your goal? Usually, we would say, “Well, because of the impact on economic growth,” but if what they’re saying is, “This is more important than economic growth,” then how does that weigh in the equation? Does that make sense, Chelsea?


Chelsea Follett: That makes perfect sense.


Todd Zywicki: And so we’ve basically lost any rational way of thinking about… They’ve thrown overboard any rational way of weighing these trade-offs, by saying, “These are existential crises that must be addressed at all cost.” But at all cost means basically you can do anything and you can never say that it’s gone too far, it’s been too expensive. And so then, once you throw out rational analysis of this, then you start to end up basically being in this political wrestling match, where basically people feel like their freedom is imperiled, feel like their economic security is imperiled. And, is enough just when people say, “Enough?” Well, that’s not a very refreshing or affirming way of thinking about when it’s gone too far. And when the people who are pushing these programs fundamentally are completely different people from those who are bearing the cost of these programs, that’s a political problem that doesn’t have a very easy resolution in terms of how that all gets hashed out. So I find it honestly to be very concerning for those reasons.


Chelsea Follett: Right. The more you take decision making out of the hands of individuals and you put that decision-making process into the hands of a small group of bureaucrats, the worse for everyone. Thank you so much for speaking with me, Todd. This is a very important and fascinating topic, and I learned a lot.


Todd Zywicki: Thank you, Chelsea. I’ve enjoyed speaking with you.