Moneybeat: The secular religion of ESG

MARY REICHARD, HOST: Next up on The World and Everything in It, it’s the Monday Moneybeat.

NICK EICHER, HOST: It's time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm, the Bahnsen group. He joins us now. And David, good morning to you.

DAVID BAHNSEN, GUEST: Well, good morning, Nick, good to be with you.

EICHER: All right, as mentioned, the big Supreme Court argument last week on student loans, we have heard the legal analysis, so let's talk economics. Now, isn't it true that student loan forgiveness as we have before us, isn't this policy, if the executive order were to stand? Wouldn't it result in raising the cost of higher education even further? And then could you explain economically, why that's true?

BAHNSEN: Yeah. Well, first of all, let's be clear, there's absolutely no chance this would pass legislatively. If it would pass legislatively, then of course, the administration wouldn't have to do this executive order that they themselves have known is constitutionally dubious, at best. It's actually open and shut, there's no possible way, constitutionally, that the executive branch has this authority. And the only question is whether or not the Supreme Court will rule that the plaintiffs have the standing to bring this case. And I'm mostly optimistic that the Supreme Court will throw this atrocity out.

Does the forgiveness of debt en masse generally push prices higher? To answer that, one has to then ask themselves in another hypothetical, if you ran up your credit card debt, and then the government came in and said, we're forgiving all this debt, and you then had a sort of baked-in assumption that you may have the chance of spending money on things you want to spend it on, and will have the debt forgiven in the future, does that incentivize you to spend more or spend less? And the answer is, I think, pretty obvious. But an even bigger question is why have prices come up so much to begin with, and it is the fact that the debt was being paid for, first of all, there was no underwriting to get the debt, anybody could get it. And the government was the backer with a blank check, so it gave administrators carte blanche to raise tuition, room and board to preposterous prices.

So having debt forgiveness come at a $10,000 or for married couple of $20,000 level for upper middle class professionals, younger doctors, business people, so forth, does this incentivize them to take on more debt, people to go to, don't really need a graduate degree, but may as well get one anyways if they're not gonna have to pay for it? Do those things put upward pressure on prices? Intuitively, we all know they do.

EICHER: David, I want to ask another DC policy question as it relates to investment markets, though this time. It's an interesting situation here, it has to do with so-called ESG-graded investments - standing for environmental, social and governance, kind of a fad, where you take into account factors other than straight return on investment. So in a rare show of bipartisanship in Congress, the Senate has passed a bill that would roll back a rule by the Department of Labor that allows fund managers, and we're talking financial professionals who have a fiduciary responsibility to bring a return on investment for federal retirement accounts, for them to consider ESG factors in managing those accounts. Now, the bill received two Democrat votes, Democrats in red states, John Tester, Montana, Joe Manchin, West Virginia, in a rebuke to what is known as woke capitalism. Now, David, I received a question from Tim Fader of Clermont, Florida. So I'll ask first, that you tell what ESG is, and then to the listener question, how does ESG affect the economy?

BAHNSEN: ESG is this movement that focuses around allegedly environmental, social and governance issues. It's a criteria of those three categories that has never been specifically defined. And it has more or less become a tool of the Left and primarily the environmentalists, to try to force different governance provisions on companies. It has become a, it was prior to the last year or so, a huge fad in the investment markets because it can be marketed to people as saying, “Hey, we are investing and getting great returns, and we have an ESG overlay,” meaning we're really focused on companies that are doing great things environmentally, socially, and in their governance.

So I've been a critic of it since day one. I didn't join the party a year and a half ago. The reason why the party got big a year and a half ago is because all of a sudden Wall Street, the media, and of course, as you're referring to here, Washington DC started running with various ESG agenda as a way of trying to cram down rules and regulations and force out the fossil fuel industry. And then companies like Exxon and Chevron, were filtered out of ESG filters everywhere. Now, Congress and the Department of Labor and others with power have been trying to use ESG to force money out of pension funds that invest in fossil fuel, and so forth and so on.

But here's the thing, Nick, and I'm sorry for the long answer, but this is really important, because this is a spiritual thing: ESG primarily exists as a secular religion. It exists to allow people to sort of feel that they've done something sacramental, that they have done a good deed, and yet, it didn't cost them anything. There was no sacrifice, there was no obedience, just simply, “Hey, I can put the ESG label on, baptize myself with it. And now I feel like I did good for the world,” when in reality, we know that good requires sacrifice, virtue comes from people being willing to go in and do difficult things, not easy things.

And ESG is on its heels now, because people are fighting back. And more importantly, energy was the number one performing sector in 2021, and 2022. And technology and a lot of the ESG favorite sectors got killed in 2022. So lo and behold, all of a sudden, all these Pharisees that said ESG was such a great way to change the world had been selling out of their ESG investments. It was very coincident and convenient ride when the performance happened to be aligned with their ideology. But as markets ebb and flow, and it went the other way, so as people's principles, so the Senate did a good thing, including with a couple of Democrats, to fight back against this atrocious violation of fiduciary responsibility. And the President is threatening to veto it, and we'll see where it goes from there.

EICHER: Okay, last question For you, David. Kind of a specific one. It's from Bryan Waites of Atlanta, I had not heard of this one before, but I'm sure you have. What are your thoughts on Secure Act 2.0, and do you think it's an overall positive or negative for the economy?

BAHNSEN: Yeah, I will just give a quick answer, because this really actually is a pretty small bill, in terms of its scope, its limited in who it may affect. There were a lot of provisions in this new bill that passed at the end of the year that went into effect for 2023. But things like what the conditions are that people can withdraw from their 401(k)s, or the required minimum distribution went up to age 73, from people's retirement accounts, and it had been age 72, before that. And so there's just little technical things that they did, and each one of them has a trade-off. And so the, you know, they matter to people, but none of them are significant. None of it is needle-moving. And none of it is pro-growth. I think they're more bureaucratic, either good bureaucratic or bad bureaucratic, but not growth-oriented.

EICHER: Okay. Well, you may have a question for David Bahnsen, and if you do, I hope you'll send it on over to us, the email address is feedback@worldandeverything.com. Thank you, Bryan Waites. Thank you, Tim Fader, Thank you, David Bahnsen. David is founder, managing partner and chief investment officer of the Bahnsen group, and you can check his personal website at bahnsen.com, B-A-H-N-S-E-N, bahnsen.com. David, I hope you have a good one. We'll talk to you next week.

BAHNSEN: Thanks so much, Nick.

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