Allison Ball is the State Treasurer of Kentucky. She's one of several state treasurers who have taken a stance against woke capital.
I recently talked with Allison on my podcast "Meeting of Minds." Below are a few highlights from that discussion, lightly edited for clarity and length.
This is part 2. You can read part 1 here.
Jerry: Have [your efforts] worked? I assume there are plenty of vendors out there who say "we can do this consulting for you"? Have you had trouble getting consulting services with this restriction in place?
Allison: I'm a big believer in the free market, and when when there's competition and opening people will show up and say, "hey I can do this work for you," and we're starting to see more and more of that. I'm very encouraged. This is early days, in this world. So it's going to be interesting to see, in the next year, who rises and falls as a company, given the fact that we're now taking strong stances. But it's encouraging to see the market respond. There are organizations that say "if you don't want to work with them, because they're not supporting Kentucky, we're happy to support Kentucky." We're hearing that more and more.
Jerry: Yeah. Someone wants to get that profit. And this is the thing about energy, by the way, that's so confusing about these divestment strategies. Many are proxies, and none of the proposals are calling for companies to put a cement plug over the oil, or send it off to space, or cordon it off. It's always divestment, which means selling it to somebody. If you're selling oil reserves to Saudi Arabi, I don't understand how you're supposed to be reducing greenhouse gas emissions, because it just means someone else is going to burn it. It's still going to produce carbon dioxide. So pressuring a United States bank just transfers ownership and deprives us of a profit opportunity which goes to someone else.
Allison: That's a great point. They're they're not going away. Someone's going to buy them.
Jerry: So they'll be owned by someone who is probably not geopolitically aligned with us, instead, like the Saudis, or the Russians. Maybe places with less regulation around emissions, too. But they get to feel pure because they're not the ones doing it directly.
Allison: Yes, I think that is exactly right. There's definitely a virtue signaling element to this. You're asking for a pat on the back, asking to be praised for what you're doing, even if you're not making a difference. You're arguably making things worse.
Jerry: It's interesting to see in the past few years, a left coalition against ESG emerging including the former head of ESG for BlackRock to wreak fancy. Saying it's all green washing, you're not changing anything in terms of the environment, it's just a new sales pitch, it's really just marketing. It doesn't change the chemistry, it doesn't improve the climate.
Allison: Which is an interesting move right now because you get these true believers who are saying, well, ESG, how do we even know you're doing what you say you're doing? How do we know that you're actually supporting the environment the way that you say you are? It's an interesting world right now where you're getting criticism from both sides,
Jerry: There's another issue that you've worked on which is, to give people some background Standard & Poor's, which is a rating agency, among other things, it rates bonds, rates municipal bonds, gave very high ratings to mortgage-backed Securities in 2006 and 2007, and even into 2008. So they didn't exactly cover themselves with glory at that moment, but their job is to say whose credit worthy and who isn't, and they do that with state bonds; states borrow money through the bond market, they're called municipal bonds, and they've been doing that for a long time.
We can argue about whether they're good at it or not. I have found them to be more of a lagging indicator. Regardless, that was their day job and they switched over and now they're using political criteria, including fossil fuels, and how you handle riots! If you're not sufficiently gentle when Antifa burns down a city, that's counted against you. And there was a letter from you, and I think 10 or 11 other treasurers saying to Standard & Poor's saying: no, that's not your job. Evaluate our credit worthiness, we shouldn't be politically evaluated by you. That's what voters are for.
Allison: Yes. This should actually concern everybody, and it sounds like it's a deep dive but it's not really. So S&P, any other credit rating agencies, you know, they have always evaluated us based on our economic health, as a state: our assets, our liabilities. And Kentucky's struggled, because we've had pension problems in the past, our pensions are woefully underfunded. We've got a lot of unfunded liability in Kentucky, so it's been something that we've worried about. We worry about our credit rating in Kentucky.
We've been doing work for the last few years to try and improve that. Recently, S&P has said "we're not going to look just at your credit worthiness based on your financial health. We're going to start looking at other things too." It's a little bit of a separate rating. You're going to have your normal rating, and you've also got this additional rating that says how you're doing on ESG. You've already listened several of the things they're evaluating.
That should worry people, because our ability to build a bridge shouldn't have anything to do with how many coal companies we have in Kentucky. These are separate and distinct issues and we shouldn't be penalized on one for what's happening with the other. Say that we're not economically sound as a state because we have coal companies in Eastern Kentucky. And that's where this is going, that's the push, saying "you know, you may have done a really good job on your pensions, you fixed your problem, you're economically healthy. You're doing a great job, people should invest in you! Oh wait, you still have a lot of coal companies. Well, we're going to tell people that you're not a good investment. You're not credit worthy, you're not reliable."
Jerry: If they're really concerned about pension plans maybe what they ought to do is have a demerit for states that use ESG criterion, rather than the fiduciary criterion, when it comes to pension plans that have the sole goal of having properly funded pension plans. So that ought to be a plus sign. We're not doing ESG, therefore we'll probably have better returns over the long run, and a better funded pension plan. Can we get a little gold star? I don't expect that to happen.
Allison: You're right though, because if you start looking at ESG funds, they're typically more expensive than non-ESG funds. You're spending more in fees. I've actually seen numbers as high as 43% higher. And in the past five years, ESG funds have underperformed regular funds. So not only do they charge higher fees but they've actually underperformed on top of that. If you start looking at these numbers, they're not good numbers. So you're right. If we're going to be really honest about someone's credit, it makes more sense for ESG to count against you.
Jerry Bowyer is financial economist, president of Bowyer Research, and author of “The Maker Versus the Takers: What Jesus Really Said About Social Justice and Economics.”