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Wednesday, June 29, 2022

OPINION:

Hester Peirce’s day job is being one of five commissioners at the Securities and Exchange Commission. It is a pretty powerful job.

In reality, however, she’s an evangelist for transparent, free, deep, apolitical and unpoliticized capital markets. Ms. Peirce understands that the capital markets are essential for those who are trying to grow companies, for those who have the cash to invest in growing companies, and just generally for all Americans who care about our economy and nation.


In a conversation a few weeks ago, she shared a few thoughts. “When I thought about coming back to the SEC, one of the reasons I wanted to come back is because I care so much about our capital markets. They’re a national treasure. Our capital markets in the U.S. are better than capital markets anywhere else in the world.”

“The capital markets are much more democratic (than bank financing). Anyone can participate, it’s much more rough and tumble. … It’s that wonderful opportunity for people to come together to fund each other’s businesses and fund each other and fuel each other’s retirements. That’s a great thing.”

That may be the best summation of the importance of free and open capital markets, untrammeled by political considerations, ever offered.

It is a necessary and valuable counterpoint to the environment, social and governance movement, which is an attempt by those on the left to politicize markets and impose their ideological preferences on corporate America, deputizing, wherever possible, government financial regulators.

Some are unclear about ESG and believe it is a government-driven enterprise. Not true. 

The core of the effort is three large institutional investors (Blackrock, State Street, and Vanguard) who, using the leverage provided by the capital given to them by investors, routinely coerce companies into compliance with their wishes. Their trusted lieutenants in this are the rating agencies (think Moody’s or S&P), who in addition to assessing the economic sturdiness of companies, also now rate them on ESG performance.

It is an impressive one-two punch and raises questions about the power of fund managers as well as possible conflicts within rating agencies.

Ms. Peirce has clear thoughts about this. “In many ways, ESG is something that companies and investors have thought about for as long as there have been companies and investors. You’re putting a plant in a town, you want to be on good terms with the people in the town, you want to be on good terms with your employees, you want to not pollute … and governance is core to managing companies well.”

“Those things aren’t new. I think now … ESG is being used in a very politicized manner. If you really take it back to the basics … if you’re a money manager, tell investors what you’re doing with their money and tell them what your strategy is and tell them what you’re making your decisions based on and let them decide whether they want to invest with you.”

She continued. “What I’m seeing now is … an attempt to push the capital markets into being political and to deciding based on political bases, who gets funded and who doesn’t, what companies are doing, what they aren’t.”

“That can do real damage to the economy because it ends up making resource allocation decisions, not based on who can put those resources to the best use, but based on who can convince people that it satisfies someone else’s political agenda.”

The odd thing is that states like Texas and Florida have yet to do the one thing that would be most effective — withdraw their investments from the problem funds. Such a step would reduce the power of the fund managers, make them less able to muscle companies into doing their bidding, and reduce their enthusiasm for using the strength of their funds to pursue their private political aims.

That advice is applicable to individual investors as well. Know where your money is going and make decisions accordingly. As Ms. Peirce notes: “The ideal is to have your investors and your asset managers having a meeting of the minds — this asset manager has my definition of ESG and is managing my fund according to what I think is right.”

Toward the end of our conversation, Ms. Peirce offered this final, powerful defense of the markets: “Our capital markets play a democratizing force … they say to all comers, we don’t care who you are, who your parents were, what background you come from, we care that you have a brilliant idea and we want to fund it to turn it into a great business, or we care that you’re bringing money that will fund someone else’s brilliant idea.”

• Michael McKenna, a columnist for The Washington Times, is the president of MWR Strategies. He was most recently a deputy assistant to the president and deputy director of the Office of Legislative Affairs at the White House. 


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