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Podcast episode

The ESG puppet show & taking Liberty seriously w/ Nicholas Gruen – EP199

Nicholas Gruen, CEO of Lateral Economics, and host Gene Tunny discuss the topics of ESG (Environmental, Social, and Governance) mandates and Liberty. They explore how ESG mandates can create confusion among executives and investors, and delve into Nicholas’ perspective on Liberty, how to take it seriously and the best way to think about it. Nicholas tells a story from the early 1980s about how he tried to change Australia’s laws which allow Parliament to lock people up for contempt of Parliament. The conversation also touches on Nicholas’ concept of citizens’ juries, which is gaining support internationally, including from Martin Wolf at the Financial Times.
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You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP199

[00:01:32] Citizens’ juries and economic policy. 

[00:02:41] Does divestment from emissions intensive firms reduce emissions?

[00:06:47] Investing in fossil fuel companies to help them transition.[00:11:58] Carbon pricing.

[00:17:54] Australian consumers and carbon pricing.

[00:23:26] A different mode of governance.

[00:26:14] Liberty during the COVID pandemic.

[00:30:46] House of Commons Privileges Committee.

[00:34:32] Safeguards and legitimacy in governance.

[00:40:25] Rushed legislation during a pandemic.

[00:43:33] High level political discussion.

[00:50:06] Managing a crisis.

Links relevant to the conversation

Nicholas’s YouTube channel:

https://www.youtube.com/@NicholasGruen
Videos of conversations featured this episode:
Why ESG is a puppet show and what to do about it
Liberty: Safety from tyranny or doing what you like?
Club Troppo posts:
https://clubtroppo.com.au/2023/07/11/why-esg-is-a-puppet-show-and-what-to-do-about-it/
https://clubtroppo.com.au/2021/08/22/lockdowns-and-liberty/
Regarding the journalists locked up the Australian Parliament in the 1950s:
https://clubtroppo.com.au/2021/08/22/lockdowns-and-liberty/
Freakonomics episode on ESG that Nicholas mentions:

https://freakonomics.com/podcast/are-e-s-g-investors-actually-helping-the-environment/

Transcript:
The ESG puppet show & taking Liberty seriously w/ Nicholas Gruen – EP199

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It has also been looked over by a human, Tim Hughes from Adept Economics, to pick out the bits that otters might miss due to their tiny ears and loud splashing. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. This episode features some recent conversations on ESG and liberty that I’ve had with my colleague Nicholas Gruen from Lateral Economics. They’re from our occasional joint podcast Policy Provocations, which is available via Nicholas’s YouTube Channel. In the first part of this episode, we talk about how ESG mandates can be a puppet show, and can create confusion among executives and investors. In the second part, we talk about liberty, and what Nicholas means by taking liberty seriously, and what he thinks is the best way to think about liberty. The title of the YouTube video of the conversation is Liberty, safety from tyranny, or doing what you like. Nicholas is one of the best lateral thinkers in economic policy out there for sure. One of the things I enjoyed about this conversation was the discussion of how his big idea of citizen’s juries can be applied in a variety of different applications. This concept of a citizen’s jury, which Nicholas didn’t invent, but which he’s been the biggest advocate of, in recent years, it was picked up by Financial Times columnist Martin Wolf in Martin Wolf’s latest book, The Crisis of Democratic Capitalism, which quotes Nicholas approvingly it’s great that Nicholas’s ideas are getting greater exposure internationally, and I’m very glad to have the occasional podcast chat with him and to feature them here on Economics Explored. Okay, let’s get into the episode. I hope you enjoy my conversation with Nicholas Gruen.

Hello, Nicholas, and hello if you’re watching, good to be doing back doing Policy Provocations. Nicholas, you’ve recently given a talk to some investors haven’t you on ESG. And you had some thoughts on this whole concept of ESG and how it’s applied. Would you be able to take us through that please?


Nicholas Gruen  02:40

Sure. So if you listen to one of the most recent episodes of Freakonomics, you will find a an episode which follows the work of two US academics, and they ask the question, Does divestment from emissions-intensive firms reduce emissions? Now, you might think it would. But their analysis leads you to believe that it doesn’t. Now, I think both you and I, Gene would have been pretty quick to say that just passing the parcel so that we don’t fund that thing, but the next capitalist to come along to invest in it will fund it. It doesn’t give us as economists a lot of faith that we’re achieving very much. It looks according to their work that it’s worse than that. Because if you starve in the, to the extent that you’re successful at all, you’re successful by raising the cost of capital to highly emissions-intensive firms and emissions-intensive firms are 282 times as emissions-intensive, as the bottom quintile the most emissions-intensive emit 292 times as much carbon as the top quintile into whom we’re going to invest. And if you ask the question, you know, how are we going to get those emissions down if they’re making aluminium or steel or something like that, then one of the obvious things we need them to do is we need them to invest in new technology in inventing it or in applying it. And if we raise the cost of capital to those firms, they won’t invest in new technology. And so these authors find that that is in fact the case and that raising the cost of capital to these firms actually increases their emissions. Now, I was giving a talk to the Centre for Institutional Investors and these are and it was on the subject of ESG. ESG stands for environment, social, and governance, a kind of an institutionalisation of of an old concept like the triple bottom line that firms should think about their environmental impact, their social impact, and the and the way they are governed. So these people, and this is on behalf of super funds, now what we know is that about half of investors in super funds, say that they do want the super funds to be ethical. Of course, it’s easy, that’s an easy thing to say, in their investments, and another 25%, sort of kind of agree, but they’re a little that they feel a little less strongly. So they feel this as a need. They feel this is something they want to provide their, their members. So they try to ask themselves, Well, how could we invest, to be simpatico with what most people think is a good idea, which is to lower emissions. And many of them end up in these positions where they run what’s called a negative filter. And they say, Well, if you’re emitting a large amount of money, sorry a large amount of emissions, we won’t invest in you. Now, another problem with that is you end up investing in banks and companies and consultants and companies that aren’t necessarily doing great things. They’re just doing them with white collars on. So they’re caught in a dilemma because one of the most plausible things you can say to your members is we’re not investing in high emissions firms. And yet, maybe if we want to lower emissions, that’s what we should be doing. And we should be another strategy, for instance, is the strategy of an organisation called Engine Number One, which invested in Exxon Mobil with a view to raiding basically to turning up their annual general meeting and replacing board members for Exxon Mobil. And they managed to do this and really not because of their own shareholding, but because their own quite measly $15 million shareholding in Exxon Mobil, gave them a stake and then going to talk to BlackRock and some really big institutional investors. And they made a big difference to Exxon Mobil, and Exxon Mobil is now less of a climate denier than it was and more interested in trying to make money out of the climate transition. Now, the ESG managers, the easiest thing for them to do is to just say, we’re not investing in emissions-intensive firms and that in fact, it you know, if you think about the divestment campaigns, for university endowments, and things like investments in university endowments, they’re all based on this kind of logic. So I put to them that they’re caught in a kind of a cascade of, of accountability, if you like, or pretend accountability. They’re trying to persuade their members that they’re doing the right thing. And what I said to these ESG people is, I think you should get a sample of your members and pay them to, so, so you might have 100,000 members, you randomly select 25 of them, you pay them to give you a day a month on the weekend, to get briefed on this stuff to talk among themselves, and to tell you how they would handle these dilemmas. And that means that you escaped from this theatricality, that you escaped from this way in which plausible ideas get embraced, and then we pretend that they then you become part of the propaganda effort to tell people that this is all working out well. And it’s not working out well, you’re actually papering over the problems. So I it’s a long explanation. But that’s, that’s the presentation. That’s what I was saying.


Gene Tunny  09:12

That study you mentioned, that’s fascinating. So it could actually be worse. I mean, I was thinking, well, it might not achieve anything, because there are going to be other people who will invest in these mining companies, the ones that are mining coal or whatever. And, and look, the reality is, if you weren’t invested in energy and commodities in coal, or oil and gas last year, you missed a huge amount of gains. Right. So you did your members a disservice. Right? So if you’re a super fund…


Nicholas Gruen  09:40

That’s right. Yeah. And then your members, I guess, are supposed to say yes, we know it did us a disservice. But that was what we were signing up for when we wanted you to be ethical. And the real kicker is that you weren’t being ethical. You were pretending.


Gene Tunny  09:55

So you’re talking about funds where it’s got an explicit investment mandate that they have to…


Nicholas Gruen  10:03

I’m also Yeah, I’m talking about them. But it turns out I sort of this was a bit new to me. You know, this is a much bigger craze than just the ethical investment folks, it’s pretty much taken over the world. Now, exactly how they apply their those mandates is, is not that they’re not applying the mandates as strongly as a fund that markets itself as in as ethical investment. But, but most mainstream funds, take this ESG business seriously. There are standards for reporting on ESG. And in a way, you know, as I thought more about this, one of the things, one of my friends said a bit of an I told you so moment, we there are many problems in the world for which we don’t have near perfect policy solutions. But greenhouse isn’t one of them. Because greenhouse we have carbon taxes, we have carbon pricing, and carbon pricing solves these problems, because it basically says, If you want to emit, it’s going to cost you more, and then you see the colour of people’s money, then ExxonMobil has you don’t have to, then the normal incentives of minimising cost drive this whole thing. Now what’s happened is that because it is so easy to weaponize carbon pricing politically, again, this is all about how easy it is to bamboozle the public in many ways. Because it’s so easy to run a negative campaign against carbon pricing, partly because it’s makes the costs transparent. The world has now built its entire strategy for reducing carbon emissions on guess what? Nice sounding statements and statements that are made by people holding offices who will not hold those offices when those statements are not, don’t come true. You couldn’t kind of make this up.
Gene Tunny  12:18

Yeah, who are you talking about specifically there because you’re talking? Are you talking about people in corporations or in super funds or are we talking about politicians, because one of them,
Nicholas Gruen  12:28

All of them. And they all have a different, they all have a different set of behavioural characteristics. But none of them are perfect. The relationship between what people say and what they do? Well, gee, that’s a bit of a problem for human beings all around. That’s one of the arguments for saying, let’s price things because you know that the people who save on emissions will also save money and people will admire them for it, and they will want to do more of it. And the whole thing is, as economists say, incentive compatible, but to take you, so firstly you’ve got the politicians. Now politicians say one thing and do the opposite. Within weeks, if they want to make it more respectable within a few years. Paul Keating tells us that the GST and I’m not being moralistic about this, Paul Keating tells us that the GST is necessary if we’re to escape being a banana republic. And then he describes it as a giant new tax that will come and monster everyone in Australia. Tony Abbott tells us that if he was getting if he was trying to reduce carbon emissions, he wouldn’t be pussyfooting around with silly regulation and, and renewable subsidies. He’d be introducing carbon pricing until he’s opposing carbon pricing, and so on it goes and Donald Trump will say different things in the morning in the afternoon. So that’s the politicians, the managers will, managers are a kind of politician or they’re, you know, they’re in a bureaucracy. There are lots you’ve worked in a public bureaucracy and managers are, you know, private or a public bureaucracy and they put a large amount of store in reassuring people having the fear you know, giving people are feeling that the adults are in the room, everything’s under control. Nothing could be further from the truth, the the transition to zero carbon, even the transition to about less than 40% of what we’re emitting now has got lots of gets more and more magic asterisks. As you go on magic bits of technology. We’re going to invest we’re going to invent. Well, I’m not I’m not being critical of anyone because that’s the best we can do. Given that we’ve have ditched carbon pricing, although that will come back. Then at the bottom of all this you’ve got people who are voters, and they won’t accept that it’s their responsibility who they vote for. They love the idea that they’re getting ripped off by these politicians who lie to them. But they don’t ask themselves. Why did the politicians lie to them? Because if they don’t lie to them, they won’t vote for them. If the politicians come out and say, well, actually, we all know that carbon pricing is the way to reduce emissions, then they won’t vote for those people. They’ll vote for the people who say, Oh, no, I’ll do it all without carbon pricing. So it’s a big house of cards. It’s not, it’s the wrong metaphor, because it won’t totally collapse. But there is something about it that lacks integrity, and will end in tears to a substantial extent.


Gene Tunny  15:53

Yeah, look, okay, I think I understand what your argument is with ESG. And you want to get more input from the members to really understand their you know, where they’re coming from what they’d like to see their understanding of the trade offs. Just on carbon pricing. I think we might have to have that discussion another time or because there’s, there’s a whole debate about carbon pricing. I agree if we are going to do something about climate change, then definitely carbon pricing is the best way to do it.

Nicholas Gruen  16:25

Yeah it’s a major part of the solution, its not the whole solution. But if that’s what we’re trying to do, it’s a major part of the solution.


Gene Tunny  16:33

The one reservation I’d have in, for Australia, like if you think about Australia, is it optimal for us to adopt it, if other countries don’t adopt it?


Nicholas Gruen  16:45

Yeah, sure, sure that’s right. But we can then adopt a domestic carbon price. So that’s a design, I look at that as a design feature. So Australian consumers should pay a carbon price, whether the exporters of Australian energy should plan to pay a carbon price is something we can we can defer to the design stage. If you like, I agree that that’s an issue. Yeah. But you would agree, wouldn’t you that Australian consumers should pay a carbon price?

Gene Tunny 17:02

If we cut taxes elsewhere?

Nicholas Gruen 17:05

But that’s you’re imposing a, an ideological or, yeah, an ideological preference. I mean, I’m just trying to impress carbon prices, yes I suppose I am. So I, you know, I’ve got my preferences. I’d like to use the money to do X, Y, and Zed, but I’m not going to say, Oh, well, I don’t want to do it. If you can’t, I can’t use the money in the way that I want.


Gene Tunny  17:40

Yeah, but conceptually, I agree that the the best way to tackle climate change is via a carbon price, I wouldn’t want to impose it and and make our industries worse off, and you’re arguing that? Yeah, the the way to stop that or that leakage, whatever they call it, when the industries go to other countries is by having an exemption of some kind. So there’s some design issues, they


Nicholas Gruen  18:06

just don’t want to that is a genuine issue that needs to be sorted out by the international community, if you can make a pretty reasonable attempt to do so at the at the unilateral level, if you have to, it’s not as good as a multilateral solution. But that’s a separate issue.


Gene Tunny  18:23

Okay. I didn’t mean to distract us from the discussion of ESG. Because I’m interested in what this mechanism is, you’re talking about? What is it a group or a sample or a


Nicholas Gruen  18:37

think of it, think of a jury, and you sample from your membership in such a way that it is representative of the membership. So you look at the age profiles, some demographics, and then you try and produce some replication of that in this otherwise random sample. Now, I think that the what that group can do is it can become aware on behalf of the members of these dilemmas, and they’re very deep dilemmas because you really get a governance problem. Any mug can say, Oh, we’re investing in all these high emissions companies in which every time we turn up to the AGM, and we say they should lower their emissions. But that’s not serious. So, if you want to go in this more bonafide direction, you, it raises important governance questions, it raises questions about communicating to your members that you really are doing your best. So that’s one way to involve the members. I also think that at the moment, what we have is we have a thing called the sole purpose test, which it makes a lot of sense, which is to say, you get various concessions to invest in Super and even if you don’t we force you to invest in these pension funds or superannuation funds so we don’t want you to invest in a holiday home, where you will get some benefit from this in your investment fund, it has to be for the sole purpose of your retirement. But a lot of people don’t mind the idea of, they like, in fact, I’ll go further, they like the idea that they will be investing in their community, they’ll be investing in things that will be good for their kids, and so on. So one thing that a fund might do in this model, according to me, and it would actually require some change in the legislation. But one thing that a fund might do is you might the ESG folks might take to this council, they might the ESG. Governance, the people running the ESG might say, Look, this is really very hard. And we’re not sure if this is achieving much. But we do think that there are a whole lot of ways we can spend money. And it may not be it may not get us commercial returns. But we’re prepared to put 1% of your portfolio into some funds that will improve the community for your children and your grandchildren. Our calculations are this won’t reduce your returns by more than this amount. But it needs to be something that you want to do. I think that’d be very healthy. And it would introduce a different kind of collective institution and collective decision making into our world and, and our use of capital.


Gene Tunny  21:38

Yeah, I think that’s, that sounds like a reasonable idea. And what was the reception like at that conference?


Nicholas Gruen  21:44

I’ve been invited to I mean, I didn’t go to that last point. But I’ve been been invited back to talk to CEOs about it, these were just so there was a lot of enthusiasm, because a lot of these in fact, I don’t think there were any, there’s virtually no managers of ESG who aren’t sitting around, really quite perturbed by the fact that they’re sort of putting on a show for the public. And when they, when they read the literature, and they think about what they’re doing. They’re not at all sure that this is a great idea. And it’s growing bureaucracy in all directions. There are standard international standards of what you report. It’s hard graft to connect up profit-seeking with community development. It’s a worthwhile objective, and we don’t understand it very well conceptually, but what’s happening is it’s being driven politically. And that’s kind of just turning into a for at least from my observation into into a pretty unhelpful set of bureaucratic instincts set up by standards, bodies, accounting bodies, everyone’s producing these reports. And I think the agenda is I’m not pooh poohing it, it’d be easy to take the fairly standard sort of public choice, critique of this and say, it’s all rubbish. I think it’s clear that there are good things about it. But then we have to take it seriously. And it should at least take the public choice, criticism of it seriously enough to do the best job of this, that it can.


Gene Tunny  23:25

Okay, and it’s about introducing some economic logic into the ESG discussion?


Nicholas Gruen  23:29

No, not necessarily. No. Well, I would say it’s about a different mode of governance instead of a mode of governance which has a bunch of consumers, and then a bunch of people who are managing a system and marketing to the consumers. You actually say to the consumers, these are difficult questions. We want to invest in a random sample of you guys to help us run this agenda. Because that’s A, going to be useful. B, it’s going to give what we do real legitimacy. We won’t be putting on a show for you. We will be trying to do what it is that you want us to do. And all of our systems default back to what I call the puppet show, and I showed them I don’t know whether you’ve seen many people have seen the film, The Sound of Music in which Julie Andrews and the kids put on a puppet show for Captain von Trapp and his girlfriend at the time. And I say the public out here Captain von Trapp and the and your members are out here. ESG is the puppet show and you’re up here, Julie Andrews and the kids putting on a show and you actually know that there’s a fair bit of unreality to this show. Get the get the audience behind, show them what you’re doing and ask them what they want.


Gene Tunny  24:56

Yeah, yeah, I love it. Very good. The Baroness was his girlfriend at the time if I remember or was it…


Nicholas Gruen  25:05

the Baroness gets gets shafted. It wouldn’t be a nice role to have as the Baroness because the Baroness has to be kind of creepy, gold-digging, vacuous, easily dispatched by the the sweet, innocent Julie Andrews. Maria von Trapp, who the real Maria von Trapp looks extraordinarily like my aunt, I can tell you who was Viennese as well. So that is a remarkable fact for you.


Gene Tunny  25:36

Okay, we’ll take a short break here for a word from our sponsor.


Female speaker  25:42

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Gene Tunny  26:11

Now back to the show.

Nicholas, you wrote a post during the pandemic, didn’t you on your thoughts on liberty? And there was a whole debate about lockdowns and masks and you had a rather interesting perspective on it. So would you be able to just take us through that, please? Then we might talk about what it all means for policy.


Nicholas Gruen  26:35

Yeah, so during the COVID period, everybody got themselves very worked up about compulsions of impositions by government, and they were lockdowns, vaccine mandates, mask mandates. And it’s entirely appropriate that people talk about those things and debate those things and have different views about those things, and also have passionately different views about those things. That’s, that’s just fine and dandy. But imagine that we were in London during the Blitz, and we had those debates about whether the government should impose a blackout so that the Luftwaffe couldn’t bomb us, we would all understand that it was consistent with our liberty to impose those constraints. And likewise, if there is absolute chaos, that it is consistent with restoring liberty and actually to getting some liberty to impose martial law, for instance. So everything is a matter of context. Now, is that me not caring about people’s liberties under these particular measures? Well, as I wrote in the blog post, I’m the only person I know who’s got a record going back 40 years of actually taking this subject seriously. But I took it seriously in a rather different way. I didn’t say oh I’m on the side of I’m always going to be sort of leaning towards Liberty rather than coercion. What I said was, what are the things about our constitution that are most would be most would be the first things that an authoritarian trying to take control of government, or deny basic democratic values? What are the first things? Where were they hid? What are the weaknesses in our Constitution, that would help them out. And so when John Button who I worked for Senator John Button in 1981, he was in opposition. And I wrote out with the help of the Clerk of the Senate, Harry Evans, I wrote out a bill, a private member’s bill on the subject of parliamentary privilege, because at the time then, and it is still the case now, the members of either house, either our house of representatives or our Senate, can meet as a Privileges Committee, and they can decide according to whatever procedures they wish to adopt, to put someone in jail for contempt of Parliament, including one of their own members, as two journalists were put in jail in Australia in the 1950s. And so this private member’s bill actually picked up some old work of, from memory, Owen Dixon who was, who became the chief justice, but I think this was when he was attorney general. If he was attorney general, I think he was and it started with a private member’s bill he wrote, and we went over it and and made it to our own satisfaction. And so all that Parliament could do was to hold initial hearings and then to present the case to a magistrate to an independent magistrate saying, This person is guilty of contempt of Parliament. And over to you. Now, that is a much safer way to deal with this matter and a way that is consistent with our liberties taken seriously. And it’s quite a topical thing because as you may recall, the House of Commons Privileges Committee has just met and considered the routinely egregious behaviour of its former prime minister, Boris Johnson and decided that he would be suspended for 90 days. Now, I think suspending Boris Johnson from the House of Commons for 90 days, I happen to think that’s a great idea, I might make it longer. But it’s not it’s a disastrous idea that it should be their decision, because they’re politicians. And it’s very easy to imagine a situation where that, in fact, it’s hard to imagine an institution more ripe, to be abused, when people without any respect for the traditions, and the conventions within which those systems operate whenever they come along. So So that’s an introduction to this idea of liberty as being fundamentally about the legitimacy of government. And then secondarily about these particular decisions that get made.


Gene Tunny  31:36

Right, just before we go on Nicholas, which jurisdiction were those? Did you say two journalists were jailed by…


Nicholas Gruen  31:44

Commonwealth, Commonwealth, Commonwealth 1956, thereabouts, maybe 1954, the House of Representatives took umbrage at these journalists, you can look it up, I can’t remember the exact details. But the journalist reported a private discussion or something, it was just the sort of thing that’s pretty pretty standard practice now, off they went cooled their heels in Goulburn jail for a week or so. And they could be detained indefinitely. There’s nothing in our constitution or in the rules of the House of Representatives that prevents the House of Representatives from locking up anyone for any length of time in jail, now, we now have a more activist High Court that would probably get itself involved and say, This is not consistent with the spirit of the Australian Constitution, but that’s what happened. And nobody, yeah, and then, and then what happened is, Button released this thing to the public hadn’t, was a bit of a disaster, because he hadn’t read it very carefully. And I’ve tried to take him through it, but he was kind of busy or tired or something. And Michelle Grattan started asking him quite detailed questions about the bill. And he didn’t know what was in it, which was a little embarrassing. Then his party turned on him and people walked past him in the corridors saying, what has got into you? Why would you want to do this? And he wasn’t too sure himself. It was really all my idea. And it, you know, another idea of mine, and no-one knows who had it, you know?


Gene Tunny  33:20

Yeah. So I just want to understand what you’re, you’re arguing, you’re arguing that well, okay, so liberty, yeah you’re taking this seriously, you’re interested in the constitutional framework, or the all the all the rules we have in place that can affect Liberty before we get into one of these situations, like the pandemic, and I’m just trying to understand what you what you’re arguing, you want to make sure that we’ve got the right mechanisms or the right infrastructure in place so that we make the right decisions, or what are you? What are you arguing exactly?


Nicholas Gruen  33:54

Well, I’m arguing that if you’re serious about liberty, that you accept a few things, you accept that governments need in the final analysis to have quite Draconian powers if we’re at war, and so on. So that puts the focus on safeguards. And it also puts the focus on the importance of legitimacy in the in the post that I did during COVID. I said, I would have thought that it would be a good idea during COVID, if you want to introduce these emergency measures have us, and we talk about this a lot. Now, it’s one of my, one of the things I go on about which is you could have a jury body of randomly selected citizens who are there who are paid to turn up every week and to look at what’s going on and the government can’t do things that it objects to. I think that would have protected a lot of governments and would have protected us from a lot of the culture war that we saw, because these kinds of things need to reflect a sense of legitimacy. And they need to reflect the confidence of people that they’re doing what they think is the right things, and for the right reasons. And there was a great, you know, the the activism against mask mandates, for instance, was, because I regard mask mandates as the least intrusive kind of intervention you could have. And I would be perfectly I think it would be good if we had mask mandates on public transport, properly enforced even now. And again, that’s a, you know, a virus is a public is a public good is an externality, these are, these are difficult questions. And so you want to find a way to navigate them with proper community involvement. If we simply have governments and the usual sort of activism against those governments, it becomes very easy to turn it into a kind of standard issue culture war, which is what we saw more in the United States than here, but certainly it’s become that way here to a substantial extent.


Gene Tunny  36:11

Yeah, okay. So there are a few things I want to comment on there. So you’re right about government. I mean, it needs the the ability to, to at times do things that do constrain liberties, there’s no doubt about that government has a monopoly on violence, as they say, I agree with you there. Now, this point about getting the citizens involved, the citizens jury, it would have been good to have done it before we got into the pandemic, because the problem is because of all of the fear, then the citizens jury might end up just supporting a lot of these the policies? Well, I mean, I mean, the concern I would have is that a lot of these policies were driven by fear. And, you know, and which, to us, to an extent, I mean, to some extent, was rational. And some people for sure, I mean, it was certainly a serious virus. But the governments they would argue that they were polling people like they were like Dan Andrews and Anastacia Palaszczuk, they were relying on opinion polling, and that was driving a lot of their policymaking. So they would argue they had that legit legitimacy. I…


Nicholas Gruen  37:21

Well, I make a distinction, as I think you might know, between the opinion of the people for which I don’t have a high regard and the considered opinion, which for which I do have a high regard. So and certainly the considered opinion of the people, I think the considered opinion of the people would have looked very like the opinion of the people early on. But if it was really fairly clear that a lot of this was the product of project fear, then there would be people in a citizen jury, that would, you know, the citizen jury would have powers to ask questions, to call witnesses, all that kind of stuff. And that’s, we spoke about this in the previous podcast we did on a different subject. The structure we have is a government that is constantly performing for the satisfaction of its consumers, ie the voters, this is what corporations do. And what we need to do is to find mechanisms for bringing ordinary people, these people who we accept are the legitimate source of democratic government, to bring them into the process and to inform them as best we can, and then ask them to deliberate and then give the considered opinion of the people an important role in this. And it isn’t just that I think it would lead to better decisions, it would lead to a grea…, it does lead when you see it being done, to a tremendously less hostile, fearful environment. The situation we’re in, we had to make decisions. I don’t even want to defend lockdowns. I don’t want to attack them either. They were difficult decisions, you could see that the pie could see and one might, you know, you might have seen something different and we’ll never know who’s right. But I think I could see politicians doing their best. That’s an, a very important thing to cultivate during a crisis and this sort of mechanism does that.


Gene Tunny  39:24

Yeah look I’m not going to criticise them for a minute. I think they did. They took it seriously. I think they were trying to do their best. I agree there. I just think there’s a good case to be made that there was an overreaction, and it was because of the the amount of fear and they were making policy based on the fear at the time. Now, pre pandemic hadn’t didn’t we have all of these plans for what we would do during a pandemic and it didn’t involve half of the things that that we ended up doing? So when we were looking at it rationally and we had a different idea of what we were could do, but then because of the, maybe there aren’t enough checks and balances or constraints, there’s not enough, there wasn’t enough time to to actually properly consider these, these policies like what we had in Queensland here, we had the government, it had a Public Health Act, and it introduced in 2005. And you know, it was, it was thinking oh we may need something like this in case there is an emergency, a pandemic. But then when we get to the actual pandemic, they they’re starting to worry about it all. And they’re thinking, Oh, my God, we actually may not have all the powers we need to deal with this. And, and so they rushed through this bill to give Jeannette Young, the Chief Health Officer at the time, all of these extra powers so she can direct individual citizens to isolate and impose lockdowns, etc. And I mean, one of the problems we’ve got here in Queensland and this is in, this is why I’m attracted to your idea of looking at the the institutions, the whatever you want to call it, the policy architecture. I like that as a concept, because one of the problems we’ve got here in Queensland is we don’t have an an Upper House, which would provide some friction. Maybe it’s not enough, because other states have Upper Houses and that didn’t stop…

Nicholas Gruen 40:11

It wouldn’t do a lot.

Gene Tunny 40:13

Policies. Yeah. But yeah, and one thing I found is that their mechanisms weren’t working, there wasn’t enough scrutiny. I mean, I spoke at a parliamentary committee here in Queensland in early 2021. And I was trying to make the case that I thought that some of the restrictions are excessive, and we should look at this as in a cost benefit framework. But the only politician who actually was sympathetic was the One Nation MP, that both Labour and the Coalition or the LNP up here. Well, they were sort of, you know, not not wanting to question anything, there was sort of a consensus view. And I mean, I don’t mind if they come to that, legitimately, but I just thought there should have been more questioning in the in the parliament, but everyone just sort of said, Oh, we’re just going to, yeah, the normal mechanisms, or what we would hope would occur in a democracy, just didn’t work. There wasn’t enough contestability, or there wasn’t enough considered development of policy.


Nicholas Gruen  42:14

Well, I completely agree with you. But I think, I don’t think it’s particularly easy to bring that about now. Because if you look at the life of a politician, certainly a politician in a major party, the major parties are kind of like battleships, manoeuvring around getting a position on a thing, circulating their talking points, and then enforcing rigid party discipline. And when an important issue comes along, that people are very emotional about, the press is doing the same thing. The press is trying to maximise clicks, report excitement, if you get up in the House and you make you make a speech, which isn’t entirely in support of your own party and call for, you know, when you discuss the issues, well, you’re not going to get any benefits in your own party for that. The press will go through it and pick out bits of your what you’ve just said, to amp them up, and then they’ll stick a microphone in front of the party leaders face and say, Well, do you agree with what your backbencher said about what’s going on in Logan? This is just a disastrous environment in which to get high level discussion. And that’s again why, I’m arguing that actually people still like discussion, not on our airwaves, but in the right forums. You bring them together, and they speak to each other civilly. And they try to see each other’s point of view. And they tried to compromise and, and explore their way to a common view. Now, that’s almost totally absent from our politics. I think it’s terrific that the TEALS have done as well as they have in federal parliament because it has set the clock back a bit. I know we’re supposed to think of setting the clock back as a bad thing. But the way the TEALS do electoral politics is a bit more like the way, but I was saying this to a team the other day, one of the members of parliament that’s a bit more like backbenchers were 35 years ago, you know, they can talk about their own situation, their own concerns, they’re not completely preoccupied with the talking points of their party and so on. But if we want really proper deliberation, we, we better try and think about how we, I was gonna say route around parliament. Well, Parliament has the power but it’s not going to, the way we, the way our society runs at the moment, there’s nothing much you can do to make that discussion a search for the truth. It’s a search for advantage. And so we have to try to think, how do we build institutions that cover for that, that allow discussion to take place, allows these processes to take place without imagining that that’s going to happen in Parliament?


Gene Tunny  45:20

I was just going to ask, I mean, like you mentioned the TEALS and, yeah, I mean, they’ve really shaken things up, that’s for sure. Do we need more, you know, more representation from different groups? Could proportional representation help with that? Something like…


Nicholas Gruen  45:35

Yeah it might be able to help with that, I think it may have helped in something a bit like proportional representation in New Zealand. I think the, I mean the worst, the most toxic politics I know of, is in our two historical great and powerful friends, Great Britain and the United States. Both have first past the post voting, I was gonna say both have two major parties. Well, that is true in the United Kingdom, but they also have an outrider, the Liberal Democrats, but those have provided very toxic political environments. And the extent to which we’ve injected other elements, I think, has been good. And in fact, you may recall, you will recall what I call the randos in the Senate, people like Ricky Muir, who got into the Senate. And you could imagine it almost like a randomising process, you just throw in four or five random people who happen to get the benefit of tiny little preference margins. Well, I thought that was actually a very good illustration of it. Like it didn’t make much sense on paper. But the people who ended up in the Senate, listened to the debate and tried to come up with the right answer. Now, that would never do inside a political party, you’re not in Parliament to try and work out who’s winning the debate and where the answers are, you’re there to add one, one vote to your party. And that’s all decided by the party structures, completely disastrous.


Gene Tunny  47:08

Yeah I think the Senate does it’s structure in the way that yeah, because it’s got it’s not just, you know, it’s dominated by one party, that leads to arguably better outcomes and I think that Housing Australia Future Fund, I think that getting held up, I think that was a good idea, because that didn’t doesn’t seem to make much sense as a policy, I know the Greens are getting bashed over the head over that but I think their stance was perfectly acceptable.


Nicholas Gruen  47:34

I don’t think you’d be as keen on their proposal for rent control


Gene Tunny  47:37

No not keen on their proposal, but I think them actually teaming up in the so called Axis of Evil with the Coalition was very good. So the reasons they opposed it was sensible, I don’t agree with what they’re proposing instead. But I was just saying, that’s a good illustration of the Senate federally working.

Nicholas Gruen 47:54

Yes I agree

Gene Tunny 47:56

I like your, how the way you’re thinking about this, we’ve got to get the right frameworks in place, so when we get into the, the crisis, we’re not just, yeah, we’ve got a proper way to deal with it. What I was wondering is whether we decide before a crisis. So outside of a pandemic, these are the thresholds if we exceed this threshold of this virus looks like it’s of this seriousness, we’re willing to accept these restrictions, like we decide all of that prior to the pandemic, so when we get into it, we’re not panicking. And we’re not imposing restrictions that arguably aren’t justifiable. So I’m wondering if we should work all of that out, and then sort of have the debate there and you could have your citizens jury, you could have a more considered process rather than it just being decided all in a panic.


Nicholas Gruen  48:48

You know, there’s, there’s a case for trying to show what foresight you can but remember, all of our plans were predicated, I mean, this was an extraordinary thing, that all of our plans were predicated on the idea that this pandemic would be a flu, and it wasn’t a flu. And yet, all of our our entire official medical establishment, that is the people like Brendan Murphy, Paul Kelly, these are the official, Commonwealth medical officers and state medical officers. They didn’t bat an eyelid. They didn’t say, right, we need to rethink this. That happened actually, the first, because I believe the first medical establishment, and by medical establishment, I don’t mean doctors, I mean general, in general, I mean the offices of the government that are there to provide the government with medical advice. The first country that did this was the New Zealand medical establishment and they did a pretty good job, for after a couple of months they said hang on, this is not a flu, we need to rethink this and that’s what they did. That we, we were incredibly inflexible, not adaptive, not, and a lot of these guys were thinking of their role as making rules for the community rather than helping the community think through the problems. So I would put more effort into that. But we’re still drifting into this question of how do you manage a crisis. And what I’m saying is that crises will be well or badly managed, and that it’s an important thing to think about. But every time I suppose you are doing something, which I’m kind of arguing we should do, which is that every time this sort of thing happens, we should be asking ourselves questions on two levels. What do we do now? And what sorts of institutions should we have to do this thing well? And there we probably should wrap up because we’ve gone on for a fair while but one of the things that just gobsmacks me is in the United States, 51 people, all the governors and the President have a pardon power. Now, maybe some of the States have done to the pardon power, what I wanted to do to parliamentary privilege and to contempt of Parliament. But by and large, the President simply decides, as Boris Johnson decided regarding various knighthoods and so on, that it’s simply an exercise of executive power to give someone a pardon. And so much so that there is serious discussion about whether Donald Trump can pardon himself in jail, because there’s certainly a precedent for him campaigning in jail that was done in World War One when Mr. Dobbs was in jail and picked up something like 3% of the vote from jail, he was in jail for breach of the Espionage Act, the same act that Julian Assange is arraigned under or being pursued under. Now. I don’t know. I am unaware of a single Democratic politician who says By the way, we’ve got to get rid of the presidential pardon power, or if you don’t want to get rid of it, we have to subject it to proper due process. We are no longer in the 18th century. But nobody does this. And I find that completely extraordinary. So there you are. I won’t say another word about it in protest.


Gene Tunny  52:33

Okay, okay. Well, Nicholas, thanks again, for a fantastic Policy Provocation. That one was particularly provoking. So, yes, gave me a lot to think about and yeah reflecting on that period we’ve, we’ve been through and yes, lots to think about for policy. So thanks again. Really enjoyed that one.

Nicholas Gruen  52:52

Thanks Gene.

Gene Tunny  52:55

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com, or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.


53:44

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Podcast episode

Democratizing VC Investment Opportunities w/ James Kwan, VentureCrowd – EP197

Show host Gene Tunny chats with James Kwan, in-house counsel at VentureCrowd, about venture capital. VentureCrowd describes itself as “Australia’s leading equity crowdfunding investment platform, leveraging the power of crowdfunding for investments that back a better future.”  Gene and James discuss how VentureCrowd is bringing venture capital investment opportunities to a wider audience through equity crowdfunding. Tune in to learn about the significance of venture capital in financing and supporting innovative ideas and businesses, particularly in the early stages when traditional sources of capital may be less accessible. Of course, listeners are reminded to do their own research and seek professional advice before making any investment decisions. 
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP197

  • James’ thoughts on venture capital and what he does at VentureCrowd. (1:31)
  • Initial thoughts on government policy towards VC (6:26)
  • The valley of death for startups (12:05)
  • What’s the range of funding for startups? (13:07)
  • Challenges in accessing the private capital markets. (17:29)
  • Crowdsourcing VC investment  – example of success: Be Fit Food (19:50)
  • What is VentureCrowd’s pitch to investors? (21:41)
  • ESG investments and societal values. (24:13)
  • What are the different ways people can invest through VentureCrowd? Is it based on specific startups? (25:54)
  • Tricky legal issues in VC. (27:01)
  • What’s the impact of blockchain on venture capital? (32:04)
  • Government assistance for entrepreneurs e.g. Breakthrough Victoria Fund (37:51)

Links relevant to the conversation

Venture Crowd website: https://www.venturecrowd.com.au/s/

Transcript:
Democratizing VC Investment Opportunities w/ James Kwan, VentureCrowd – EP197

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. The transcript was then checked over by a human, Tim Hughes from Adept Economics, to pick out any clangers that otters may have missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:07

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to the show. In this episode, I chat about venture capital with James Kwan. James is in-house counsel at VentureCrowd. VentureCrowd describes itself as Australia’s leading equity crowdfunding investment platform, leveraging the power of crowdfunding for investments that back a better future. In this episode, you’ll learn about venture capital and how VentureCrowd is trying to bring venture capital investment opportunities to as many people as possible. Nothing in this episode should be construed as financial or investment advice. Wherever you’re choosing to invest, do your own research and seek advice from a professional financial advisor if required. Okay, let’s get into the episode. I hope you enjoy my conversation with James Kwan from VentureCrowd.

James Kwan, welcome to the programme.


James Kwan  01:31

Great to be here Gene, longtime listener, first time guess, so


Gene Tunny  01:35

yeah, very good. Well, it’s I should have had you on earlier. I’ve recently discovered you, you’re the in house counsel at VentureCrowd, and you’re involved in venture capital and venture capitals has been an interest of mine for a while or as a as an observer of it, and is keen to get your thoughts on venture capital and what you’re doing at VentureCrowd. So if you’re happy to chat about that, that’d be great.


James Kwan  02:05

I’d love the opportunity. Look, can I just give a disclaimer, Gene? So yes, and I’ve loved you know, I’ve wanted to do this for a while so pilfered this from an American lawyer I listened to. Now what he says is, I’m VentureCrowd’s lawyer, obviously, I’m kind of swapping in a couple of different words, but I’m VentureCrowds’ lawyer, I’m not your lawyer. So anything I do say here, please don’t take it as legal advice. If you do need such advice, please solicit your own lawyer. So with that out of the way, I’d love to actually talk about venture capital.


Gene Tunny  02:34

That’s very good. Is that Jordan Harbinger? He says that on some of his podcast episodes, you know, the did you hear from Jordan Harbinger or from


James Kwan  02:43

He’s a bit of a new name. I think I’ve heard it from a couple of American lawyers speaking in the blockchain space. And we can talk about that as well, because that kind of feeds into the VentureCrowd vision, but it might just be an Americanism right?


Gene Tunny  02:57

No, it’s good advice, though. I mean, yep. I’m not your lawyer. So yeah, exactly. Get your own independent advice, professional advice. So and this is all for general information only. There’s no investment or financial advice in or legal advice in this episode.


James Kwan  03:12

Not even life advice, I think.


Gene Tunny  03:14

Okay. So James, to kick off with, could I just make sure I understand what we’re talking about with venture capital, we’re talking about financing for early stage businesses, typically startups they’re not they’ve got an idea. They might have a few employees, they’re looking to get some funding so they can can grow. What’s, how do you think about venture capital?


James Kwan  03:37

Yeah, look, the best way to probably explain it is that crazy uncle you’ve got in the garage, right? Who’s forever tinkering away on and, you know, a harebrained idea, they’re the people which you attract into the venture capital space, it is the idea, are the ideas which are crazy slash revolutionary, but really stand a chance at completely reforming, you know, how we think about doing life, because of the speculative nature of the ideas and the relative lack of business history behind a lot of, you know, these ventures, it’s very difficult for them to get funding from your traditional sources of capital, right? AKA, the bank. So what that leaves, for VC entrepreneurs really is four different options. You can go to your family and friends for a handout. Secondly, you could go to a benefactor with deep pockets, so high net wealth individual or their associated family office and the family office is just their army advisors to, you know, facilitate investments into the venture capital space. And lastly, I would historically have stopped at venture capital funds, so professional funds, who are looking to make an investment in a early stage venture on the prospect of a, you know, just hitting it out of the park in terms of you know, its financial performance five years down the track. VC funds do that on the understanding that, let’s say, the VC fund makes 10 investments, five of them go under, three of them break even and two of them really hit it out of the park. And I said, there are actually four options for VC entrepreneurs to go to for capital. And the fourth entrant into that are the government backed funds right? Now, the one people think about, I think, mostly in this space, just because it’s been so successful, is probably Temasek. Over in Singapore. So Temasek is Singapore’s sovereign wealth fund and they also have a ventures arm. But a little closer to home, there is an organisation a small organisation called Breakthrough Victoria with, I think, circa 2 billion funds under management. And they’re also looking to attract entrepreneurs in the VC space to the great state of Victoria. This probably because I know this is an economics podcast on that fourth source of venture capital, capital, probably a discussion to be had around whether or not that’s crowding out private investment, right. And to what extent you want the government maybe picking winners, but I leave it over to you as the host.


Gene Tunny  06:26

Yeah, exactly. Well, yeah. I mean, I mean, I’m not a great fan of government picking winners. And we might have to chat a bit later about how you think it’s crowding out. I mean, yeah, to the extent that the government gets involved in the deals, or does the financing rather than the private sector, then yeah, sure. I mean, that’s crowding out, I guess they would argue that they’re meeting, there’s a market failure, there’s not enough venture capital funding in Australia. And yeah, there wouldn’t be anyone else who would, who would fund it. Because I know, years ago, it was very difficult for startups in Australia, or people doing something innovative. So someone that Nick Gruen, and I both know, and I know you had a chat with Nick, recently, Anthony Goldbloom, who founded Kaggle years ago, he was at Treasury when I was there. And then he went to the Reserve Bank and he developed this Kaggle, the data science competition website, but he had to go over to the States to get the necessary financing. And you know, he ended up doing really well and selling to Google. So I think there’s been that view, historically, that we just haven’t had the the venture capital here in Australia. And if you want to get venture capital you for something that really innovative, really breakthrough, you need to go to the States to San Francisco to Silicon Valley to get it. What’s your take on that? James, do you think we’ve actually got an emerging private VC sector here?


James Kwan  07:51

I mean, it’s difficult to tell over the last decade, right, just because, I mean, on one interpretation over the last decade, there’s just been so much easy money, which is poured into, you know, people’s pockets, and it’s needed a home investment wise, right. So whether or not we have a working innovation framework in this country is probably something the jury’s still out. Right? There is, I think, good criticism, I think, and it’s, you know, was articulated by Kim Carr, who was the ex Minister for Innovation. And now, the, I think, believe the Chancellor of Victoria University, who says, in a nutshell, the innovation framework within Australia is just fragmented, right? It’s not that it’s nonexistent. But when you, you know, have to go to one arm of government to talk r&d tax incentive than another one to get something known as the early stage venture capital Limited Partnership, the tax incentives associated with that, that’s a particular structure, you can make VC investments through in order to obtain some sort of, you know, tax incentive. And then also litany of incentives. Like I said, you know, at the state level, think, Breakthrough Victoria, it’s very, very difficult for an entrepreneur who simply wants to build a business to tap into the government assistance in an aggregate way, right. So there is, you know, putting to one side, whether or not the existing architecture for innovation in this country is working, I think you could probably say, with a fair degree of certainty that it would substantially benefit from a degree of consolidation.


Gene Tunny  09:38

Right. Okay. Okay. So back to the, the startup. So you’re talking about what your uncle in the backyard garage or in the backyard shed, you know, as an example, I mean, are there any data or do you have a sense of who’s founding these startups? I know that, like the image of startup founders is that they’re all sort of just out Uni, they’re all sort of in their 20s, and if you don’t make it by 30, you’re a failure. But the reality is different. Is it? I mean, what what are you seeing in the startup space? Do you do have any observations on that, James?


James Kwan  10:13

Yeah. And look, I posed that early illustration of, you know, crazy uncle in the garage merely as an illustration. But really what I wanted to capture, and that was, the ideas which live and inhabit the VC space are just far fetched, right? They, you know, stand a minute chance to completely change the world and along the way to make an outsized financial return. But it is interesting that you touched on this. And I suppose to answer your question directly, I don’t actually have any data. But there is very much this dynamic, arguably perpetuated by Silicon Valley, which worships at the fountain of youth, right. So in order to be a entrepreneur in the VC space, you need to be somewhere between the ages of 18 to 35, you need to wear a black turtleneck. And I think, certainly from the VentureCrowd, side, we really want to expand people’s conception as to where great ideas can come from, because as we see it, VentureCrowd’s mission is simply to fund great ideas, and great ideas can come from anywhere.


Gene Tunny  11:23

Okay. So there are angel investors which are wealthy individuals who might give small amounts, I don’t know, whatever they give nowadays, bu you need a few angel investors, typically, to be able to get the funds, you need to scale up. And so they’re there. And then there are also the venture capital firms, so established ones, they might give you a bit more a larger amounts of funding. What are the different series of funding? Are you across that James, what they talk about?


James Kwan  11:55

Yeah, taking a step back from that, okay, I think some of the policy work, which has been done in this space to inform our innovation framework has identified something called the Valley of Death. And that’s simply a poetic expression policymakers have attached to that very early or infant stage in a company’s life, businesses life, which are very, very difficult to attract capital for the reasons we’ve just gone over, right? They don’t have a track record. And the idea is just far-fetched, it hasn’t been proven. So going to your question about you know, what do Series A, B, C, what does precede mean? These are essentially an effort by the venture capital industry to categorise that very infant stage in a company’s life. And they do that in order to introduce or inject funding in at defined milestones. So company would start a precede, there may be a couple of different stages before that before advancing to Series A, then to B, then to C. And then each stage at each progression, that the checks get bigger. And the prospect of a return gets hopefully more certain.


Gene Tunny  13:07

Right, gotcha. Okay. So so A is the first is that right?


James Kwan  13:12

Yes. So I think they call it following the alphabet in some circles. You would start off at A, well you would start off at precede nowadays and then you would go to A then to B, and then to C,


Gene Tunny  13:24

and is there any accepted understanding of what scale of funding is involved? I mean, so for precede, are we talking in the order of 100k? Or a couple 100k? Or under a million? Or what’s, is there an accepted range of funding term?
James Kwan  13:38

Yeah, look, that’s actually a really good question. It’s one I usually one I kind of leave up to our capital managers who might actually kind of slice that up. But really, they are kind of stages to know, you know, at what level or stage an early stage startup is at. And you know, that’s a way to, again, to kind of size the amount of funding investors would like to put into that company.


Gene Tunny  14:02

Yeah, I might look it up and see if there are any, any guides to that. Just interested. But I mean, one thing I’ve noticed is that, like, it’s so risky, isn’t it? Because one of the reasons banks don’t want to invest is because there’s, there’s not a lot of collateral there. I mean, banks want to lend against, you know, they want to lend you money to buy assets. So they’ve got something they can actually repossess, or foreclose on if, if you can’t meet the repayments. So yeah, startups are a really risky proposition, because you might end up with with hardly anything at the end if if everything goes wrong, if it …


James Kwan  14:39

absolutely. And yet we have this problem with lagging productivity, right. So you kind of you know, take that as a, you know, necessary ingredient to nurturing and expanding Australia’s economy into the future. These are the ideas which need to be funded in order to give that objective a real shot.


Gene Tunny  14:59

Right, Yeah, yeah, exactly, exactly. So it’s across, you know, it’s IT. It’s technology. There’s biotech. There’s I know that there’s a lot of discussion about medtech, biotech, particularly up here in Brisbane where I am medtech is quite popular, we’ve got the Olympics coming up. So everyone’s, sportstech too, I mean, there’s fintech, all sorts of things.

Okay, we’ll take a short break here for a word from our sponsor.


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If you need to crunch the numbers, then get in touch with Adept Economics. We offer you frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.


Gene Tunny  16:00

Now back to the show.

Could I ask you about Venture Crowd? Where do you fit in this constellation of venture capital, financiers or funders or however you describe it?


James Kwan  16:15

Good question. So go back to what I was saying, what I said a little bit earlier about VentureCrowd’s mission, because it has been around since I think 2013, has always consistently been to fund great ideas. And sorry, we’ll take the detour path to you know, the response to your question about where VentureCrowd kind of sits in the space. What we have seen as the two main hurdles to fund great ideas would be a lack of diversity of thought and imagination from the traditional sources of capital entrepreneurs would normally go to right. So if you can’t persuade a family office or a VC fund to fund you, I mean, you’re pretty much out of pocket in terms of, you know, getting someone to, you know, to back you. My boss loves giving the example of Airbnb, right, who faced rejection letter after rejection letter after rejection letter in Silicon Valley. One of those rejection letters, I think said, and I’m paraphrasing here, we just don’t think travel is a sexy idea. And yet, and yet, we know Airbnb is an eminently profitable commercial idea, because you see it everywhere, right? So entrepreneurs have had to contend with, you know, the biases in the people who they would traditionally go to for funding. On the investor side, investors have had to contend with challenges in accessing private capital markets. That’s happening in a context of companies, good companies staying private for longer, are not even contemplating listing at all. So what VentureCrowd want to do in this space is to really democratise access to founders, access to early stage startups for normal investors. And on the founder side, expand the investor base. So they actually have people with the right alignment of values, to really buy into the founders vision and to make it a reality. So where VentureCrowd sits, you know, in the constellation of VC funds, as you’ve put it is really, that idea of democratising access to private capital markets, both for founders and investors. It doesn’t have a particular mandate, although we have a number of products which align along those segments, which you just mentioned. So there’s a VentureCrowd Health Tech fund. But what we’ve seen is that investors, particularly in an area as speculative as venture capital, want to be able to invest not just in something which will make an outsize financial return, but also align with their values. And we’re actually seeing this in the suppose more conservative end of investments, right with the rise of ESG ETFs. We think the way to do this is by giving communities out there the tools to invest in a broader range of investment opportunities, which hopefully, engages that flywheel dynamic of more investment opportunities available for investors incentivizes more investors to come into this space, which incentivizes more entrepreneurs to come to VentureCrowd to seek capital raising activities through us. So that’s basically it in a nutshell. There’s a couple of nuts and bolts kind of sitting under that. I might just leave it at that.


Gene Tunny  19:43

Yeah, we’ll certainly delve into that. What are some of the successes so far James? Are you able to take us through any of those. I saw that you’ve got a there’s a meal prep business is there health.


James Kwan  19:54

Yeah Be Fit Foods is our one which we’re currently conducting a crowd source funding campaign for. So crowd source funding if you think Kickstarter, but for shares and equities, you’re basically right on the mark. So they’re doing really, really well over an established, you know, relatively new space for an established business. And the great thing about them seeking funding through the CSF, a crowdsource funding regime, is that really opens up the doors again to you know, the Mum and Dad investors I alluded to earlier.


Gene Tunny  20:27

So, yes, yeah, sorry, James, I’m just interested in that, because you’re talking about Mum and Dad investors. So normally, these type of opportunities would be for the wealthier individuals who could be angels or sophisticated investors, where you have to meet certain income or net wealth requirements. With Mum and Dad, are you talking about just ordinary people or people with which don’t, who don’t meet the normal, those requirements for sophisticated being a sophisticated investor or an accredited investor? Yeah,


James Kwan  20:58

Absolutely, I mean, there’s probably a kind of parallel conversation to this, right. But when you look at financial services regulation, you have that split between wholesale investors, and that includes sophisticated investors, investors with experience, investors with a certain amount of annual income, on the one hand, and everyone else who gets put in the retail basket. Now that’s fine from a regulatory perspective, if the objective is to have additional protections, which retail investors may avail themselves of, but increasingly what we’ve seen is the categorization of a wholesale investor actually allows you to access a broader range of investments. So go back to what I was saying about companies staying private for longer, and you know what that means in terms of, again, normal people being able to build wealth into the future. That’s really a big part of what’s motivating VentureCrowd to democratise access to these markets. Right. Because why should they be the purview of the already rich?


Gene Tunny  22:05

Yeah, look, I think I generally agree with that, that viewpoint and that philosophy, I mean, the the issue is, of course, that it is it is a risky, sector isn’t it and and I mean, potentially, there are much higher returns, but you don’t get that without taking on a lot of risk. So how do you explain it to investors? What’s your, what’s your promise? Or what’s your, yeah what’s your pitch to investors?


James Kwan  22:31

So the first thing probably to say is, and again, you know, not legal advice, not financial advice. But venture capital, probably, you know, again, because of its, you know, speculative nature, will probably only ever occupy a very, very small part of, you know, someone’s portfolio. But it’s interesting, you mentioned the riskiness of, you know, this area, and, you know, that is a deserved reputation. But when we look at, you know, the volatility in asset classes, which we’ve traditionally treated as less risky, and I’m thinking US Treasuries, right. I mean, as an economist, you’d probably be aware about the volatility that asset class has gone through over the last 24 months. So it’s interesting when we talk about, you know, these asset classes as having a permanent risk profile, and maybe that needs to be revisited. But parking that venture capital investments will, you know, tend to occupy a fairly small portion of an investor’s portfolio. It probably also engages that part of the investor, which, again, what I said earlier, wants to invest not just because of the financial value inherent within that company, but also the values which that company represents.


Gene Tunny  23:47

Yeah, do you find that, that is a, you know, people are really looking for that, that is something that, you know, that will affect materially affect people’s investment decisions.


James Kwan  23:58

I don’t think people can deny the fact that people bring their personal values to investments. I don’t think there’s any other way to describe the, you know, explosive growth in ESG funds over the last 12 to 24 months. I think as a society, we’ve just been, we’re getting less prepared to accept the cost to society, which traditionally had been externalised and separated out from the company’s financial performance.

Gene Tunny 24:25

Yeah, fair enough.

James Kwan 24:28

Yeah. I wouldn’t read into that, though. So the qualification there, Gene would be that I am not an absolute supporter of ESG. I think there are a number of important questions which need to be asked in terms of how you reconcile the values which ESG is intended to stand for on an internal basis. So how do you reconcile the E standing for environment with the S which is for social with the G right when those things come into conflict? And I certainly do think those values aren’t always in alignment. Certainly that broader proposition of people investing, because they see something which, you know, they see a value as in a social or an ethical value they want to advance, in addition to the financial value they hope to realise in the future, I don’t think anyone can really deny that.


Gene Tunny  25:18

Right. So how does this work at VentureCrowd? Do you have a specific investment vehicle or a specific fund that is making ESG investments? Is that what your, is that the case?


James Kwan  25:30

We don’t, and you’d have to ask the people developing products as to why we don’t. But what we do have, and again, getting going back to what I was saying about ESG, having a couple of internal inconsistencies, it’s perfectly fine to invest on the basis of your values, but it probably needs to be a little more specific than something as amorphous as ESG.


Gene Tunny  25:54

Yeah, good point. Yeah. Well, what are the different ways people can invest through VentureCrowd James, just interested in that you have specific funds? Or is it based on specific startups? There’d be a startup, and you, you were mentioning before you went and crowdsourced for Be Fit, was it? Is that right?


James Kwan  26:12

Yeah Be Fit Foods, so probably the best way to think about and I think this kind of applies broadly, is you can either invest into a single asset, or you can invest into a portfolio, right? A number of our investments right now would fall into the former basket. So investments directed into single company. But we do have and the example which I gave earlier being the VentureCrowd Health Tech fund, that would be one which grants people exposure to you know, a number of companies playing in a particular sub sector of the economy, namely Health Tech.


Gene Tunny  26:44

Yeah. Yeah, gotcha. Okay. Okay. Very good. And James, you’re a lawyer, aren’t you? You’re the in-house counsel.


James Kwan  26:53

For my sins, they never take me out of the dungeon.


Gene Tunny  26:55

Right. Yeah. So, I mean, what sort of, are there tricky legal issues involved in VC? I mean, what what are the, can you give a flavour of the types of issues that people in your sector or, you know, in venture capital have to think about please?


James Kwan  27:11

On any given day, you will have, I think this is the way I would describe it, you would have work which is driven by the broader economic climate. So when, yeah, when times are good, no one ever looks at the contract, but when interest rates are rising, and people are finding it difficult to put food on the table, you know, that’s when people actually, you know, start taking, you know, a magnifying glass to the investment contracts and seeing whether or not they can withdraw their money at a particular time noting that venture capitals, you know, tends to be a mid to long term investment. You have companies who you may have, you know, I’m not singling anyone out, in particular, I’m just kind of painting this sector in a broad brush. But you may have companies who, who you got along famously when you’re raising capital for them, but as soon as that capital is raised and transferred into their account, you no longer hear from them. So you having to chase them up. So there’s a lot of things of a transactional nature, which are driven by again, the broader economic climate. The other parts of my job, what really the other half of my job really would be dedicated to standing up the technology platform, which VentureCrowd wishes to move its financial services and financial products onto and that’s a way of engaging online communities to make investments. We think, within that the, so I again alluded to blockchain has been a bit of a part of the VentureCrowd strategy. And we think, so putting aside cryptocurrency, which is a particular, you know, use case of blockchain, we think that there is something within that technology, which neatly aligns with this idea of democratising investment, because what blockchain allows you to do is to represent ownership in a virtual context. And it allows you to do that as potentially as seamlessly as sending an email, you know, between you and I. So, we have, you know in the works, a development of a blockchain platform, which we hope to leverage to facilitate investments in a virtual slash digital context. And there’s a long list of items of a regulatory nature which we’ll need to tick off before we can do that in a compliant and safe way. So that’s probably the other part of my job, which is probably a little less applicable to other VC funds and more specific to the job I currently occupy right now at VentureCrowd.


Gene Tunny  29:54

Right, and so is this why you’re in, you’re based in Canberra aren’t you James and is this why because you have to talk to Treasury I guess and maybe APRA, the Australian Prudential Regulation Authority.


James Kwan  30:04

So APRA does actually have I think it’s a little known secret. But APRA does actually have a Canberra office. But you know, the headquarters are still very much ensconced in Sydney CBD.


Gene Tunny  30:15

Right, gotcha yeah,


James Kwan  30:16

I’m actually in Canberra, because I’m a born and bred local, so this is kind of in the personals. And, you know, it’s probably safe to say that, but for, you know, the broad based acceptance for remote work, which has happened over the last 12 to 24 months, because of COVID, I probably wouldn’t be where I am right now that, you know, we now live in a world where you can work in a, you know, industry where, you know, you are very much separate, except for a virtual connection with your employer, and pros and cons, but it’s working out pretty well, for me.


Gene Tunny  30:48

Ah very good. This blockchain platform sounds terrific. Would this be a first to the world? Do you know if anyone else is looking at this worldwide? Are there any examples of this sort of thing?


James Kwan  30:58

Yeah. So there’s a couple of people who, you know, have also twigged to the idea of blockchain being, you know, a potential, you know, next generational platform to make investments. So, you know, the effort to tokenize, they call it, you know, real world assets. But, you know, you could also include shares traditional financial instruments into that definition, definition of real world assets. And there’s definitely a couple of people doing that, again, over in Singapore, which, by the way, I should probably mention VentureCrowd’s also recently announced that it’s established a branch office over in Singapore, which is why I know about this. There’s a couple of companies, the one which comes to mind is ADDX, which is an exchange, which is hoping to tokenize a bunch of financial instruments and put them onto the blockchain. And it’s just, you know, again, there are certain efficiencies which you know, businesses see, which make developing, you know, a market exchange on that technology on the blockchain and attract a prospect.


Gene Tunny  32:04

Yeah, I’ll have to look more into that. I know, that wasn’t ASX looking at this. And then they had an issue that just didn’t work out for them. They blew a lot of, 200 million or something on investigating a blockchain exchange for the Australian share market. But you know, they had a go at it. I mean, you know, you may you’ve got your own tech guys and your own ideas. So yeah, I think it’s worthwhile looking at for sure.


James Kwan  32:28

The ASX post-mortem Gene is actually really interesting to read because blockchain at its heart is the idea that you can scale up peer to peer transactions, right, whereas the current model of financial services and financial transactions very much and the realm with which ASX sits in is very much based on intermediaries. So you know, how you reconcile a technology which promises peer to peer transactions with also the presence of intermediaries is somewhat difficult to reconcile. And I think that’s, you know, something which comes out in the post-mortem on a ASX chess replacement project,


Gene Tunny  33:09

I’ll have to have a look. So you were saying what they were trying to do if they, the way they were coming at it was never going to work? Is that what you’re suggesting? Because it was incompatible. There’s this incompatibility with their model and why would you use blockchain for that? Because they just, they didn’t want to surrender their role as the as the intermediary? Is that what you’re arguing?


James Kwan  33:31

I think that’s something which definitely kind of comes through quite clearly in the report, or at least if not quite clearly, and then reading between the lines, right, because ASX is, you know, an existing financial service has a number of stakeholders, which, you know, it needs to accommodate. And those, you know, stakeholders make money. You know, they have business in the existing financial system, which is predicated on money passing through different entities before it hits, you know, kind of, you know, the end investor.


Gene Tunny  34:03

Yeah you’re talking about the brokers as their stakeholders and the banks. Okay, gotcha. That makes sense. I’ll have a close look at that. I just thought of that then when you mentioned this, and just remembered ASX blew a, a whole bunch of bunch of money on that. But look, you know, there are going to be failures, in any when we’re innovating and before you get to the successes. I want to ask you about one thing you said before where there are concerns, sometimes the founders, they’ll get the money deposited, and then you don’t hear from them. But one of the things with venture capital, I mean, the way I understood it is that, I mean one of the benefits of this approach is that the the founders can get the benefit of these people who’ve been in venture capital like the or the angel investors have been successful business people, and they’ve got a lot of experience and the, and the venture capitalists have seen it before. And so they can provide them with the founders with the benefit of that experience. So will they sit on a board, they could be advisors, I mean, I know that someone like Tim Ferriss, you know, he would be an advisor to Uber or Shopify, and then they’d have an IPO and then, you know, make ridiculous amounts of money. Like, how does it work with VentureCrowd? Do you have a role in how the company runs day to day or the strategic direction?


James Kwan  35:19

Again, good question Gene. So, ideally, the investment is tied also to some sort of ongoing engagement with the company. Right. And while that is the perhaps the ideal let’s say, it doesn’t always happen. And it really is kind of horses for courses right. Some founders, you know, may be reluctant to relinquish the control, which is represented by having, you know, an external person sit on their board. And it really is, I suppose, on investors VC funds, the onus is on them to actually persuade founders of the value of having a fresh set of eyes, an experienced set of eyes stewarding the company as it kind of goes through, you know, its various stages of maturity. And I suppose, where that doesn’t happen, right, where the company just, you know, takes the money and run that is, you know, a risk, which, you know, needs to be considered.


Gene Tunny  36:15

Yeah, I mean, just thinking about it, what I’ve seen with these, a lot of these startups is that it’s so long until they’ve actually got any significant amount of revenue, right. So for their first few years, they’re just burning cash. And they have a burn rate, don’t they? So they figure out oh, this is how much money we’re burning every month. And this means we can, you know, we’ve got to basically have the product up and running, earning revenue by this date. And, yeah, it’s, it can be tough that that sort of business. And if you’re investing in it, yeah, you’d have to, you really have to have nerves of steel, I suppose. Because a lot of it…

James Kwan 36:45

It’s not for the faint-hearted Gene

Gene Tunny 36:48

Yeah, that’s, that’s a good way to put it. Okay. Right. James, I should ask you about policy, you, you were talking about policy before. And Kim Carr, he was Industry Minister when I was in Treasury I remember. And he had an innovation review. And I think his idea was to try and connect everything up and have a more integrated system. And so he was Minister for Industry and Innovation for a while. So I guess he was probably trying to make, to improve the interconnectedness or whatever you want to call it when he was there, but you’re saying that there’s fragmentation? Is that, is that the case? You think that there are, that we could have better policy settings for venture capital here in Australia? Is that your view?


James Kwan  37:37

Yeah I don’t think I really have too much more to say, apart from you know, what I said earlier about fragmentation. But again, as I put it before, as an entrepreneur, right, your focus, the reason why you get up every day is to build a business. It’s not there to fill in a form. And so it is a little puzzling, that in order for people to access government assistance in this space, but it’s not just one form, it’s multiple forms. And those forms are Byzantine in nature. And you’ve got to deal with a host of government bureaucrats in order to access those those incentives, you know, those assistance packages, it may simply be, you know, a symptom of government being a complex creature, right. I mean, you would know that perhaps better than most people right Gene, but if that is the case, that the assistance is out there, it’s just not readily accessible. It’s not easily accessible, then perhaps one way of nurturing, you know, the venture capital industry in Australia, is to simply make it easier for entrepreneurs to do that on a personal basis with, you know, the least amount of friction possible in the least amount of time and attention taken away from building their own business.


Gene Tunny  38:55

Yeah, it sounds like what, is it about information, getting the information out there? Just trying to think how they can do that. Improve that accessibility? Maybe I’ll look into it and just see what the, yeah, I mean, I might have to try and connect with some founders and see what issues they’re, they’re facing moving. It’s, it’s a good point to, to make. I’ll also have to look at the break through fund and break through funding through Victoria, right BreakThrough Victoria. I’ll have to see how it’s gone. It’s, Ill have a look at its financial disclosures, and, gee, it’s risky for governments to do that sort of thing. And one thing that, it’s interesting it’s being done in Victoria, because Victoria, historically, I guess everyone’s forgotten it now but back in the late 80s and early 90s, there was the Tricontinental which was the merchant banking arm of the State Bank of Victoria. And it lost a lot of money on commercial real estate, if I remember correctly, and that basically led to the downfall of the State Bank of Victoria. And you know, huge issue at the time. So in, you know, venture capital’s arguably more risky than commercial property. So it’s it’s interesting that they’re doing that I guess they, if you’re upfront if you’re clear that you could lose money and it’s highly risky then, and they’ll argue that there’s a public benefit to it. Maybe you can, maybe you can get away with it if you limit your losses I suppose, limit yeah…


James Kwan  40:23

Yeah, what is it people say, Gene, don’t put money in to an investment which, you know, you’re not happy losing right, and I think that applies on the individual level. It probably also applies at the level of state governments.


Gene Tunny  40:34

Yeah, I think that’s a very good point James. Absolutely. Okay, James, anything. Any final points before we wrap up? This has been great. I’ve learned a lot about your business. And yeah, really appreciate your perspective, is there anything more you’d like to add before we wrap up?


James Kwan  40:48

No, I think you’ve done a pretty good job of covering everything. I’ve really appreciated the opportunity just to come here and have a bit of a chinwag. And you know, if there’s an opportunity to do it in the future. You know, who knows?


Gene Tunny  40:58

Absolutely. Okay, well, next time I’m in, in Canberra, and yeah, not during the winter, though. And it’s winter there at the moment. And I remember those Canberra winters, so stay strong, stay warm. Very good.

James Kwan 41:12

Thanks again for that Gene.

Gene Tunny 41:16

Pleasure. Thanks, James.

Righto thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.


42:04

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Credits

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Categories
Podcast episode

Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

Australian Treasurer Jim Chalmers argues for values-based capitalism and against neoliberalism in a January 2023 essay in the Australian Monthly magazine. In this episode, show host Gene Tunny discusses the Treasurer’s essay with Dr John Humphreys. John is the Australian Taxpayers’ Alliance (ATA) Chief Economist and the founder of the Australian Liberal Democrats. Gene and John discuss just how literally we should take the Treasurer, the risks of the so-called co-investment approach, and whether the Treasurer is arguing for socialism (or a different -ism).      

This episode features audio from an ATA Econ Chat livestream broadcast on 31 January 23. You can watch the whole thing here:

https://www.facebook.com/AusTaxpayers/videos/509950911277607

You can follow the ATA on various platforms including Facebook and YouTube.

You can follow John Humphreys on Twitter.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP175

  • Jim Chalmers’ idea of co-investing with the private sector [4:21]
  • Regarding superannuation funds increasingly having social goals that they aim to meet as well as financial goals [9:12]
  • The Australian stage 3 tax cuts and values-based capitalism: are they compatible?  [12:37]
  • ESG, stakeholder capitalism, and socialism [15:24]
  • How does the Treasurer intend to direct investment? [23:28]
  • How a poor government policy can lead to another poor government policy [27:31]
  • The social impact investment bank expected in the 2023 Australian budget [32:34]

Links relevant to the conversation

Jim Chalmers’ essay Capitalism after the Crises

Clean Energy Finance Corporation Financial Outcomes 2021-22

Australian Government principles for social impact investing | Treasury.gov.au

Impact Investing Won’t Save Capitalism  

Transcript: Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I discuss so-called values based capitalism with John Humphreys. John is chief economist of the Australian taxpayers Alliance, and he’s President of the Australian Liberal Democrats. The idea of values based capitalism has been injected into the Australian policy debate by the Australian treasurer of Jim Chalmers. In a monthly magazine essay, the Treasurer argues we need greater coordination between the public and private sectors, and we need co investment. He argues that government business philanthropic and investor interests and objectives are increasingly aligned and intertwined. The Treasurer is the top economic official in Australia. He’s the equivalent of the US Treasury secretary in the UK Chancellor of the Exchequer. So obviously people pay attention when he tells us what he thinks. The audio of my conversation with John Humphreys is taken from a live stream I did with him on the 31st of January 2023. I’ll put a link to the full live stream in the show notes. Okay, let’s get into the episode. Please stick around to the end, because I have additional thoughts after my conversation with John. Well, I think we have to chat about this essay by the treasurer Jim Chalmers capitalism, after the crises, rather extraordinary for the treasurer to publish something like this. I mean, although we had the former PM, Kevin Rudd, publish something similar about how he was going to save global capitalism in I think it was around February 2009. While we’re all busy in Treasury, with actually managing the budget and all of that, somehow, the pm found time to write a 8000 word essay. And now, I mean, Jim Chalmers is done. Well, I think is 6000. It may not be as long as the one Rudd wrote. And Jim Chalmers wants to remake Australian capitalism. I don’t know if he necessarily wants to remake global capitalism. But he does have a critique of neoliberalism. So that’s the new thing that everyone hates. And I mean, it’s similar to a lot of critiques of so called neoliberalism that, you know, we we’ve gone too far in the direction of the market, and we don’t care about society as much anymore and isn’t as all dreadful. And isn’t all this inequality, terrible. It’s causing problems for Democracy Now look, okay. There’s certainly issues and in some countries, inequality has certainly increased, there’s no doubt about that. Overall, it’s this very simplistic analysis. And look, it’s Jim Chalmers is views. I mean, you know, fine. That’s his philosophy, it’s probably what you’d expect from Jim chamas. He’s entitled to those views. I mean, my personal view is you should be looking at specific policies. I mean, what exactly do you think we did wrong? Okay, let’s look at specific issues and see how we can fix those up. I mean, is it tariff cuts? You don’t approve of them in tariff cuts that the whole Keating government supported? I mean, what is it precisely that you think is the problem? So there’s this general critique of neoliberalism, which is no different from a lot of stuff you see online by various progressives? And, look, I mean, I’m not necessarily going to defend everything that that’s been done in economic reform. I mean, there certainly been like, I think there have been some great successes. But there have also been areas where the insert less than stellar results. There’s no doubt about that. But I think what’s important is to get it all. Okay, let’s understand what he actually wants to do because he’s got this general critique, okay. But what do you want to do? And his main idea seems to be this idea of co-investment. That’s the real substantive thing. That seems to be how he’s going to define his time as treasurer or his time as PM if he later becomes PM, because in a way, this is job application for PM he wants to be Labour leader. He sees this as defining his philosophy as a labour treasurer. We’re going to fix capitalism. He talks about values based capitalism, he thinks capitalism, we want to move away from a system where it relies upon people beings If interested in greedy and the private sector alone, we want to have a cooperation between the private sector and the public sector. We want the public sector, getting the policy settings right and and then co-investing with the private sector to provide some, some ideas about how that will occur. He talks about the Clean Energy Finance Corporation, which is designed to provide finance for various renewable energy projects. He sees that as a success, even though it doesn’t appear to be meeting its investment mandate. So I had a look at that, because I found it interesting that that was his one, the example that he gave, so he talks about co-investment as a powerful tool at our disposal. The Clean Energy Finance Corporation has been a great success, partnering with investors to direct capital where it can have the greatest impact, not by subsidising returns, but by helping structure investment vehicles in a rapidly emerging economic sector, we will employ this co-investment model in more areas of the economy, with programmes already underway in the industry, housing and electricity sectors. Okay. So they’re looking at providing some type of framework, having these entities like the Clean Energy Finance Corporation, and I think they’ve set one up similar to that in housing, it’s to encourage investment by the private sector and by I guess, providing more accessible finance, or making creating financial products, perhaps with some government guarantee, I don’t know, we have to wait and see what exactly the treasurer is, is talking about here. So yeah, that’s where I think we’ve really got to focus. This seems to be his idea of how he’s going to be this innovative, new wave labour treasurer. Yeah, Nick’s made a good point here in the comments that they want the super funds to, to invest in some of these areas such as housing, or an infrastructure. But again, I mean, we’ve got to ask exactly how are they going to do that? There’s, what I see is the risk that the government provides some sort of guarantee or does provide financing, he’s saying it’s not subsidised. But, I mean, you’ve got to wonder about if it isn’t subsidised? Or if if the government’s not making finance more readily available in the market within the banks would then what exactly is the market failure they’re addressing? Why wouldn’t the private sector do it? So I think there is going to be some sort of subsidy or, or risk taken on by the public sector that’s not compensated for. And so when I looked at the Clean Energy Finance Corporation webpage on financial outcomes, I discovered that and this is what this is a an institution that the treasurer claims has been a great success is its return its lifetime annualised portfolio benchmark. Return. So this is, this is a return that they’ve earned. So 4.38%, which is, you know, hardly anything, really, if you think about what you’d really want to be earning as an investment vehicle like that. So I think there is a risk that this sort of thing is subsidised. I think there’s a risk that they’re taking too much risk onto the government balance sheet. And there’s a potential to fund projects, which are uneconomic. So if that’s the big idea, I mean, okay, well, let’s see the specifics, and let’s analyse exactly what you’re, you’re recommending, and we can talk about that. Yeah. And there’s that point about, yeah, they do want access to the super funds, money, they will have to make sure that it’s a compelling investment opportunity to actually get that money. And, and that is a big risk. I mean, we don’t yeah, that those super funds, if they just invest in something because the government wants them to invest in it, then they are breaching their fiduciary duties. That would be a terrible thing if the government does direct where that money should go.

John Humphreys  09:12

Interesting points on that today. I think this is part of the problem that we’re sneaking up on the situation several ways. Super funds increasingly have social goals that they need to meet, as well as financial goals. You make a good point that, well, that needs to show that they’re going to meet the financial needs of the super investors. Increasingly, the super funds feel the need to meet their social KPIs, rather than their financial KPIs. And if they are required to meet social KPIs, then they’ll very easily get away with it. Remember, it’s not like this super is optional. We’re forced to give it and if the government gives the super funds who have guaranteed access to our money, social KPIs, you must do something social. By the way, here’s something social we want you to do. You can imagine it happening, even if it doesn’t have financial risk. I think the point Nick can correct me if I have not expressed her concern accurately, please jump into the chat again, Nick. But that’s my understanding of your point.

Gene Tunny  10:09

Yeah. So the whole thing with this values based capitalism, one of the concerns is that you end up with this very odd relationship between the government and banks and super funds. And in a way, it’s very odd for a Labour leader or an aspiring Labour leader. And this is a point that Matt Canavan made that he was very critical, as you probably would expect of this sort of thing. And I mean, he was saying that the treasurer seems to have been spending too much time in the boardrooms of banks and super funds. So yes, it’s, it’s very strange, but what I think might be going on, and this is, this is one thing that I’m wondering is, is this because he really doesn’t have many other options due to the state of the budget due to the high amount of debt, and due to the fact that he’s committed to the stage three tax cuts? Katherine Catherine Murphy on the Guardian podcast asked him, Okay, if you’re talking about values based capitalism, does this mean or she, she was basically asking me if you actually, given what you’re professing about values based capitalism and your concerns about inequality, etc? Does this mean you’d revisit those stage three tax cuts? And other there was a good question, and he just gave the standard line? I look, we’ve already dealt with that. And we’re, you know, my position on that. I think she probably could have pressed him more on that because it is a legitimate question, if in terms of traditional Labour government, some people have been saying that with this essay, Jim Chalmers is channelling Whitlam or it’s going back to the Whitlam government, I’m not entirely sure about that, because the Whitlam government was big spending on social welfare programmes, I really ramped that up. I mean, I know now we are spending more on that sort of thing. But there’s, I don’t know if there’s a capacity for this government, given the fiscal situation to really increase those welfare payments, or expand the welfare state much at all. And so he’s really falling back on this sort of thing, because he may not have any other option. And to an extent, that’s because the government’s had to go along with the stage three tax cuts for political reasons to win the last election. And now they can’t go back on it. So you know, this could be the only shot he’s got in the locker, so to speak. That’s one thought I’ve had on this, this essay.

John Humphreys  12:47

It will be interesting to see what they do in the next budget in terms of tax, I suspect, I’ll sneak that tax rate up, they are going into that. Look, I think that was politically hamstrung with their previous commitments. And quite frankly, I think they made the right decision to stick to their promise, both because I’m a big advocate of the stage three tax cuts, but also politically, if you want to keep any political capital, you can’t just line up lie after lie after lie in your first year in power. So I think it was the right political move and the right economic move. I suspect they also know it’s the right political move. They think it’s the wrong economic move, but they’re stuck with it. And so I’m happy about that. You’re not just a couple of quantifications. I haven’t thought about this article as long as you have, but I think you’ll write in one very important point. There’s been a lot of furor about the words. And I think the words of what Jim says, if taken literally, we shouldn’t be worried if they can, literally. But you pointed out, I think that it’s not necessarily true that we should take it literally, because there’s a lot of fluff and waffle in the middle there, that could be interpreted multiple ways. And to a large degree, what we have to do is go back to them and say, what does that mean, exactly? Exactly what I’m suggesting here. And I suspect what’s happening is there’s two things it’s worth responding to both. I suspect he’s the policy recommendations coming out of this, I suspect will end up being tinkering. I don’t think it’d be good tinkering. But this is probably a lot of grandiose statements. I’m not sure if they’re going to follow through on grandiose actions. I gotta say, as I say that, if I’m right, that would be a good thing. Because if they followed through on all the grandiose statements, I think it would be a supreme mistake for the future evolution of our country. So I am hopeful that this is a lot of bluff and bluster. But also if history is anything to go by, politicians are often full of bluff and bluster and grandiose statements. And then once they actually sit down and work out, what does this mean? It can be a tweak here and tweak there.

Gene Tunny  14:46

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Gene Tunny  15:21

Now back to the show.

John Humphreys  15:24

I do worry about them targeting the super funds, I do worry about what they when they say race, it just sort of interaction cooperation between the government in the corporate sector, that could be done in several different ways. Some of them supremely damaging, and some of them rather mild. And some of them perhaps useful, we really need to know the details first, but I worry that what he’s talking about is not the mild version. But hopefully what he does is the mild version. But what he’s talking about here has echoes of a lot of things that have been growing over the last couple of decades. Some people have actually said it in the chat and see if I can find some here. I think Percy said this twice. It’s the ESG goals. A lot of the language here is also the language of ESG, the environment, the social and governance systems. And it’s steadily in being embedded through several different means fair and foul into the goals of a lot of companies sometimes basically being shoehorned in there by governments, sometimes by industry super funds, which as was also pointed out by Percy, I think, that they are closely related to the union’s so you are getting lots of deviations from normal capitalism for ESG. Another term that’s been thrown around a lot by people that are it looks like Jim Chalmers is influenced by the stakeholder capitalism, and stakeholder capitalism, it sounds so benign, but if you scratch the surface, it’s a very worrying idea. The whole point of capitalism is that corporations are supposed to represent the owners and benefit the owner, it is capitalist who make a profit and the profit goes to the people who made the investment. That’s the idea. Stakeholder capitalism basically means all you know that ownership thing we told you about, yeah, not so much. Right? I mean, you don’t have to be an owner to have a stake, you could be a consumer, or a worker, or a neighbour or just anyone with a pet dog that ran across someone’s front yard. And that basically means society, if society is the owner, where that’s not a real thing, right? That’s always code word for government. If society is the owner of the business, i.e. government is the owner of the business. That does not, that system and economics does not have a good track record at work. There’s a couple of things here. The Chalmers thing has been likened to out and out socialism. I don’t think that’s quite right, because what he’s talking about is this incestuous relationship with big business and big government and big unions. And now socialism, just what’s the leaders of big business up against the wall, shoots them and takes their property. This is like traditional socialism. It’s been likened a bit to Whitlam. And you already mentioned that before, but it’s not quite that either. Because what Whitlam wanted to do was have the government take over all of the realms of how you help the massive welfare state, massive redistributions. He’s not really talking about changing the welfare state. He’s talking about changing the way business operates. So it’s not quite socialist. It’s not quite Whitlamisk, what I call it an eco socialism. It’s instead, this incestuous mix of big government, big corporations, big unions, and we need another word for that. There was a word for that this is not a new idea. This is the thing I’m seeing showing up by some of the op ed writers look at this wonderful new idea. It’s not Whitlam. It’s not Marx, it’s a new idea. It’s actually not a new idea. These ideas have been around for quite a while they were quite prominent, about 100 years ago. I believe, Jim Chalmers is the follower of an Italian economist at the moment. These ideas were very popular amongst a certain Italian politician. From about 90 years ago, if anyone knows their Italian history, El Deus, the Mussolini ideas were basically exactly this. But we don’t need to get rid of business. What we do is we need to have a really close relationship between big government, big business, big unions, we all work together. It may be better than for more efficient for socialism, but it’s a bloody dangerous system. And of course, if you actually call it fascism, everyone gets upset because they say no, no, no, Jim Thomas doesn’t hate the Jews. But fascism isn’t only the economic system of fascism isn’t just about being a Nazi. The economic system of fascism was quite literally the idea that big business can exist, but they just have to cooperate in bed with big government. That was literally the idea of the fascist model of the economy. And it’s not a new idea. I don’t think it has a good track record is actually working as an economic idea. And I’m not trying to say Jim Chalmers is a fascist, I’m just simply saying that we can look at how this has worked in the past. And I don’t think it’s been pretty. The other thing to note about this is they talk a big game about how much they want to cooperate with big business and integrate with them. It’s as if they that they’re unable to draw a distinction between the markets and a business. Right. I mean, most people on my side of politics we believe that a market is a better way of cool donating things, then bureaucrats and politicians. That’s true. That’s not from a love affair with business. Indeed, business are often also the enemy of markets. Like I am not pro business, I am pro markets and markets happen to have business in them. And it seems when a lefty stumbles across this idea and sees markets working, they think markets work, because there’s a couple of nice businesses. So they Co Op those businesses. But it’s not the existence of those businesses that make the market work. It’s the nature of the dynamic nature and the competitive nature of the market. That helps the market system to work. And sometimes a good market needs businesses to fail. If businesses make enough bad decisions, they fail this idea that markets defending markets are about defending businesses. Some people on outside of politics need to get out of that way of thinking, bad businesses should fail. We’re not here to defend businesses, I’m happy to defend people who make good decisions and get ahead and are rewarded for that, whether they are in any field of Endeavour. But it’s not just about defending businesses. And this approach the Chalmers has seems to be pro business anti markets, whereas I am pro market and indifferent to any individual business. And that’s some of the things I do notice in some of his language. He talks about redesigning markets, and that markets need to be carefully constructed. So I think once again, that shows a fundamental misunderstanding of what we mean with markets. Markets are evolutionary concepts. They’re not design. They’re not constructed at all. They happen sort of spontaneously out of the interaction of a bunch of voluntary interactions between consenting adults, it is a it is an evolved system. And one of the most dangerous things we have is these politicians that lack the humility to realise that they can’t design such a complex system meddling in a hugely complicated evolved system that is probably beyond their capacity, it’s beyond their can to actually understand the dynamics. It’s beyond the understanding of most people. Leonard Reed famously wrote a book saying no one knows how to, it’s called “I pencil”. And he pointed out that no one knows how to make a pencil, seems like a crazy statement. But if you unwrap each part of making a pencil, someone has to know how to cut down the wood, which means they have to know how to use a chainsaw, which means they have to know how to make the chainsaw, which means they don’t have to know how to get the metal for the chainsaw, which means they have to know how to make the iron, which the steel which comes from the iron, which comes from the mining. So you go back through all the parts of making a pencil, no one person can do it, but it comes together spontaneously, seemingly spontaneously without any central controller. That’s the important point. There’s no central controller in that. And yet, you can go and buy a pencil now for 10 cents. It involves the cooperation of literally 1000s of people around the world who speak different languages, and may not even like each other, they may hate each other. And yet 1000s of people around the world all coordinated and managed to bring you a pencil at your local store for 10 cents. That is insane. And there is no controller. It wasn’t designed, it wasn’t carefully constructed, as Jim Chalmers seems to think, it was a spontaneous order coming together. And that is the dangerous thing. I think there is when these politicians decide that they need to redesign markets in their own image. And often they have wonderful goals, right? I mean, their vision of the world, that vision of the future is not some dystopian nightmare. That’s just the accidental byproduct of their arrogance and their lack of humility. So anyway, that’s my rant on this. Now, I haven’t spent as little thinking about it as you, so maybe I’ll have to duck into it a bit more over the next week.

Gene Tunny  23:28

But I want to have a closer look at just what these vehicles are and how they intend to direct investment. I mean, he talks about, well, we’re not going to pick winners. Okay, that’s great. Oh, but we’re just gonna set the priority. So it’s like this state directed model that the French had, I think in the 50s or 60s, I wouldn’t call it fascism. I’d call it corporatism, or, or whatever the French used to call their system back in the day, the government’s got an idea of where the investment needs to go broadly. It’s sort of national economic planning. That’s the type of mindset and one thing I’m waiting to see is will they try and revive this idea of an infrastructure bank? So this was something that was raised during the time of the Rudd Government but got knocked down. Turnbull criticised Kevin Rudd has been Kev Lonnie, with reference to Kim Lonnie and there was the people were talking about well is this gonna be the new transcontinental I don’t know if you remember it was it transcontinental, the tri-continental, the, the Merchant banking arm of the state bank of Victoria that went bust in the late 80s. Victoria, when it just got into, you know, just made all these crazy loans during that, that colossal boom in the late 80s. There’s a real risk to government balance sheets here, and I just want to wait and see just what they’re proposing. And whether there is some bold scheme like that, that the treasurer could be announcing. That’s what I’m going to be looking out for.

John Humphreys  24:58

I think on the retail politics that is the right thing to look for I should reiterate, I don’t actually think Jim Chalmers is intended to be a fascist, because I don’t think he intends to follow through on the logical consequences of his own article. But I still think it’s worthwhile pushing back on the substance of the article, even if I don’t think you’ll follow through on it. I don’t want people to think of it as an ideal, because I still think the ideals in there are very dangerous. And look, I also take your point, in reality he’ll be whether it’s fascism, or corporatism, it’ll be a watered down version of that. And we need to see the details I agree. But still, the steel man version of that is worth addressing, in case it seduces the thoughts of any young people that stumble across these ideas. You make a good point that perhaps corporatism is the better word for it than fascism. I’ve thought about that a bit lately, that could work. I wonder though, whether there is a difference between the two, they both involve this incestuous relationship of big business and big government. Perhaps the difference is who has the upper hand. And I think in corporatism, perhaps the idea is that big business has the upper hand, and they kind of use big government as their tool for success. And in fascism, it’s the government has the upper hand, and they use big businesses, their tool for enforcement, or getting things done. But anyway, that’s a thought bubble there on what the potential difference could be. I don’t know which one Jim Thomas hopes he would achieve. Probably not corporatism. But I’ll cheekily put that aside for the voters. What he

Gene Tunny  26:17

wants to achieve is he wants to get enough votes from the labour left by imagining he’s can remake capitalism, where, really, he’s going to get some he’s going to create some investment vehicles. There’ll be some additional money into into renewables and housing. But is it really going to make much of a difference? And I don’t know, I mean, in housing that, you know, that’s one of their big challenges. I mean, that housing affordability is a massive problem now. And the number of people who can’t find accommodation, particularly in Brisbane, I mean, I go for a walk along Wickham terrace in Spring Hill. And I mean, the usual homeless people, you see, but now you see there are people living in cars, they’ve got all their worldly possessions, in, in the back of their vehicles. And it’s just tragic. And it’s because for years, we’ve just stopped people from building houses where people want them. So we’ve got, we’ve got problems that have been created, in part through government regulation. And now that’s going to be used as one of the excuses for remaking capitalism and providing, I don’t know, whatever, they’re going to do subsidised housing, there’ll be some money for that social housing, but it’s not really going to be enough to solve the problem, in my view.

John Humphreys  27:30

But it’s so often the theme, isn’t it? A government programme goes wrong. And the lefties turn around for capitalists to say, Why did you do that? And then they use that to justify another government programme that also goes wrong. And the whole cycle repeats itself. I do like the fact that every time I try to get us distracted in a conversation about the grandiose philosophy of the implications of Jim Chalmers article, he brings us back to the real retail politics, which I think is entirely correct. I think your read on this is true that his grand philosophical statements, they’re mostly just fluff and waffles so that he can try to get the Labour leadership and it’ll mean a bit of tinkering. I think you’re right. I just still enjoy rebutting the actual words. Anyway, that this has been a fun discussion.

Gene Tunny  28:13

Definitely John. Okay, I hope you enjoyed my conversation with John Humphrys about the Australian treasurer’s essay on values based capitalism. I’d say the takeaways from the episode include firstly, that there’s clearly been a big change in the intellectual climate since the financial crisis, and treasurer Jim Chalmers has picked up on this making some of the standard criticisms of so called Neo liberalism. Secondly, it’s important to consider specific policies and to weigh up their costs and benefits and the likelihood that claim benefits will be achieved in my view. If we do so it’s understandable why there’s been such a negative reaction to Jim Chalmers essay by economists and financial commentators here in Australia, I should say, I don’t want to be too negative. I have met Jim Chalmers in the past when he worked for treasurer Wayne Swan, and he struck me as a nice person. He clearly thinks a lot about economic issues, and I respect that. And the treasurer did say some say on things in the essay, for instance, he writes, in the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models. The reality is that democracies largely work. As of 2021 GDP per capita is around 60%, higher in democracies than in autocracies and the gap isn’t closing. Thankfully, Chalmers is a Social Democrat rather than a revolutionary. But he argues that to protect democracy, we need to have greater economic inclusion. That’s fair enough, but we need to think critically about the measures he proposes to promote it. obvious questions include, will they actually achieve greater economic inclusion, what will they cost? What are the risks to the government’s balance sheet and to taxpayers who will ultimately bear the cost of any bad investments? As I suggested in my conversation with John, history tells us we should be wary of governments owning banks or other financial institutions that don’t have a great track record. The failures of the state banks of South Australia and Victoria were big news in the early 90s. But now three decades have passed and the lessons may have been forgotten sadly. Also, as I noted, when chatting with John the results of the body that the treasurer calls a great success, the Clean Energy Finance Corporation, well, they’ve been pretty ordinary and they don’t appear to be meeting the target of return. The presentation of the financial results for the corporation is rather confusing, but it looks to me that they’re underperforming. I’ll put a link in the show notes so you can see for yourself. One thing I should have covered in my chat with John is the concept of social impact investing. This is an investment where there are both financial and social returns, such as in a profitable social housing development. Social impact investing is one of the concepts that Jim Chalmers is fond of. In a recent financial review article, John Keogh referred to an example from New South Wales in 2013, a social impact bond which raised $7 million from investors to finance the new PIN programme. N E W P I N. New PIN stands for New Parent Infant network. It appears to be a programme to support new parents so they look after their children properly and the children don’t end up in foster care. It looks like the Queensland Government has tried something similar. Typically, impact investments require government involvement of some sort to ensure that the private sector investors get a return. For instance, governments could pay performance bonuses if certain social outcomes are achieved. There’s a handy note from the Treasury which summarises the Australian Government’s principles for social impact investing, which I’ll link to in the show notes refers to such things as payments by results, contracts and outcomes focus grants, that’s how the investors will be rewarded if the investment achieves its social objectives. These payments could be justified because successful programmes could result in budgetary savings in the future. For example, if programmes result in healthier children, that could reduce health costs in the future. You could also imagine programmes resulting in savings in welfare spending, or cost of the justice system. I’d say that such savings are possible, but we should think critically about the likelihood of such benefits and follow up to make sure that they do actually occur. That is, so we’re not paying nonprofits and investors additional money for results that they don’t actually achieve. It looks like treasurer charmers might end up announcing a social impact investment bank in his next Australian government budget in May 2023. James says that the Financial Review gave a good summary of what this bank could do in an article in October last year, which I’ll link to in the show notes. He wrote, the new body would work with investors to supply capital to intermediary funds, which would direct private investment into social housing, aged care, early education or disability services alongside government funding. This could take some pressure off the government budget for providing these services alone. Okay, that’s the point I made in my chat with John, that some of the motivation for what Chalmers is proposing is the poor state of the government budget, they just don’t have the money to undertake traditional programmes. He’s talking about impact investing because he doesn’t have a lot of options. With his social impact investing bank, he can support things that he wants to do off budget, so to speak. James Ayers continues, the institution would make returns when service providers who would typically be receiving some government funding make predetermined improvements to social outcomes such as housing, education or caring for more people under agreed service standards. Apparently, there’s a body like this already in the UK called Big Society Capital. There’s a fair bit to explore with impact investing, so better return to it for a closer look at a future episode. There are a lot of players involved and I’ll do my best to get someone familiar with impact investing on the show for a deep dive. In the Australian model, it looks like there’ll be a government backed social impact investment bank referred to as a wholesaler. Major commercial banks could also provide capital for this bank. It appears based on reporting from the financial review. There’s talk about 200 million coming from the government and 200 million from the private sector. I expect the social impact investment bank will provide finance at lower than market rates for social impact investing funds. These funds then invest in nonprofits or so-called Social Enterprise causes which are delivering programmes under government contracts. An example of a social impact investing fund is the $91 million social impact investment trust, established by social ventures Australia, a nonprofit and Hester a superannuation fund. How the performance bonuses are shared by the nonprofit, the investors and the government back bank will need to be defined by various contracts between the players. This all seems very elaborate to me. There are no doubt a lot of investment bankers and fund managers earning healthy fees along the way. Does this lead to better results? It may do so if the investors push the nonprofit to deliver superior services. As always, I’m open minded but sceptical. I’ve seen that the consultancy firm Airbus has undertaken a positive evaluation of the New South Wales new ping programme. So it could be good to go through that in a future episode. I haven’t had a real chance to dissect that one yet. I do wonder just how much we can rely on impact investing to solve social problems compared with other measures. As I noted with John, I doubt it will solve the housing availability shortage, which to me appears related to restrictions on housing developments. And it’s not going to replace welfare state programmes such as Australia’s various support payments and the National Disability scheme. Maybe you can do positive things at the margins, we have to wait and see because it’s still early days when it comes to impact investing. For a sceptical take on impact investing, which I’ll link to in the show notes, I’d refer you to a 2020 Harvard Business Review article by Ruben Finnegan, who I know well and Alan Schwartz is a prominent Australian businessman. Impact Investing won’t save capitalism. Okay, that’s all from me on values based capitalism for now. If you’d like a closer look at impact investing or any other topic, please let me know. Thank you. Right oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:41

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Podcast episode

ESG: Useful concept or greenwashing? w/ Rachel Baird & Stephen Howell – EP145

ESG, short for environmental, social, and governance, is proving difficult for companies to implement in practice, and some have been accused of greenwashing. What exactly is ESG and has it come to the end of its useful life, as the Financial Times has suggested may be the case?  

Joining show host Gene Tunny in episode 145 to discuss ESG are some highly experienced corporate governance experts: Dr Rachel Baird and Stephen Howell, part of HopgoodGanim Lawyers. Both Stephen and Rachel advise boards on ESG matters and Rachel is currently facilitating the Law & Sustainability short course delivered in partnership between Pearson and Oxford University.

In this episode you’ll learn how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts pushing their own agendas. 

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps.

Links relevant to the conversation

Dr Rachel Baird, GAICD, FGIA – Director – IcebergSRC | LinkedIn

Stephen Howell – Director – Effective Governance – Part of the HopgoodGanim Advisory Group | LinkedIn 

Origins and Consequences of the ESG Moniker (paper mentioned by Rachel in the episode)

Who Cares Wins 2005 Conference Report: Investing for Long-Term Value

Tim Paine scandal a mess of Cricket Australia’s making — and it will get worse – ABC News

How ESG investing came to a reckoning | Financial Times

Effective Governance

Transcript of EP145 – ESG: Useful concept or greenwashing w/ Rachel Baird and Stephen Howell, Effective Governance

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored…

Rachel Baird  00:04

We don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; you know, there’s movements about green steel. We don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing.

Gene Tunny  00:22

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 145 on ESG, short for Environmental, Social, and Governance.

According to Investopedia, ESG criteria are used to screen investments based on corporate policies and to encourage companies to act responsibly. But ESG is proving difficult for companies to implement in practice, and some have been accused of greenwashing.

What exactly is ESG? And has it come to the end of its useful life, as the Financial Times has suggested may be the case? Joining me to discuss ESG this episode, are some highly experienced corporate governance experts, Dr. Rachel Baird and Steven Howe, of effective governance, part of HopgoodGanim lawyers. Both Stephen and Rachel advise boards on ESG matters. And Rachel is currently facilitating the law and sustainability short course delivered in partnership between Pearson and Oxford University.

In this episode, you’ll learn about how good corporate governance is the critical foundation for everything, and how company leaders should ensure their company’s policies are not dictated by inexperienced people posing as ESG experts, pushing their own agendas. In the show notes, you can find relevant links, corrections and clarifications. You’ll also find details of how you can get in touch with any questions, comments, or suggestions.

Please let me know what you think about this episode. And if there are any topics you’d like me to cover on the show. I’d love to hear from you. Right now, for my conversation with Rachel Baird and Steven Hale from effective governance on ESG. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Rachel Baird and Steven Howell from effective governance part of Hobgood Ghanem Lawyers, welcome to the program.

Rachel Baird  02:26

Thanks. Great to be here.

Stephen Howell 

Yeah. Great to be here, Gene.

Gene Tunny  02:29

Yes, it’s good to have you back on again, Steven. We chatted about corporate governance a while back and I reached out to you because I’m interested in this issue of ESG. And you mentioned that Rachel is an expert on ESG. So, I thought, that’s great. Let’s bring her into the conversation. So, Rachel, it’s good to have you.

Stephen Howell  02:51

It’s good, Gene, because, in our practice, we recognize the importance of the Australian; ESG is not just Rachel’s area of practice, she does right across the governance advisory work, but she does have an interest in ESG. So, that was one of the main reasons that we brought Rachel into the business to assist us with that. Because of the increased activity, particularly from boards.

Gene Tunny  03:21

Right. Okay. I’ll be interested to hear about that. Rachel, could you just tell us a bit about your background? When I spoke with Stephen last time, I learned a bit about Stephens background at ASIC and, and before that, in the Police force. I’d be interested in your background; you’ve been in the law, haven’t you?

Rachel Baird  03:43

I have, but I actually started my legal career in the defense force. So, Stephen and I share that; we come from, I guess, regulatory backgrounds, which is good for governance. And I was a lawyer in the Airforce and decided that I needed to have more challenges and got out into the masters of environmental law. And that led to practice at Clayton Newts, which was great; big law firm, lots of exciting work. And then, children came along and I ended up doing academic work and did my PhD in International Environmental law with Gillian Triggs, who was a great supervisor. And I’ve always had this very strong interest in ESG. And even in the late 1990s, that corporate social responsibility concept was starting to take seed. In a way, I feel like I’ve written this wave where environment wasn’t accounted for on the financial pledges, and now it’s very firmly on the board table conversation. And I’m really excited about that. And obviously, of course, social as well, and we’ll unpack that acronym soon. But yeah, I have a strong sort of academic and practical background in environmental social issues. I’ve worked on big oil and gas projects, I’ve been exposed to the social impact, I have done large projects as well.

Gene Tunny  05:02

Right, okay; very good. Let’s get started.

Rachel, would you be able to tell us what ESG is exactly? You mentioned corporate social responsibility; is this a successor to that concept? What is it exactly?

Rachel Baird  05:20

You could say it is. I guess to start with, it obviously means something, because there’re some estimates that, by 2025, around US 53 trillion dollars, will be held in ESG assets, whatever that could be. And it’s a very nebulous term. And I think it’s an acronym with a huge remit. And, I could be cynical and say that it’s like, avocado on toast, or soya balls; it’s the big fad. But I don’t want to be that cynical, because ESG is very, very important. But you can trace its roots back; I think the first time it was mentioned was 1999, the UN came out and they were more forward looking. And they talked about this global compact where they wanted big business and banks and government to be part of a social conscience. And so, there was a report that came out of that global compact, called Who Cares Wins. I guess that was by James Bond,

Gene Tunny  06:23

Yes, yes, very good.

Rachel Baird  06:27

So, Who Cares Wins, and buried in this report was a statement that said, “better inclusion of environment, social and corporate governance factors in investment decisions from there and its use.” Well, that was the statement, sorry; “better inclusion of environment, social and corporate governance factors and investment decisions would lead to better outcomes.” But from there, its use really grew in investment decisions and investment circles. So, for a long time, it was spoken about in investment circles. And I think that’s borne out by a lot of the standards about, climate change related disclosures, financial disclosures, you know; are there climate change related risks or litigations that are going to impact the financial bottom line of a corporation? But gradually, it sorts of crept out of the investment circle.

So, in 2005, there was a UN report that linked ESG factors to financial performance, and that was increasingly being recognized. So, it wasn’t just nice to have that, it was actually proving its worth looking at environmental issues, social issues, and corporate governance, decision governance issues.

Gene Tunny  07:37

So, what was this report, again?

Rachel Baird  07:39

In 2005, the UN report, I’m sorry, I don’t have…

Gene Tunny  07:43

That’s okay. But they were making the case that it does improve financial performance.

Rachel Baird  07:49

And I think that’s been accepted. Well, and truly now, with 17 years later, there’s a definite link between improving your environmental and social and corporate governance factors. I mean, Stephen…

Stephen Howell  08:01

I think it links back to good, or highly effective governance processes and procedures in place. We know from other reports, we know from a lot of research that’s been done, we know from our own businesses, and our own business activity, that, investment decisions often relate to good governance practices within corporations. Investors will look for those good practices; investors will be turned off by those bad practices.

So, good, solid governance frameworks, good processes in place, good controls in place, having the right people with the right skills sitting around board tables, having the right people with the right skills, in the executive teams making those decisions, always attracts investors and investors nowadays will go out of their way to seek out good companies to invest in based on their governance practices. And that’s what Rachel was saying. By having; investors will now look towards those organizations that have good ESG practices in place.

Gene Tunny  09:37

Yeah, they mean to have a closer look at those types of studies because the skeptical economist is going to wonder, to what extent is the correlation rather than causation? or to what extent is it; is it the fact that it’s something else? I mean, it’s the fact that these companies are better run, they’ve got all of these other processes and then they adopt ESG because they like to have that suite of policies and procedures and it may not necessarily be ESG that’s improving their performance. It’s the fact that they’re well run in the first place.

Stephen Howell  10:12

Some really game commentators will talk about percentages of increase in performance levels, based on good governance practice. I think that’s a bit dangerous to do that. Because, it sends the wrong message. And but, I think a lot of it, Gene, is also based around government policy, particularly around particularly the regulators; we’ve got a lot of regulators in this country, we talk about ASIC, our company regulated when we got our pro rail, prudential regulator, we’ve got the ACNC, charities regulator, and all those regulators always talk about the; sorry, not so much, talk about they articulate the level of scrutiny of companies that aren’t abiding by good governance practice. And they will highlight the fact that they need to have the people that are able to make the right decisions. The people that have the background and experience. It’s a big push from regulators at the moment to ensure that directors and executives for that matter, have the right skill, they’re the right people to make decisions that are going to affect shareholders, stakeholders, consumers.

Rachel Baird  11:47

I think economists can be encouraged by the fact that the term ESG started in investment circles, okay? So, it’s earned its chops so to speak, because it’s proven that it relates to a better financial performance. But it’s true that the better organized you are; the better your governance structure is, the better equipped you are to take advantage of opportunities. Some people talk about ESG is a risk, but it’s an opportunity. So, if you’ve got a really well operating organization, then you can go; let’s take advantage of the opportunities that an environmental and social strategy provide us. So, if you just look at environmental, and we’re talking about this before, it’s becoming a requirement of government tenders to show that you’ve got an ESG strategy.

If you don’t, you’re straightaway cutting yourself out of those opportunities to get the government work. We also know with our young workforce, the millennials entering the workforce, they want an organization that’s aligned to their values.

A research shows that employees want to work for companies that have a strong environmental and social moral license, whatever that means. But then you’re going to have more engaged employees, you’re going to have theoretically lower attrition rate, a higher discretionary effort. There’s also benefits to your bottom line where you’re operating more efficient processes; there’s a lot of economic benefits to be gained. And I used to say to my environmental law students years ago, when we get very idealistic, and they go, why does environmental social issues; why do they always lose out to the Big E economy? And I’d say, it’s time will come when it will have a financial value and I think that time has come.

For the ASX 200 companies would not be involved in ESG because it’s voluntary in Australia still. If there wasn’t a financial benefit to doing it, because they still at the end of the day, have shareholders to be responsible.

Gene Tunny  13:46

Okay. I mean, it’d be good to explore that a bit later. And to what extent they’re doing it because it is of economic value, or to what extent is it just for PR, or is it so called greenwashing, that sort of thing? So, we can we can chat about that? There are a couple of things I want to pick up on what you’ve said.

It’s ESG; and you mentioned the statement relates to environment. Is it society or social? Social issues and then corporate governance. So, to create the ESG abbreviation, they’ve dropped the C because ESG sounds better than ESCG, presumably. So yeah, that makes sense. Environment, social, and corporate governance. What typically are these issues; what are the big ESG issues, Rachel?

Rachel Baird  14:37

Okay. Well, before I go to that, I’ll just talk a bit about how I think the term can be misused or misappropriated. So sometimes it’s used for investment analysis and a lot even more and ASIC has made some comments that we can talk about later. Some say we’re ESG friendly, whatever that means. It can also be used from a risk management point of view, opportunity point of view; it can be used in what I call corporate social responsibility context, which is really values-based or morals-based. And then it can also be just its trend, like the vibe of people want to go to the movie, the castle, it’s the vibe.

So, I do sometimes get a bit cranky that people misuse the term or bandied around and don’t know what it means because it’s complex. And so, when people get, I just want an ESG strategy as well, I want one piece. What do you really want from your strategy? And it goes down to what your business is.

So, short climate change, greenhouse gas emissions reductions, sea level rising, they’re huge, big-ticket items, from a global point of view. But your local florist is not going to have much of an impact on that. What does ESG mean to them? So, then you have to really translate it to them and go, well, what are your environment impacts? Are they waste to energy use transport suppliers? What are your social impacts? What’s your supply chain? Are you employing staff properly? There’ll be micro level but, to them, don’t make a difference. And then also, what’s your what’s your governance impact? So, a florist who’s running a chain of florists might say, well, how governance impacts or compliance or decision making policies about employment or whatever they are, but you relate it to the florist.

But then if I move to say, a suite of health, transport operations, they would have completely different E, S and G issues. I guess, there’s no one size fits all, you can’t just roll out a roadmap or a playbook to a company and say, we’ve got your ESG sorted, because it will depend on their level of maturity, where they are in the businesses; some businesses might be so broken that until they get their governance framework sorted, people throw around diversity is a governance issue. Yes, it is. But if you if your governance framework is so broken, I can’t even talk to you about diversity until you get the governance framework working.

I’m working with an organization at the moment, who going on; we need women on the board, we need women on the board. I said, yes, you do. But governance is not static, it’s dynamic – it’s a journey. So, let’s sort out your basic hygiene first and your policies. And then you can talk about diversity on the board. And I think with ESG, people try and promise too much, as in, over promise and under deliver. And I think they really need to be realistic and going, what can we actually deliver? And that goes to greenwashing which we’ll talk about but don’t over promise and under deliver because that’s greenwashing territory.

Stephen Howell  17:34

I think it’s really interesting, Gene, with the activity that we’re seeing, at the moment. Yes, ESG is a big issue. But some of the questions that were being asked, as you know, in my role as the Principal Advisor for effective governance, I spend probably about 95% of my time working directly with boards. And the questions that I get asked all the time by boards is, those questions that you’ve posed today, what is ESG? How do we deal with it? Should we be dealing with it at board level? Should we be just ensuring that we’ve got the right people with the right skills in the management team? Or do we need people on the board? And if we do need people on the board with those skills, where do we get those people from? How’s that going to affect our business? How do we report on that? So, they’re asking all the right questions.

I’m talking about boards in the listed area, in the unlisted area, the public companies, even governments, of course. You know we do a lot of work with government and corporations, and we do a lot of work with charities, which is really interesting; the big charities around Australia. And they are asking those questions, because that’s going to improve their governance footprint, if you like. Particularly when they’re talking to funding bodies, about how they might be operating the hospitals, that we do a lot of work in the hospital; health sectors. in working imagine the ESG implications for within hospitals.

Rachel Baird  19:29

I was just going to say charities are; they’re going to have the biggest impact on the SRP – ESG. Because their whole purpose; their purpose driven for social impact and social change. So that’s where we’re going to see a lot of a lot of good work.

Gene Tunny  19:46

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  19:51

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Gene Tunny  20:20

Now back to the show.

So, one of the criticisms of, I think it’s a criticism of ESG, or maybe it’s a criticism of the whole sort of woke concept in the States, particularly is that there’s this concern by some commentators, particularly on the right, that companies such as Disney, and well, I think Netflix has pushed back on it recently, we chat about Netflix, perhaps. But other companies, Nike, they’ve gone, so woke, so to speak, and that they’ve embraced particular sort of positions. They’re promoting diversity. And I mean, I think diversity is great. But it looks like they’re taking political positions. To some extent they might be; Disney will be changing traditionally, male characters into female characters. There’s a huge debate about all of this. And that, I mean, there’s an argument that it’s gone too far. I’m just wondering to what extent is what you’re seeing in the States, I don’t know, maybe it’s a bit of a beat up? I don’t know. You’ve seen similar things in Australia? Is this something you’re concerned about?

Rachel Baird  21:34

Yeah, it’s really good question. And before I get to that, Steven mentioned something about the boards asking lots of questions. There’s a real dearth in ESG talent. Okay? So, what I worry about and it goes to your question, is there’s not enough people who have the skills to talk about this in an informed and intelligent way. So, and we can’t just call someone a sustainability officer, okay. So that they are so if you’re sticking someone in a big multinational and saying, drive sustainability, if they’re a young generation person, they might drive it from a me too lens because that’s all they know. Or if they’re a greeny who; I shouldn’t say greeny. It’s not in a pejorative sense. But if there’s someone who recycles and, and it has zero waste and doesn’t use plastic and all that, they’re going to drive it from an environmental sense. So, you’ve got to be really careful about what the corporate strategy is.

So, Nike, for example, their purpose is people, planet, profit. And so, they are going to go out and make comments about; and a lot of companies go people, planet, profit, because the planet is environment, people are social and profit is still their shareholders. Like I said before, there is the risk that the term gets misappropriated to drive different agendas. So for example, if we’re going to say that we’re going to have more animated characters – female because there’s been a dearth, and it’s been to male, that goes to gender diversity and social. But is that really part of ESG? Is that really the roots of ESG? And that’s where; you could be debating about that the whole time. But it probably has lost its way. And there’s a really interesting article that I’ve got with me, written by an American academic, where she out of the Wharton School, University of Pennsylvania, and it’s a really good one. It’s called the Origins and Consequences of the ESG moniker by Elizabeth Pullman. And it explores how the term evolved and has been appropriated.

Gene Tunny  23:29

Okay, I might put that in the show notes. I’ll have a read of that. Okay. Good stuff.

Rachel Baird 

I’ll send you the link

Stephen Howell  23:35

From the Institute of Law and Economics, Gene.

Gene Tunny  23:39

Oh, good. Excellent. So, another thing I wanted to chat about was, you mentioned the younger cohorts. I mean, we’ve got, millennials have come into the workforce. And now, we’re getting what came after Millennials or Gen Zs; they’re coming in.

Rachel Baird  23:58

I forgotten I’m a Gen X. I’m just sandwiched between the baby boomers who spend my inheritance and my children who inherit it.

Gene Tunny  24:05

Yeah, same here. But I remember when I first entered the workforce, I mean, I don’t think anyone cared what I thought about. I wouldn’t have been presumptuous enough to try and change the culture of the, the organization of the company. I don’t know. But yeah, it’s extraordinary. It’s become an issue in the States because I think, it was Netflix; there were some employees at Netflix who complained about the Dave Chappelle special. I don’t know if you’re aware of that. Or was it, Josh Dave Chappelle the comedian and Ricky Gervais has had a controversial special on recently, and whether they’ll make comments that upset some of the people working because the people in the organizations think that they’re not respectful of the rights of marginalized groups or whether it’s gays or whether it’s trans people. And yes, there was some pushback internally, and then Netflix, I think, put out a memo that said, ultimately, we have to make the business; the business has to work, and we have to produce content people want. Just settle down people, was basically what they were saying. I thought that was interesting, because ultimately, these companies have to make money. They do have an obligation to shareholders, don’t they?

So, how do companies balance these considerations? Because the traditional economists view and what Milton Friedman argued, in that infamous Newsweek article in the early 70s, was that companies just owe an obligation to their shareholders. And so, they’ve just got to maximize profits. That’s what they do. They should abide by the law, but they shouldn’t go beyond that and do much more for the environmental social issues, and that they should just maximize profits. That’s how they’ll maximize well-being.

But is that right? That companies still owe an obligation to shareholders, don’t they? And how do they balance all of these things?

Rachel Baird  26:04

It’s a double-edged sword because this new phrase of stakeholder capitalism has been gaining traction. And then it’s, well, how long is a piece of string? Because shareholders are stakeholders, but so are the community that you operate in. So, if you’re operating in a developing country, they’re stakeholders. So are your employees, so are your suppliers, so is the government. So, how do you keep all of those stakeholders happy? It’s a huge balancing job. And I think the key is to be really strong on what your strategy is, so that you’re not doing what I call the 24/7 news cycle, knee jerk reaction, that if someone says something, you go; I’ll be better put out a press release to keep them happy. The board goes back to its strategy and goes, well, look, we can’t keep everybody happy all the time. But our strategy is this, we’re happy with it, we’ve deliberated on it, we in a moment of quiet deliberation, we agree this was our strategy. So why in a moment of crisis, would we deviate from our strategy and make some kind of knee jerk comment? A bit like I guess, if you want to say cricket, Australia, when they handle the Tim Payne thing, stick to your strategy.

Gene Tunny  27:18

Can you elaborate on that?

Rachel Baird  27:20

I don’t know a lot about it. But I just think that they probably acted in the heat of the moment when they decided to part ways with Tim Payne rather than sticking to; and again, I wasn’t in the boardroom, sticking to a strategy and going, we don’t need to feed the 24/7 news cycle, we can take a moment, we can issue a press release that talks about strategy. So, the Netflix one sounds like they’ve done something where they’ve gone no, this is our pathway. We’re not going to keep everyone happy, but as long as we’re not being egregious, we’re being socially and environmentally, sustainable and responsible. We’re not going to apologize for who we are. I think that’s where boards are the second guessing themselves a bit trying to think well, we just got to keep; so I think really, Cricket Australia was trying to stay on the right side of the me-too movement. But if you ever try and stay on the right side of a movement, you’re never going to be on the right side of it.

Gene Tunny  28:13

Gotcha. So, Tim Payne was an Australian cricketer. And I’m trying to remember the circumstances; did he have an affair with someone who was working at Cricket Australia?

Rachel Baird  28:21

I think there’s something about that incident, messages exchanged or something. Okay, even the facts aren’t really relevant. It was I was more raising my eyebrow about how it was managed.

Gene Tunny  28:33

Right. Okay. I’ll put some links in the show notes. Can’t remember the facts.

Rachel Baird  28:39

And he was ultimately stood down as captain of Australia for something he did several years ago.

Stephen Howell 

Several years prior.

Gene Tunny  28:46

Right. Okay. I’m interested in the companies that are asking for this. You talked about a wide variety of companies; there’re public companies, but what about private companies where the owners have a strong control over the operations of the company? I can see why charities would want something like this because they’re trying to achieve some social purpose. But what if you’re an Elon Musk or something; actually that’s not a good example, because these companies are public, aren’t they? But he’s been trying to privatized Twitter, but what about private companies? Are they immune from this or they’re not? Do they want ESG as well? what’s driving…

Stephen Howell  29:33

They might not want it now, but particularly, I always think about the private companies being some of the big building corporations, some of the big builders that are building not just homes;

Rachel Baird  29:51

We’re getting commercial work that needs to comply;

Stephen Howell  29:55

They need to comply. Yeah. It’s really interesting. Yes, the private companies are going to be involved as well.

Rachel Baird  30:05

They’re slower, they’re definitely slower than public companies. And I’m seeing in Europe because I’m, I’m involved in this course that’s run by Oxford University. But I’m employed by Pearson, I’m not allowed to say I’m employed by Oxford University even though I teach the university course. And I’m seeing talking to all my students who are from all around the world, that I mean, environmental law really started in Europe anyway, and those streets ahead of Australia, and we’ve been following the lead of the Europeans. And the private companies are jumping on and realizing they have to comply with ESG requirements as much for their customers, their employees, and also to be competitive, definitely. They might not have the stakeholders who are shareholders, but I’ve got all the other stakeholders.

Gene Tunny  30:55

Okay, so this is something that will you mentioned, the younger, potential employees, it’s something that they care about that if you want to get the best people, you need to show that you’ve got ESG. Right? That’s interesting.

Rachel Baird  31:11

You’ve got everything, so you care about your staff, you’ve got good leave programs. You do waste recycling, and you give them leave days to do like, say, a law firm, pro bono, or whatever it is. You’ve got a social conscience, what does that mean? it’s defining it for the firm. Like you said, when you join the workforce, it was just you just turn up and work and do what you’re told. But now it’s like, I know, I want to have a work life balance, but I also want value in the work I do.

The worst thing my son told me was, I don’t want to grow up and be like you because you just leave the house and you look sad, and you go to work, and you come back and you’re tired. I really do enjoy my work when I’m at work. But they seem to think there’s a utopia out there in the workplace. I don’t know; it is still works.

Gene Tunny  32:02

Yeah. Well, ultimately, if you’re in business, you need to make money, you need to make a profit to keep going. just with this regulatory requirement or this requirement intenders, that you need to demonstrate your ESG credentials. I know for government that’s right; is it also corporations that are pushing this on their suppliers as well? Are they pushing for ESG?

Rachel Baird  32:32

It’s becoming more evident. I was talking to a very large company, I won’t say what industry they’re in, or it might be easy to pick them. But they found out dealing with other commercial providers that they were needing to show that they had an ESG strategy. If you think of it as like a food chain or supply chain. If they’re tendering for work, they needed to be able to demonstrate that the suppliers that they deal with how socially responsible. So, it goes up that whole ecosystem.

Gene Tunny  33:08

Gotcha. Yeah. Okay.

Stephen Howell  33:11

Also Gene, as I mentioned earlier, the push; there’s a significant push from government and regulators, and my experience is that when there’s a push from government, when there’s a push from regulators, boards and corporations will take note because they need to take note; because government and regulators don’t have a heightened scrutiny in particular areas for no reason. They do it based on  what’s driving that, and it’s normally driven by shareholders, the people, those investors and the general public who want to see higher levels of  ethics and responsibility in organizations. So, that’s what’s normally drives it.

And so, boards and organizations will take note of what the regulators have to say and as we were saying earlier about the; yesterday, ASIC made a press release in respect to that whole issue of what’s described as greenwashing. particularly Australians, the Australian Securities and Investments Commission, and, who are responsible for Australian or most of Australians companies.

It’s interesting that they targeted superannuation funds and managed funds. There’s a similar push from the corporate ring at the prudential regulator, ASIC being the corporate regulator; APRA, the Australian Prudential Regulation Authority, being the prudential regulator, the ones that the regulator looks after the financial institutions. Being, of course, some of the super funds and managed banks and insurance companies. And, in fact, I was only talking to a life insurance company this morning, one of their clients along the similar lines about skills that are needed in particular areas, and this particular area came up.

It’s all about what the regulator is saying, what ASIC is saying is that, these firms need to be very careful about how they represent their financial products, or their investment strategy. Particularly around being environmentally friendly, sustainable and ethical. If they market their products as being ethical and sustainable and environmentally friendly, they need to be able to show that that’s in fact, correct.

What ASIC is saying today is, these promoters need to use clear labels and they need to clearly define what sustainability terminology they’re using, they need to define that. What does that actually mean?  This product will help maintain a sustainable, organization or product. But unless you properly describe it, it doesn’t make much sense, and clearly explain how sustainability considerations affected in to the investment strategy. How does that all work? How do you actually factor all that into any investment strategy?

They made it clear; the regulators made it clear that it’s what they call it a priority area of focus. And they’re going to be looking at it and monitoring the market.. And they specifically highlighted that any misleading claims about ESG and sustainability will come under their notice. What I’ve seen of recent times, Gene, is how the regulators making these sorts of comments about monitoring, and about how they’re going to be, really watching the market clearly. So, it’s not just ASIC, it’s APRA, and it’s the ACNC – the charities regulator,

Rachel Baird  37:54

Even the securities [exchange] ASX has come out and said, companies should check their sustainability claims. But what’s interesting is I think, this comes off the back of litigation. So, Australia is a bit of a hothouse of litigation. But in America, there is a shoe wear company called Allbirds. And they manufacture wool; they’re called slippers, but they’re not slippers. They are like soft linen, sunlight pleasure shoes, and their statement was that their wool was sustainably sourced. Now somebody in New York who had a lot of time on their hands delved into that and challenged that in a New York court and found that their wool wasn’t sustainably sourced or their statement was greenwashing. And I think everyone in Silicon Valley was wearing Allbirds shoes.

But then in Australia, we’ve had Santos; there was a federal court claim made by the Australasian Centre for corporate responsibility, alleging that they engaged in misleading and deceptive conduct saying that they would produce clean energy and had a clear pathway to net zero emissions. So that was what I mean about over promising because, they were tested and then the Commonwealth Bank, a shareholder, must have been a large individual shareholder, made a claim in a federal court, and they ordered that he be given access to documents in the bank’s premises to, I guess, scrutinize the bank’s decision to finance oil and gas projects. So, more and more claims are being challenged to be verified the accuracy of those claims. And so, as Steven mentioned, the ASIC information sheet that just came out, came off the back of ASIC’s own review. They just looked at a sample of superannuation funds and found there were some areas for improvement.

We’re not at the stage yet, as the UK and New Zealand where they have actually; the government has mandated there’s got to be disclosures of financial related climate change, material risks or material disclosures. We are not there yet. But I think the change of government, they’re probably testing the mood of the public. I don’t think we’re that far away from some kind of mandatory reporting or tighter scrutiny. And the ASIC guideline is enough to put every single ASX company on notice to go. We can’t be cavalier anymore about ESG and greenwashing and just say, those terrible shows you see where you have marketers ago, just put that out that will do. This can’t happen anymore because it will be scrutinized.

Gene Tunny  40:38

I better make sure I understand what the actual requirements are now. Is it under the Corporations Act and other countries would have, I mean, the UK would have a Companies Act? And the US has got some legislation for corporations, but companies are supposed to look after the interests of shareholders or obligation to shareholders. I guess we’ll talk about Australia, given you’re working in this jurisdiction? What are the requirements for reporting on environmental and social and governance issues at the moment? They don’t have any, do they?

Rachel Baird  41:09

Directors have a responsibility to exchange due diligence in relation to climate change.

Gene Tunny  41:13

Due diligence in relation to climate change? That’s included in the corporations act, is it?

Rachel Baird  41:20

There’s no requirement to produce an ESG report, for example. There is a preference from shareholders, that any such report was integrated with the financial report, because a lot of companies are doing standalone reports, but there’s no requirement to do; just a financial disclosure report, is all that’s required.

Stephen Howell  41:39

So, directors just generally have a duty of care and diligence. Like, that’s one of the fundamental wrong to govern, with due care and diligence in the interests of the organization. I just think that we really do need to; I will be advising my clients to be very careful about how they label and explain any of their products, because any misinformation that will erode investor’s confidence in the Australian markets, is going to be looked at very, very closely by the regulators, and by the market supervisor, the ASX.

Gene Tunny  42:33

Yeah, I have to look into that provision about climate change, because I’m going to be the skeptical economist again. Because, the government saying you’ve got to give due diligence, or you’ve got to pay attention to climate change. But what’s wrong with a company just abiding by the law? And if there’s no carbon price imposed? What do you do? I mean, how do you know what to do? I mean,  what if you do too much, and that adversely affects your company and the viability of your company? I mean, you’ve got employees, what if it affects our competitiveness relative to other countries?

Anyway, I know, these are big questions, and we can’t answer them today. But it just strikes me as just over the top to have that in the act at the moment.

Rachel Baird  43:21

It relates to financial disclosures. So, you’re obligated to make financial disclosures, material risks of climate change might be material risk. You’re not obliged to make non-financial disclosures. Does that makes sense?

Gene Tunny  43:34

It’s not imposing an obligation to do anything in a positive sense, to get to net zero? I misunderstood what you are saying.

Rachel Baird  43:43

There’s no obligation. And again, I don’t have it right in front of me, but I know that there’s been talk about; I wish I could remember the name of it. But some kind of safety mechanism, it might be called the safeguard system for over 200 Children 21 large emitters in Australia, those companies to help them transition. So even if there is something that comes in, there’ll be a recognition that you can’t require, say AGL for example, or Santos to suddenly pivot and stop emitting greenhouse gases, because otherwise we’d all be sitting around in the dark.

There’s got to be that pragmatism that we want to move to; not just net zero but just reducing our footprint waste use. Food waste is one of the worst contributors of carbon emissions and people don’t even talk about food waste. So, there’s all sorts of ways we can reduce our carbon emissions.

Stephen Howell  44:47

I saw a great thing, talking about food waste; I saw a great innovation just recently, one of our colleagues showed us, was in here in Brisbane or around and all the public hospitals, you can only just imagine the food waste within public hospital systems. And it all traditionally just gets delivered out to a waste disposal facility somewhere. What they’ve been doing is there’s a company been gathering all waste food up and turning it into fertilizer and putting it into carryback packaging and selling it as fertilizer. It’s just amazing. Rather than take it all the way and dispose of it, turn it into something that’s going to be useful and, and making money out of it as well. So, turning it into fertilizer

Gene Tunny  45:45

That’s useful, particularly because the price of fertilizer has been spiking, hasn’t it because the cost of the inputs;

Stephen Howell  45:54

I thought that was a very innovative, sort of a process; deal with what would otherwise be a total waste of product.

Rachel Baird  46:05

And that reminds me like ESG, you can take it really, really high and say okay, what’s Wesfarmers doing about ESG? Or you can take it really, really low and say what’s Rachel doing about ESG so in where I live, I can have my little worm farm and my little recycling compost thing and I cannot use plastic; that’s the thing, it’s such a huge term that can go across all these layers of human activity.

So, if your listeners, I’d encourage them to say well, what can you do to ensure you don’t have a net zero? Some of my students at Oxford are talking about an individual passport, so when you buy something you get to choose, you might go and the product actually has a little ESG rating like the heart smart or the energy rating you can go I’m choosing that loaf of bread because it has a lower carbon footprint. Yeah, and that goes onto my little smartwatch and I can show everyone that my carbon footprint, kind of gamify which the young people would like but we’re not there yet.

Gene Tunny  47:02

Just as long as this doesn’t end up going to some government agency…

…We’re going to have to start wrapping up. This is a good conversation.

Stephen Howell  47:29

Isn’t it the smallest garbage bin you’ve ever seen in your entire life, Gene?,

Rachel Baird  47:34

Does that makes you rethink? That’s the bin in our office.

Gene Tunny  47:37

It’s slightly bigger than a Rubik’s Cube.

Stephen Howell  47:46

That’s what I was thinking. It’s the size of a Rubik’s Cube.

Gene Tunny  47:49

Yeah, that’s tiny. I was just going to ask you about Wesfarmers; that owns, is it Coles? One of the major…

Rachel Baird  47:57

I think they’ve diverted from Coles, they did okay. Bunnings and Officeworks.

Gene Tunny  48:03

Right. Okay, so they’ve got some retail businesses in Australia.

Rachel Baird  48:07

And then, they got the chemicals part in their fertilizers partners, WesCEF.

Gene Tunny  48:12

I know that at least one of the major supermarket chains is trying to have it all of its energy, renewable energy, by some date, and I think they’ve signed some agreement with the clean energy company here in Queensland, if I remember correctly, I’ll try and find some information about that.

Rachel Baird  48:29

That’s really smart because you’re going to get customer loyalty. So, a lot of my friends who don’t work in law at all, but they ring me up and they say, oh, shop here, because that’s an environmentally friendly company. I don’t always take it on face value. I like to investigate and make sure they actually are. But it’s a great PR tool if you’re accurate. If you’re not accurate, you could be in front of the court.

Gene Tunny  48:52

That will cost you …I mean, if you’re making bold claims, like Volkswagen years ago, I mean, they got into trouble for what they were alleging about emissions, didn’t they? They were doctoring or they were manipulating their test results on the diesel engines, okay.

 I’ll just ask you finally, about this article that Stephen and I both found independently, it was published in the Financial Times, and then it was picked up by the Australian Financial Review; how ESG investing came to a reckoning. This is the sort of thing you expect to see in the Financial Times – very good paper. The term ESG is less than two decades old, but it may already be coming to the end of its useful life. Have you had a look at that article at all, Rachel? And any thoughts on that?

Rachel Baird  49:48

I did. Steven, do you want to start?

Stephen Howell  49:49

I think that’s just a way; what I read into that, Gene was that it was a way to, once again, highlight ESG, to say, it’s been around for a long time, we haven’t really sort of made too much of a movement. But really, we have. This what I read into it that it was a way to heighten the level of understanding of ESG. I don’t agree with that comment that it’s not going to be around, I think it’s going to be around for a long, long, long time. And it may even change shape in some way. But I think, from the way I look at it, Gene, from a governance perspective. And as a forensic accountant coming out in me, looking at the evidence and looking at the impact that ESG will have from a governance point of view, I just think it’s just that another level of good governance practice.

Gene Tunny  51:06

Okay.

Stephen Howell  51:07

That’s the way I’d describe it.

Gene Tunny  51:09

Yeah. I just thought I’d ask because this article is getting shared around a lot, and particularly by economists, who say, I’ve been saying this all along.

Rachel Baird  51:18

That’s interesting, because a couple of weeks ago, there was a Financial Times conference, where a very senior banker at a bank whose name escapes me, made a comment about how those hysteria carry on and it’s the same as like Y2K, and I think he got stood down, didn’t really test the waters. So, this might be the Financial Times way of saying, it’s a movement that’s come and gone. I think it’s not, there’s so much to do, like, we don’t even know what the implications are of lithium, like, is that actually going to be environmentally friendly? We don’t even know; there’s movements about green steel, we don’t know what the impacts are of all the cloud-based servers in the American desert. So, there’s so much more potential to understand what we’re doing. And every time we have a decision to reduce our impact, we don’t know what the trigger is for more impact.

This is not why we’re here and we’re aware. I mean, we can say that we’ve evolved as a species. And going back to my polar exploration, when mankind, because it was men first started exploring, they just left their rubbish in Antarctica, that didn’t take it back, right? So it’s taken years and years to clear those rubbish dumps from Antarctica, because it doesn’t degrade, right? There’s nothing to degrade it. So, we’ve just evolved as a species to understand that we can’t just keep polluting our environment, and keep abusing our people. That’s not going to go anywhere.

Gene Tunny  52:47

Yeah. And that’s why we have regulations and laws.

Stephen Howell  52:54

It’s like that concept, Gene, that I’ve been sort of, looking at closely recently about the consequences of decision making. And, the decisions that you make in respect to whatever the issue might be, what are the consequences? What are the likely consequences into the future? And so, we’re talking here about, ESG and environmental issues, what are the consequences, many decisions that we make in respect to our environment. The consequences of the decisions that we make in respect to the social impact within Australia and also corporate governance issues. I think you might be aware, I just said, there’s a fabulous book that I’m reading at the moment called Leadership by Algorithm.

Gene Tunny  53:45

Yes, my mother bought it for my birthday based on your recommendation.

Stephen Howell  53:57

It’s written by Professor David de Cremer. It’s all about artificial intelligence, but he does talk a lot about the consequences of your decision making. And he relates it to real life stories. It’s really interesting stuff.

Gene Tunny  54:16

I’m going to read it. It does look great. And I’ll see if I can get him on the program.

Stephen Howell  54:26

I think it’d be great to; he told a fabulous; I went to a conference that he spoke at, he related that to a to a decision that was made by the Singapore government, in respect to the COVID app.

Gene Tunny  54:49

Yeah.

Stephen Howell  54:52

And the COVID app in respect to identifying where people might be at any point at the time, so that they could be tested, etc. And then what happened there in Singapore is that the Singapore government then decided to go one step further and use the information for law enforcement. I am sure it happens in other jurisdictions as well. But it was only the Singapore government got caught. I’m sure we got closer in Australia, there might be something similar. It’s interesting, isn’t it? We think that okay, the government is going to do this for us, to help us, but we had no idea that we’re going to move further and use it for war enforcement purposes.

Gene Tunny  55:44

Yeah, okay. I just thought I’d bring up that FT article, because it has been shared around a lot. And I’ll put a link in the show notes, unfortunately, as paywalled, though, but anyway, I’d recommend getting a subscription to the FT if you don’t already have one, if you’re if you’re listening. I just what I did want to point out was that, one of the factors is this war in Ukraine, which is arguably making it more difficult for companies to meet ESG goals. I’ll just read this out before we wrap up.

On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies investors and governments to wrestle with developments that at times appear to pit, the E, the S and the G against one another. For example, governments in Europe are reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas in order to fulfil ethical goals because they don’t want to buy it from the Russians. They’ve got someone who’s a managing partner at Lombard od air is it? I probably mispronounced that.

The war in Ukraine is an incredible challenge for the world of ESG says Hubert Keller. This conflict is forcing the questions; what is ESG investing? Does it really work? And can we afford it? And that’s what we’ve been talking about today, Rachel.

Rachel Baird  57:07

I know; what it goes to that whole social issue, if you really want to take the high moral ground and the UN’s involved, and we’re not political. I’m not being political. But if you’re saying what Russia is doing in Ukraine is hugely immoral socially, because of the civilian casualties? Then that’s highlighting a failing of the whole international community to try and do something for social good. And I mean, I know you can’t just stop the war because you can’t take action against Russia, because then you’d have world war three. But you can see how ESG can just apply to any conversation, right? So don’t think it’s failing. I think it’s just showing how complex it is. Because there’s so many levers and there’s so much human interaction.

Gene Tunny  57:50

Exactly. And there are tradeoffs. And I mean, this is what economists would say. And ultimately, the companies have to be sustainable financially, so they can keep people employed, they can keep operating, and so if you can do these other things, and then that’s great, but fundamentally, that’s what they need to do. They need to produce products that people want to consume.

Rachel, we should wrap up. Any final words, I mean, anything you’d like to say anything you’d like to push back on anything? If you want to push back on anything I’ve said? Or if you’ve got other points you did want to make that haven’t been made, then please make them now.

Rachel Baird  58:27

No, I think what I’d like to; if your listeners if there’s anyone out there go, where do we start on this ESG journey? Is to just get the right advice from the right people who actually have the right credentials. Because there is a lot of; there’s a vacuum, we need skills on ESG, and the vacuum has been filled, and it’s not being filled equally, if you know what I mean. So, if you want to start embarking on this journey, or you want to have a critical conversation on ESG, do some reading yourself first, but then really test the credentials of the people that you’re talking to. Because you can’t afford to make a misstep on this now that we’ve got the heightened scrutiny by regulators and also stakeholders, which are not just shareholders on what you’re doing. So, I guess, I get a bit cynical that there’s the people who suddenly go, Hey, I’m an ESG expert, and I’m going, yesterday, you were, like a corporate lawyer. You can’t just be an ESG expert overnight. So, people please, look for someone who knows what they are.

Gene Tunny  59:26

So, you need the experience?

Rachel Baird 

I think you do.

Gene Tunny 

Do you need specific training?

Rachel Baird  59:30

Not necessarily. I’m talking to some people at the moment who are experts in greenhouse gas emissions measurements, right. So, it’s a huge ecosystem of talent from environmental scientists to accountants, who are forensic accountants to lawyers to bankers, so pick the person for the problem you’ve got at the time. So, it’s not particularly credentials, just matching. So don’t think you’re going to get one person to solve your whole ESG problem. It won’t happen

Gene Tunny  59:59

Okay.

Stephen Howell  1:00:02

That’s why we have an expert in Rachel.

Gene Tunny  1:00:06

I’ll put links to effective governance out of the hub good Ganon. Lawyers here in headquartered in Brisbane, but you work or live in Australia, you probably work internationally as well.

Rachel Baird  1:00:19

Yeah. I’ve practiced in most, a lot of different states in Australia, because we have environmental law, is state based, is Commonwealth based, it’s international. Again, you’ve got to understand how they operate. It’s quite complex.

Gene Tunny  1:00:35

I have to come back to environmental law. There’s so much of our law that’s driven by these international agreements and rams are and all of that, but that’s a topic for another time.

Okay. Rachel Baird and Steven Howell from Effective Governance; I’ve really enjoyed this conversation. Thanks so much for your time and your great insights. Really appreciate it.

Stephen Howell  1:00:59

Always great to be with you.

Gene Tunny  1:01:01

Thanks, Stephen.

Rachel Baird  1:01:03

Thanks, I really appreciate the chance to talk about something that I’m passionate about.

Gene Tunny  1:01:08 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP145 guests Rachel Baird and Stephen Howell, to the show’s audio engineer Josh Crotts for his assistance in producing the episode, and to Peter Oke for editing the transcript. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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The Go Woke, Go Broke hypothesis w/ Darren Brady Nelson – EP139

I had a great conversation with regular Economics Explored guest Darren Brady Nelson on the Go Woke, Go Broke hypothesis in episode 139 of the podcast. I’ve cut a couple of clips (see below) from the video of our Zoom conversation so you can quickly see some of the highlights.

You can listen to the conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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