Due diligence on the notion of "responsible investing" is needed

Today I was moved to write a detailed response to an article I came across, titled From KYC to KYP: how one advisor weaves responsible investing into his practice. Here is my response.

I have examined the ESG, "responsible investing" and "sustainable" taglines for many years, doing my due diligence to decide if they have merits worth including in my practice. I have found them all to be so badly defined, to include so many biases, fallacies and outright falsehoods, and to be so fundamentally immoral that I want nothing to do with them.

The prime example is anything to do with carbon dioxide emissions, global warming, climate change, net zero and the linked ideas. In a world where 6 billion people would be incredibly jealous of the energy we have access to and the resulting life-enhancing technologies powered by this energy, and reducing poverty is the most important way to improve the lives of billions, the world can desperately use vastly more energy.

Fossil fuels currently provide over 80% of world energy and are the fastest-growing energy source as measured by the amount of energy created. Every single country that has emerged from poverty has done so using fossil fuel energy to enhance life and every country now trying to do so chooses fossil fuels as the primary energy source. Why? Because of the unique and currently irreplaceable qualities of fossil fuels, including availability, energy density, affordability, scalability, flexibility. Despite decades of taxpayer subsidies for wind and solar combined with policies impeding fossil fuels, the percentage of world energy from fossil fuels has been steady. Also, wherever wind and solar are adopted, to the degree they are added to the grid, the cost of electricity rises.

There are huge biases and great context-dropping when many people think about energy. While the advantages of fossil fuels are downplayed or completely ignored, the advantages of wind and solar are over-hyped. While the disadvantages of fossil fuels are over-hyped and demonized, the disadvantages of wind and solar are mostly overlooked. The most thoughtful examination of the flawed thinking process I have seen is provided by energy expert Alex Epstein, author of the 2022 book "Fossil Future" and of www.energytalkingpoints.com. Time and again Epstein provides evidence and ideas that no one has been able to refute, and opponents of his ideas are almost all afraid to debate him.

For a great look at how the UN social development goals can actually be met using just a fraction of the money wasted on climate change issues, I recommend the work of economist Bjorn Lomborg and his organization The Copenhagen Consensus. This includes his books "False Alarm" and "Best Things First."

For an excellent look at the science of what we actually know about our climate I highly recommend the book "Unsettled" by Steven Koonin, one of the world's leading scientists and former Obama appointee. Koonin aptly distills the science literature, showing where the gap between what we know and what is commonly believed has been created and persists.

In summary, my research shows that for those who actually care about improving human life, the ESG/RI/Sustainable movements as constituted are so far off-target as to be against human flourishing and I condemn them as immoral. I recommend that financial advisors and investment management companies do deep due diligence on this subject as I have, in which case they will find an overwhelming body of evidence that supports the rejection of the ESG/RI/Sustainable taglines. I want nothing to do with them and when clients very occasionally ask, I have clear and definitive evidence from every knowledge discipline to back everything I say on this subject.

The rot in the ESG investing ideology

Reading an article in Wealth Professional Canada I was moved to comment. 

ESG has been all the rage for several years but is based on deeply flawed and at their root anti-human principles. Consider just one issue that dominates ESG: carbon dioxide produced by fossil fuel use. Fossil fuels are used everywhere that people work to break out of energy poverty because of their unique combination of abundance, dense energy, flexibility, portability, scalability and affordability. They can be used in millions of location by billions of people and despite thirty years and trillions spend on wind and solar, they only provide 3% of world energy and fossil fuels provide 82%. The fastest growing energy in the world by gigawatts? Fossil fuels that have lifted every single developed country out of energy poverty and powered the industrial revolution.

What about side effects of carbon dioxide? CO2 is literally the gas of life, feeding the plant kingdom that in turn feeds the animal kingdom. As CO2 rises life flourishes and for the last several decades the world has been greening due to CO2 fertilization. Is the global temperature rising? Is appears to have risen slightly, by about one degree celsius since the industrial revolution, however we have only had good satellite data for forty four years and it is hard to separate the human effects from immensely powerful natural forces like solar cycles, Milankovitch cycles, cosmic ray cycles and impacts like volcanoes. Yes, cities have warmed due to the urban heat island effect but mainly they are warmer at night.

Did you know that deaths from extreme weather events have declined 98% in the last hundred years or so? Yes - FIFTY times lower. This is because with abundant energy enables humans to prepare for, recover from and be more resilient against the naturally dangerous climate. 

The anti-fossil fuel component of ESG is so deeply flawed, so immoral, so anti-reason and anti-human that if any good remains within ESG it is all poisoned by association and can't be trusted. I avoid all ESG in my practice and will never be a supporter no matter how irrational the world becomes nor how popular the ESG delusion becomes. Take a close look for yourself, read widely and think carefully and in full context while eliminating bias. If you dare to you will find in ESG the rotten ideology that I have found.

The Canadian government attacks the values of its own citizens

I wrote this to an Ottawa area MP when I learned of an upcoming "consultation" phone call.

I am writing to you as a financial advisor who lived in Orleans for a number of years when I first built my business and who has many clients living in Orleans to this day.  I urge and implore you to push the government to stop all action towards implementing the published proposed tax increases as they could be the most damaging tax increases in our lifetime so far.

When I learned of the proposed changes, my jaw dropped and I felt very angry too.  As a financial advisor for the last 24 years I have gained a very good knowledge of many parts of the Canadian income tax system, particularly individual income tax, as I am a registered eFiler and prepare about 130 returns per year for my clients. Over the years I have done over 2,000 tax returns. In addition, a crucial part of financial advice is understanding how income tax reduces the value of investments made by clients, thus reducing the wealth of Canada forever, and helping clients understand and plan to keep their tax burden to a legal minimum through proper planning.

I think it is crucial for you to clearly understand what it means when a person earns income. It means he has created something of value that another person is willing to exchange his own values for. Money is simply the medium of exchange – the underlying value represent a piece of each person’s life, their energy, their intellect, their physical effort, their personal property, their values. In a country that truly protects the rights of individuals, productive ability is celebrated, not punished. Individuals with prodigious ability to create value must be free to do so and the value they create should not be attacked by their own government. If a man can build a business and create value of $200,000 more than the cost inputs, then this is only possible because the people he trades with agreed that he had created this value – that is to say they willingly traded their own values in exchange and only because they thought they were better off for having traded.  If a man can produce excess value of $2 million then he has created much more benefit to his fellow members of society than the man who created $200,000 of value. Should the man who creates greater value be punished for it? Should his productive ability be stifled? Should his ability to allocate capital that is used to create even more value be impaired? Is it moral for him to have a greater portion of his production stripped from him by force the harder he works? This is exactly the regressive tax system we have today.

For many years I taught a financial planning seminar series for adults through the Ottawa Catholic School Board and in the class focused on income tax I listed thirteen different examples of situations where the tax system claws back income, over and above the basic income tax, leading to sometimes severe punishment for earning more income. I used an example drawn from my real life experience doing a client tax return, where a single parent earning $30,000 faced a 70% effective tax and clawback rate. This is not the only example, the system is riddled with complicated buttons and levers pulled by a series of governments over time.  I’m sad to say this has only become worse since the last Federal election and the punishment for daring to produce more value for fellow citizens has risen.

Consider the possible things a business can do with its earnings. Remember that dollar are simply place-holders for actual economic values such as tools, equipment, buildings, vehicles, clothing and all the other goods and services produced by people to improve their lives. First, it can hold them in a bank account and in this case the cash then is available for the bank to lend to others who may need capital to pursue their own goals in life. Second, the business may spend it on maintaining operations or invest in growing its productive capacity and in this case it also produces value. It may pay salaries or dividends to owners of the business, enabling them to pursue their personal values and improve their lives. The business may hold retained earnings and invest in other businesses, either small private businesses or larger, more liquid and secure businesses; again in both cases serving to maintain and increase the production of human values. All the actions a business may take with its earnings are positive, unless the business is not run well enough to be competitive and profitable and thus closes.

This is economics 101, but it is not well understood by many people, including Canadian elected officials of the last century. When production is taxed, the whole chain of wealth creation in society is slowed down, retarded, held back. Don’t forget, wealth is simply the values chosen by people, values such as homes, cars, communications, schools, hospitals, scientific discoveries, etc. Forcibly taking greater amounts away from those who are better at producing values - no matter what is done with it, no matter how well intentioned the takers may say they are, no matter their justifications - can only impair human progress. Taking ever-higher percentages from people as their productive abilities increase is an even greater harm to the producers and to society. Below is a table from my class slides, showing that a dollar doubled ten times is worth $1,024 but when taxed at 46% is only worth $75. In one case, society has $1,024 of homes, schools, hospitals, etc. and in the other it has only $75 of these. Which society has the greater health of citizens, greater education, greater communications, safer houses and cars, more ability to care for the small fraction of truly incapable individuals?

Note that when I referred to helping clients pay a minimum of tax, “minimum” does not by any means mean low or nil, as many of my clients pay far more than a fair share of tax already. The fact is that the people who are the most productive already pay taxes at a rate far greater than their fair share. As the table below shows, just 10% of our population pays 41% of taxes, four times their fair share. Even worse, the most productive 1% of our people are already forced to pay, despite spending vast amounts on tax and legal and financial advice, 24 times their per capita share of taxes. Twenty four times! Each of them carries on their backs twenty four fellow citizens, weighing down their ability to produce values, to improve civilization, to advance human knowledge, to improve the lives of those they trade with, to innovate, to hire people to help them in their productive efforts. Just imagine the progress that would be unleashed if the greatest producers among us were truly freed to use all their abilities to their fullest!

Actually, you don’t need to imagine it. Until the recognition of individual rights along with proper governments to protect them in the late 1700’s, the natural state of humanity through all history was poverty. Suddenly, an explosion of knowledge and production raised the quality of human life by more in 200 years than in the thousands of years prior.  Countries that adopted the principles of freedom have uniformly flourished beyond the imagination of 18^th century Kings. Canada was one of these.  Even today, wherever and to the degree the right to life, liberty and property are cherished in law and in the culture, progress and flourishing occur. To the degree a country violates these three great rights by the force of central controls, regulations and taxation, human life suffers – witness Venezuela in recent years. 

Alas, Canadians have forgotten the philosophical roots of the enlightenment and are unaware of the causes of the industrial revolution and the great advances they see around them. They are moving away from expanding freedom and towards, and even accelerating towards, collectivism, socialism, statism and fascism, which are all essentially the same. The current proposals to raise taxes on private corporations represent a significant slide towards Venezuela and misery and suffering. Notice how there has been NO discussion of the possibility that some people are being taxed too much and their burden should be lowered to create a more level playing field. The only discussion by the Government is to increase taxes on some people to a level paid by some other people - people the government thinks it can persuade to vote for them to continue punishing high producers. The tall flowers are being cut down again. The logical progression of this is to cut a level lower and lower until all are equal in their suffering and the Marxist ideal is achieved, a la Venezuela, where you cannot find a dog, cat or bird in the city because the people have killed them all for food – even zoo animals.

The consequences of implementing this tax proposal will not be unintended, but fully intended. The government has been told, warned, notified of the pending damage to society. The assumptions behind the proposal are severely flawed in both moral and economic terms, so to seek ideas in a “consultation” on how to minimize unintended consequences is to entirely and deliberately miss the point. The proposal represents a willful and wanton destruction of real, tangible and deeply moral values like homes, food, education and health so cherished by so many Canadians. Instead of attacking our most productive people, isn’t it time Canada started to encourage them to ever greater heights and encouraged all others to emulate their success and help them in building an even wealthier society? Our entrepreneurs, business people and high producers should be our greatest role models, not the object of scorn, derision, insults and attacks via the force of taxation. While there is so, so much more than could be said on this, I will close with a quote from one of the great thinkers in the field of human freedom and progress.

You cannot bring about prosperity by discouraging thrift.  You cannot help the wage earner by pulling down the wage payer.  You cannot help the poor by destroying the rich. - Abraham Lincoln

I look forward to your thoughtful response to my letter.

Financial illiteracy in the press and in society as a whole

While Ottawa east opinion writer Brynna Leslie belittles the importance of financial literacy, she exemplifies it in her opinion piece. It is clear she has not sought any professional advice, nor did the CBC Radio economics reporter she refers to. If they had, they might have learned some of the following basic financial principles.

She likely would have learned that you don't "make some good money in interest." Interest is a payment in return for borrowing your money and interest is normally a part of what is left over after the borrower has made a profit using your money. The source of wealth creation is ownership of the means of production, meaning businesses, companies, shares, stocks or whatever name you prefer to give them. With financial literacy she certainly would not have labeled the source of all wealth as "junk."

She could have learned how important it is to match the time horizon of an investment with a suitable investment type. Earning interest through a bank is suitable for short term goals because there is little fluctuation, but is spectacularly unsuitable for longer term goals because of the inherently lower returns of fixed income investments, especially one inflation is subtracted.

She could have discussed how growth investments fluctuate, but with diversification and prudence the probability of a negative outcome decreases exponentially with time. An advisor would have shown her how important it is to have patience and to understand the fluctuating nature of investment markets and coached her to avoid making mistakes of timing and selection.

With advice, she would have understood the difference between saving and investing, earning interest versus earning profits, and thus embraced the crucial incentive to save and invest - the pursuit of wealth accumulation and creation through rational self-interest.

If she was financially literate or rational enough to seek help from a financial advisor, the economics reporter Leslie refers to would have never dared advise her own daughter to "blow her pocket money on Cheezies" instead of learning about investing and personal financial independence, then reported it to the world.

The state of financial education in our schools is nothing less than a travesty and a moral outrage - testimony to the awful result of government monopolies.  Ask yourself the same question I do when I start a conversation about finance with someone I know little about: "in your primary, secondary, college and university education, how many minutes of instruction were dedicated to the understanding of critical, real-world personal financial principles?"  The usual answer is... zero.

What percentage of high school graduates are not only expected, but required by law to file annual income tax returns once they have their first job, which is usually before graduating from high school?  100%.  What percentage of these graduates is even remotely familiar with the structure and principles behind income tax? The answer is scary - for all of society.

Brynna Leslie's column is testament to the failure of our education system to prepare students for reality and the failure of our society to value financial education. Until such time as the subject is embraced (and even more so if it ever is), financial advisors provide an essential service to their clients and create enormous value in society.