The Division of Economic and Risk Analysis (DERA) at the US Securities and Exchange Commission (SEC) held the 9th Annual Conference on Financial Market Regulation on May 6, 2022. Co-hosted by Lehigh University’s Center for Financial Services (CFS), University of Maryland’s Center for Financial Policy (CFP), and CFA Institute, the conference brought academic participants together to discuss topics of interest and relevance to the SEC. Chief Economist Jessica Wachter opened the conference, followed by comments from SEC Chair Gary Gensler and a keynote by SEC Commissioner Allison Herren Lee, appointed by the prior president.
The conference highlighted a continuing lack of securities market regulatory capacity. While we appreciate the desire many SEC employees have to protect the public, we note that, for the most part, the SEC remains an ineffective public interest regulator. Their lack of regulatory effectiveness and the securities industry greed cost the nation $19.2 trillion in the years leading up to the financial crisis, increased the speed with which China will overtake the U.S. in GDP terms, and set the stage for the eventual replacement of the US dollar as global reserve currency.
One paper presented at the conference showcased this. The research, titled "Does Socially Responsible Investing Change Firm Behavior?" purported to "examine the impact of socially responsible investment (SRI) funds on corporate behavior." It did not. The paper was flawed in a number of ways. In presenting the research, the principal author quoted "Milton Friedman’s epochal essay, “The Social Responsibility of Business Is To Increase Its Profits,” published in the New York Times Magazine 50 years ago." The problem is that Friedman was wrong. There is no debate about the real world, negative societal impact of unethical, damaging business practices: discrimination, environmental degradation, etc.
Friedman argued that corporate managers, in attempting to meet social goals, would waste money on "pet projects." He ignored that facts: over the past 100 years, multiple ethical and financial crisis have shown that corporate managers repeatedly spend money on "pet projects" designed to maintain white/male supremacy. Friedman also assumes that most, if not all, decisions corporate managers make are optimal, that is, all of these decisions would result in a profit increase. This is clearly not the case. If it were, no firms would ever fail.
The paper presented did not accurately assess firm behavior. The analysis suffered from time bias: looking in the mirror (using historical data), not on the road ahead.
The paper uses ESG/SRI ratings provided by Morningstar, a mutual fund rating service. These ratings suffer from cultural bias, inaccuracies. A cursory examination of unethical practices in the ratings industry, at the major rating services (S&P, Moody’s) confirms this.
The paper reminds us that the goal of white supremacy is to protect white incompetence and to protect whites from the consequences of bad behavior. One only needs to examine the performance of the previous President to confirm this fact.