It’s a kick to the bulls for the investment markets. If we bust the limit of 2 °C of warming set at the Paris climate summit at the end of last year, it could wipe anything from $2.5 trillion to $24 trillion from the value of the world’s financial assets, environmental economists warned on Monday. That’s up to a fifth of the current global economy.
Some of that financial meltdown would come as agriculture succumbs to drought, industrial zones are ripped apart by hurricanes and cities are flooded by rising sea levels. The rest would come from coal mines and oil fields becoming worthless as the world is finally forced to give up on fossil fuels.
This dystopian view is increasingly heard at capitalism’s coal face. For example, last year, the governor of the Bank of England, Mark Carney, told a meeting in the City of London that . In Paris, he said that the world was on an inevitable “transition to a net-zero world”, meaning zero greenhouse gas emissions. The only issue was how bumpy the ride would be. But how much can investors and companies do to ease the ride?
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Risky business
Greens have always seen capitalism as a threat to the climate. For financiers, the idea that it could work the other way around used to be a fringe one. But a sustainability summit entitled in the City of London’s Banking Hall last month was packed with chief executives and people from all parts of the finance ecosystem. They were there to discuss how environmental and social sustainability could find common cause with capitalism red in tooth and claw.
As an executive of one of the world’s largest insurance companies put it amid the Banking Hall’s Art Deco splendour: “A four-degree world is uninsurable.” Risk is good for insurance companies. It is what they trade in. But too much risk is bad for business.
Similar perspectives came from pension funds. A man in charge of the retirement nest eggs of almost a million California teachers said his job was to put that money into corporations that would deliver a good return decades hence. He worried that conventional markets were driving out companies that wanted to do that, in favour of short-term profits.
Sustainable is profitable
Capitalism’s strongest advocates hold that , and government interference is bad. Even those who don’t accept that ideology point to the growing profitability of green technologies, such as wind and solar power, in the present economy. Per Bolund, minister for financial markets in Sweden, told the meeting: “Sustainability is profitable.  In Sweden we see that high-carbon investments produce less profit than low-carbon investments.”
But the idea that unconstrained capitalism can curb climate change and transform our rapacious use of scarce natural resources is still pie in the sky. “There is $300 trillion [of investment] in the global market and all of it pretty much is ignoring the fact that we have only one planet,” said Steve Waygood of Aviva, one of the world’s largest insurance companies. “We have to change market structures.”
First there is the problem of capitalism’s short-termism. Profits now are all that matters; the future is discounted. And second, there is the failure of markets to penalise pollution and the other external factors that don’t hit corporate balance sheets but create misery for someone else, now or in the future.
But if companies don’t take emissions into account now, it will hit their bottom line very hard in the future.
Changing the rules
A bit of transparency would help. On behalf of the G20 group of rich nations, Carney is writing global rules requiring corporations to disclose the extent of their involvement in the carbon economy. But disclosure won’t help much without incentives for investors to save the world, and penalties for trashing it. That requires governments to change the rules of the game.
Some see tinkering with the market as sacrilege. Capitalism is a law of nature, akin to Darwinian forces of evolution, they say. That is nonsense. Markets are machines for delivering what society wants. Their main entities are “limited liability” companies, which can go bankrupt without bringing their investors down with them. There is nothing Darwinian about that.
In return for that licence to fail, society can and must impose rules that make markets deliver what we need. In the 21st century, that means not trashing the planet for the rest of us. Markets must be re-engineered to achieve that, whether through carbon pricing or outright bans on investments like new coal mines. Without that, capitalism is the problem not the solution. Even in the Banking Hall, they agreed about that.
Journal reference: Nature Climate Change,
