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10 March 2020 (Wall Street International)*  —  Could our financial and managerial leaders be ahead of many of our politicians and governments in climate improvements?

Recently in an interview with Reuters, Bank of England Governor Mark Carney called on the world’s businesses to publish their strategies for cutting carbon emissions and adopting cleaner power sources by November, when world leaders meet in Scotland for U.N.-led climate talks.

“It’s not just green assets, and divestment campaigns or certain things are so brown or black. Every company ultimately has to have a plan for a transition and what the opportunities are and where the risks are,” Carney said.

“For Glasgow, that must be well on the path. That, that is the norm. That the question doesn’t even have to be asked because companies are answering that question as part of their strategy. And the answer is, it’s the transition, stupid,” he said, referencing a phrase coined by former US President Bill Clinton’s election strategist in reference to the US economy (Galloni 2020).

In other words, there is no doubt about climate change and that it requires an energy transition. The point is that companies must plan for the transition and disclose those plans, in a standard way, so that investors may evaluate them.

In 2015 Carney launched the Task Force on Climate-related Financial Disclosures (TCFD) that has become a global standard for more than 1,000 companies, financial firms, governments, and other organizations. However, it is voluntary, and disclosure claims can be challenging to compare and verify.

Hammering out a common set of global reference points on climate-related disclosures is seen by many as a crucial step to helping investors allocate capital more effectively. Money would flow to those companies managing the risks – and therefore likely to perform better in the transition to a low-carbon economy – and away from those in danger of being impacted more severely.

(Galloni 2020)

Larry Fink, the CEO of BlackRock, with 7,4 trillion dollars in asset management, has indicated that the firm would take a tougher view of companies that are not properly disclosing their climate risk.

He makes it clear that they will be “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them” (Kramer 2020).

Decarbonization-of-oil-and-coal

Decarbonization of oil and coal | Image from Wall Street International.

Corporate and financial managers, as compared to politicians, believe in their scientists. These managers have engaged in the technological development of our economies for decades. They understand that climate change is real, and many are realizing company plans for the transition and making investments in climate mitigation, without an accompanying public framework.

Apple Corporation issued one of the first and largest corporate green bonds in 2017 for two billion dollars to make green facilities within the company.

Brad Smith, President of Microsoft, announced on January 16, “While the world will need to reach net zero, those of us who can afford to move faster and go further should do so. That’s why today, we are announcing an ambitious goal and a new plan to reduce and ultimately remove Microsoft’s carbon footprint.

By 2030 Microsoft will be carbon negative, and by 2050 Microsoft will remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975.” (Smith 2020)

B-Corporations constitute another form of certifying environmental actions and the more general performance of sustainable development. They are legally required to consider the impact of their decisions on their workers, customer, suppliers, community, and the environment, as reported by the B Corporation organization (2020).

There are some 200 criteria, and an aspirant company must be certified to meet a minimum. Currently, more than 3,100 B Corps are operating in 150 industries in 71 countries around the world.

Even central bankers are beginning to move. Christine Lagarde, President‎ of the European Central Bank, “has called the fight against climate change ‘mission critical” for the European Central Bank. She has proposed that climate change to be part of a strategic review of the European Central Bank’s purpose.

This is justified since climate change may cause systemic risk to the financial system, due to extreme weather, decarbonization of oil and coal, unstable food prices, and fluctuations in economic growth. It remains to be seen how the bank could purchase green assets.

One of the reasons for this change is that “the basic math falls largely within a CFO’s purview. Mitigating and adapting to climate change will require close to $1 trillion in investments per year through 2030 for the (US) economy as a whole, and is also expected to put at risk between $4.2 trillion and $43 trillion of tradable stock exchange assets by the end of the century, depending on the level of planetary warming. (The latter number is for a world that has warmed by 6 degrees Celsius) (Palmiero 2020). Risk management is an essential and widely practiced business activity.

Renewable-energy-technologies-photovoltaic-plants

Renewable energy technologies: photovoltaic plants | Image from Wall Street International.

The other fundamental reason for the increased participation of business leaders is that climate mitigation usually makes money. Cutting gas emissions through energy efficiency, lowers operating costs. And these investments will return even more if the correct economic prices are used, for example, as firms such as Microsoft do with internal carbon pricing.

Currently, 1400 multinational companies use internal carbon pricing, according to GDP, a non-profit environmental disclosure platform. The essential use is for making investment decisions related to energy, but carbon pricing is also crucial in the supply and R&D areas.

These mitigation efforts reduce air pollution and save the lives of our citizens. Naturally, in energy-intensive sectors, the most profitable energy efficiency investments have already been made, but the correct energy prices will help. Governments need to remove tax subsidies and introduce carbon prices in a fiscally neutral manner, as advocated by William Nordhaus.

Climate mitigation also makes money through the latest renewable energy technologies: photovoltaic plants, wind turbines, and biomass, with increasingly lower costs for energy storage.

According to a review by the SUN DAY Campaign of data released today by the Federal Energy Regulatory Commission (FERC) for the first eleven months of 2019, the mix of renewable energy sources (i.e., biomass, geothermal, hydropower, solar, wind) is now in first place in the race for new US generating capacity added in 2019.

(Bossong 2020)

And increasingly our financial institutions are backing off carbon-intensive investments. “The world’s largest financier of fossil fuels has warned clients that the climate crisis threatens the survival of humanity and that the planet is on an unsustainable trajectory, according to a leaked document.

The JP Morgan report on the economic risks of human-caused global heating said climate policy had to change or else the world faced irreversible consequences. The study implicitly condemns the US bank’s own investment strategy and highlights growing concerns among major Wall Street institutions about the financial and reputational risks of continued funding of carbon-intensive industries, such as oil and gas” (Greenfield 2020).

Extreme-weather

Extreme weather | Image from Wall Street International.

In conclusion, we are gradually beginning the transition because it makes economic and ecological sense. It represents a significant business opportunity to supply green products and services for the US economy. Industry and finance are ahead of governments in many areas, but cannot accomplish the transition fast enough without government support, particularly in introducing carbon pricing and in phasing out carbon-intensive sectors.

As our scientists and industry leaders know we must reduce by 50 percent our present rate of GHG emissions, over the next ten years, to be able to reach the goal of the Paris Agreement.

If we do not do halve our emissions by 2030, we are highly unlikely to be able to halve our emissions every decade until we reach net zero in 2050, our final goal. The coronavirus is a wake-up call for facing climate warming. Global collaboration and goal setting are necessary for resolving the global problems facing our planet. We have a moral responsibility to future generations and an opportunity for our economy.

Do we want to be on the smart side of history?

Bibliography

Bossong, K. 2020, January 15, Sun Day Campaign Press Release.
Galloni, A., 2020, February 14, Reuters.
Greenfield, P., Watts, J., 2020, February 21, The Guardian.
Kramer, M. R., 2020, January 20, Harvard Business Review.
Palmiero, L., Gibassier, D. January 2020, Harvard Business Review.
Smith, B. 2020, January 16, Official Microsoft Blog.