How can we solve the impending climate crisis?




The past year has seen a run of disasters that were natural, but very far from normal. Hurricanes in the Caribbean that flattened entire islands, flooding that drove tens of millions from their homes in Bangladesh, and spectacular wildfires that filled the news with smoke and fury. Inevitably, there are those who link these catastrophes to climate change and those who object strenuously to any connection. You’ll have heard both of these stories. They are old, outdated and tired; yet still they stumble on.

In the blue corner are sceptics. Climate change is not happening, they say, or if it is, then humans are not responsible; and anyway it’s just a leftist conspiracy trying to destroy capitalism. In the red corner are environmentalists, saying that the apocalypse is coming, that leaders are doing nothing to stop it, and above all that business is the enemy.

Both of these narratives contain some truths, but I believe that both are also wrong in the ways that matter most. Climate change is real, it is largely caused by humans, and it is highly dangerous. But saying so is not an anti-capitalist conspiracy. Many of the loudest voices calling for action on climate change today are those of business leaders. And in the past year the financial sector has begun to wake up both to the risks of financial instability from our warming world, and the bright new investment opportunities that arise in our attempts to deal with it.

"Climate change is real, it is largely caused by humans, and it is highly dangerous."

First, the risks. Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board, set out why he believes climate change has the potential to threaten the stability of the entire global economy. There are direct risks, he says, that extreme events can damage assets. There are liability risks of new regulations, or catastrophic reputational shifts, or litigation. And there are transition risks that the shift to clean energy and the staggering pace of technological change will leave your old-fashioned investments stranded, and worthless.

Many of these things are already coming to pass. That’s one reason the CEO of BlackRock, Larry Fink, declared climate risk disclosure to be one of BlackRock’s top engagement priorities. And it’s perhaps also why Goldman Sachs CEO, Lloyd Blankfein, not famous for hugging trees, used his first ever tweet to criticise President Trump’s decision to pull out of the Paris climate accord. The opportunities, of course, lie in investing in resilient assets that can weather the transition, capture value from the plummeting costs of clean energy, and build market share in the new, low-carbon economy. And this is where the pace is definitely picking up.

Some years ago, the United Nations Environment Programme Finance Initiative (UNEP FI) outlined four barriers to action on low-carbon investment, and lately these have been tumbling, one by one. First was the lack of suitable financial instruments. Now, intense research and experimentation is starting to bear fruit, and in the past year the likes of UBS, BlackRock and Legal & General have issued funds based around climate investment instruments that just a few years ago were seen as niche.

Next was a lack of effective policies. But the Paris agreement sent an unprecedented political signal, triggering a raft of new policies, and even President Trump has just sneaked out an effective tax break of $50 per tonne for capturing and burying carbon dioxide emissions.

Then, poor data. Last summer, Michael Bloomberg’s Task Force on Climate-related Financial Disclosures issued a masterful set of guidelines for including climate risk metrics as part of mainstream financial reporting. By December these had been backed by companies with a combined market capitalisation of more than $6.3 trillion.

The last barrier identified by UNEP is the toughest one to crack.

They called it ‘cognitive’ and it all comes back to narrative. In spite of the mountains of evidence, analysis and reports showing that investing with a weather eye on climate is economically sound, and indeed that fiduciaries would be neglecting their duty if they continued to ignore it, many investors are still trapped in the outdated story that climate change is for anti-capitalists, people with soft hearts and softer heads.

I believe this is the most exciting opportunity area, which is why I’m spending much of my time here. The fundamentals tell us that climate risk and opportunity should be a key part of investment decisions.
Now we just need the narrative to catch up.

Last year Mercer published a report showing that only 5% of European pension funds included climate risk in their investment strategy. That’s an interesting number because it’s small – showing there’s plenty of opportunity for improvement – but it’s also not zero. It can be done, even within the current structural, regulatory and cultural regimes. What did it take to enable those particular investors to break out of the old story and into the new one? What new metrics are they using to guide their decisions, and how can others follow suit?

If we can crack that, we will be very well placed not just to protect the existing value of our assets against the risk of climate change, but also to create much more value in the resilient new climate economy of the years to come.


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