Greenhouse gas emissions are deeply woven into our economy. We burn fossil fuels to produce energy, we use nitrous oxide to fertilize our fields, our trash generates methane – all of which contribute to climate change. Reducing this dependency will involve shifting a vast array of practices, throughout our economic and personal lives. And yet climate campaigners and lawmakers alike are paying alarmingly little attention to the financial system that makes these unsustainable practices not only possible but profitable.

Addressing climate change is, at its core, an issue of finance: whether one is fighting against entrenched economic interests tied to the status-quo, or pushing for the development and implementation of new technologies, much of the fight against climate change revolves around money. For example, in order to prevent catastrophic climate change the energy sector would have to invest nearly $17 trillion (US) in energy efficiency and low-carbon technologies from 2015 to 2030. Yet much of the world may be unable to access the finance required.

In order to meet these targets, public spending will have to play a critical role. And indeed, some governments are beginning to step up to this challenge. A great example is the German program on renewable energy, which played a key role in making solar and wind competitive. Governments are also working to provide finance through development banks and funds such as the Green Climate Fund. Meanwhile, projects such as the Global Innovation Lab for Climate Finance aim to create an enabling environment for private sector investment.

Yet while these developments may be encouraging, estimates suggest that public sector finance will fall woefully short of the finance flows required to address climate change. Given the glacial speed of public regulatory action and provision of finance, it is imperative that the financial and corporate sectors contribute to the shift towards sustainable development. The potential is enormous: the banking sector manages financial assets of almost $140 trillion; institutional investors, such as pension funds, manage over $100 trillion; and capital markets, including bonds and equities, exceed $170 trillion.

Important shifts have taken place in the financial and corporate sectors – even as the scale remains far too limited. Investors and managers, for example, are beginning to understand the importance of sustainability as a means of ensuring long-term profitability. Private commercial finance for sustainable businesses increased from $22 billion in 2012 to an annual average of $37 billion over 2013 and 2014, reflecting investors’ growing comfort with renewable energy technologies. Green bonds, which are bonds issued for projects with a positive environmental impact, are another good example. In 2016, nearly $100 billion in green bonds were issued, nearly surpassing the total for all previous years combined. 2017 looks set to beat this record. Greenwash remains a problem, as projects strive to claim ‘green’ status for themselves; yet as the market grows, labelling standards have begun to become stricter and more harmonized, helping concentrate attention on those projects with genuine impact.

More broadly, the pressures of a warming world change the risks we all face. Within the financial world, investors are increasingly looking towards innovative forms of finance that recognise the inherent risk posed to everyone by short-termist approaches to business. These new approaches to investment strive to account for global risks such as climate change in how they select and price shares. This is a slow process, but one gaining momentum.

Yet an increase in private-sector momentum is only possible within a broader policy environment defined by strong, long-term public policies that guide investment and provide credibility to climate action. An example here is the EU long-term mitigation goal of “cutting its GHG emissions, by 2050, by 80-95% compared to 1990 levels.”. The commitments made within the Paris Agreement also go in this direction. Yet there’s still further to go.

For one, there is increasing consensus that a strong carbon price is essential. By making polluters pay for the damage they cause, carbon prices can direct investments towards low-carbon technologies and provide for economic efficiency in climate action. They also provide for a level playing field for corporations, allowing them to compete fairly and encouraging broad buy-in. National and sub-national carbon pricing instruments currently cover 15% of global GHG emissions and their use is on the rise. China, for example, is on track to launch the world’s largest emissions trading scheme.

Beyond this, however, we need to address the failures of our current system, including dismantling the over $500 billion in subsidies given to the fossil fuel industry every year, and regulating the financial sector to re-align it with the needs of the societies it is supposed to serve. This includes increasing regulation that ensures prudential investments, more transparency and disclosure, and more liability, among many others. This would help close the climate finance gap; prevent abuses such as those that led to the 2008/2009 global financial crisis; and make the financial system resilient to the threats that climate change is shaping on the horizon.

Given the need for strong policies to guide both the public and private sector, none of this can happen if we, as citizens, simply stand by and let events take their course. Fighting for smarter climate policy can seem an uphill battle – not least since US has recently installed a ‘denier in chief’. Yet even in the US, 68% of the public now supports the view that humans are the primary cause of climate change, and only 9% believe climate change ‘will never happen’. In other words, the potential for popular pressure remains strong. And, encouragingly, there’s plenty we can do as citizens to bring the urgencies of climate and the financial system in line.

For starters we can each put our money where our mouths are and be willing to pay for the real cost of things: this means paying more for electricity, transport, and sustainable produce. As Dr Kim Nicholas explains, citizens are far from powerless in the face of climate change, and can often have significant impact through their choices as consumers. This should be coupled with strong demands to our government representatives to commit to ambitious climate action, put a high price on carbon, and shape regulation to favour prudential investments. Voters will need to push for this at the ballot box, but also make sure they keep the conversation going, holding politicians to account.

Regulators and investors alike must push companies to ensure that they take interest in sustainable business models and practices. Companies do not develop business strategies in a vacuum, but are shaped by their perception of the options available to them, as well as their perception of what shareholders want. And as David Pitt Watson argued earlier in this series, anyone with a pension is an investor. Financial decisions are taken daily in the name of shareholder interests, yet beyond the super-wealthy, very few shareholders bother to voice their interests at all. As Pitt-Watson notes, shareholder engagement is so rare that even just a few letters from ‘ordinary’ shareholders can change fund managers’ perception of their clients’ interests. Climate change, then, calls for us to be both more invested citizens and citizen investors.

The window of opportunity to halt the catastrophic threats of climate change is very small. We are fast exhausting our planet’s carbon budget, and we risk locking-in carbon-intensive investments that will shape our planet years into the future. In this context, it is imperative not only to be aware of our own power as citizens, but also its scope. The world of finance has long been out of focus for climate change campaigners. Now is the time to change that.

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The scale of the risk is clear. If business were to continue as usual, with no immediate action to mitigate the effect of climate change we face at least a 50% risk of exceeding 5°C global average temperature change in the coming decades. Given that we are currently only around 5°C warmer than in the last ice age, climate change is banishing us, or better, we are banishing ourselves to completely unchartered territories. It is beyond a doubt that these changes would irreversibly transform the physical geography of the world, but perhaps more importantly for some, this self-imposed exile would fundamentally upend our economic system.

The Cambridge University Institute for Sustainability Leadership has been working to studiously model the risk climate change poses to the economy as a whole. In their Unhedgeable Risk Report they model three scenarios, one where we pursue growth without consideration for the economy, one where we step up our existing climate commitments progressively over time, and one where we actually do enough to meet a 2 degree target.

The warning they deliver is stark: the economic shocks that will result from unchecked climate change will cause ‘substantial losses in financial portfolio value within timescales that are relevant to all investors’. In the scenario where climate policy has stalled, they predict that only half of these losses can be avoided by moving out of risky investments and into safer ones. The other half are simply unavoidable – or in financial terms ‘unhedgeable’. This would cause a global recession, dipping into negative growth for most of a year, and a permanently depressed global growth rate. Meanwhile there would be grave impacts to poverty reduction, as the poorest countries in the world are the most susceptible to the geophysical effects of climate change, and investments in these countries would face particularly acute risks. Avoiding these risks would require radical measures that go beyond the financial system. But if market players face unavoidable losses due to this unhedgeable risk, then there is a purely self-interested incentive to support a socio-economic environment where these systematic changes can take place.

All this means that while it may be true that the geophysical consequences of climate change are likely to occur in the second half of this century, financial markets, macroeconomic trends and the reduction of poverty are likely to suffer much sooner because of the uncertainty regarding the climate crisis on behalf of consumers and investors. This suggests not only that the fate of the economic system is inextricably tied to the climate crisis, but also that there should be an incentive for businesses and investors to get proactive, and deal with these risks before either the physical consequences of climate change, or the uncertainty they will inevitably generate, become real. Here, investors have a particularly important role to play, in providing the signals that can guide the market towards a sustainable future, or deeply astray.

After nearly a decade of stories uncovering the self-serving greed of bankers and investors which triggered the 2008 financial crisis, we might be forgiven for forgetting that financial systems were designed to serve a social purpose. Yet a well-functioning financial system has a role: to provide funds to those ideas and enterprises which it thinks will provide value to others. It is meant to bridge the gap between ideas and execution, by providing the cash businesses need to get going, or to continue on.

Yet our current financial system has drifted far from this core purpose. Trading has become increasingly frenetic, and increasingly ruthless in search of profit. In the mid-20th century 15% of all stocks held by investors would be traded within a year. By 2010, this figure had climbed to 250%. This represents a fundamental shift in our attitude to trading: from one where stocks were bought largely as an investment into a business’ long-term prospects, to one where investments shift rapidly, chasing marginal profit in the fluctuation of share prices, rather than looking for sustainable businesses.

This has driven a change in the behaviour of businesses. For instance, a study presented 400 corporate Chief Financial Officers with a hypothetical project that would have guaranteed an overall return, but would have reduced a quarterly earnings. The authors found a majority of CFOs unwilling to take on the project, prioritizing being able to report higher short-term earnings, and thus safeguard their share price, over producing anything of value and ensuring the company’s long-term success. In line with this short-term culture, between 2000 and 2009, average CEO tenure dropped from 8 years to 6 years. In thrall to the financial markets, which control the perception of their value, businesses are increasingly focused on short-term profit themselves. This has been described as a shift from “a culture of management to a culture of speculation”, and it is proving disastrous for our ability to get businesses to confront the realities of climate change.

Of course businesses are not the only ones in denial. As Rolling Stone noted, the US Republican Party are the only mainstream political party in a major polluter nation who still systematically deny climate change, and they do so with almost religious fervour. With the US as the second-largest emitter of CO2 worldwide, behind only China, and having just installed a climate-denier-in-Chief, things look bleak. And if you trace how this state of affairs came about, the financial system is deeply implicated.

On one hand there are the now all-too-familiar stories of companies lobbying and lying about climate change for private profit – whether it’s Exxon Mobil burying decades of climate data, or Volkswagen lying about their vehicle’s’ emissions. Such machinations are constantly justified in terms of securing shareholder value – fighting climate change simply isn’t a good investment. On the other hand, the same American foundations such as the Searle Freedom Trust, the John William Pope Foundation, and the Howard Charitable Foundation which have championed the sorts of radical free-market ideas that have secured the dominance of short-termist, quick-profit practices in the financial sector, have also given hundreds of millions of dollars to climate change denial think-tanks and lobbyists.

The result is a world where we directly subsidize the fossil fuel industry to the tune of $492 billion every year. At the same time, the IMF estimates that the damages caused by fossil fuels to health, and the environment amounted to $4.8 trillion in 2015, comprising an astonishing 5.9 percent of global GDP^[1]. This not only represents a huge barrier to tackling climate change, but it should also disturb anyone who believes in the market system as a fair arena for competition.

The financial system is undoubtedly a major part of the problem when it comes to creating change. In fact, in many ways it’s invested in the problem. Yet the scale of the climate challenge means that any solution to the crisis we’re in will have to harness the financial system to drive change. To avoid catastrophic global warming, we will need to move a lot of money into sustainable solutions, and fast.

The International Energy Agency estimates that in order to switch from fossil fuels to sustainable energy will cost $44 trillion, between now and 2050. Meanwhile, looking beyond the energy industry, the World Bank estimates an additional $70-100 billion per year will be needed to allow the rest of the world to adapt to the changes we’ve already caused, in terms of dealing with impacts on health, agriculture, forestry and fisheries, water supplies and much more. This means investment on a scale beyond what most governments are currently putting forward. In fact, between 2011-2015 private and public investment totalled $1.195 trillion. If that trend continues, we’ll miss the 2050 IEA target by over 71%. It’s clear, then, that halting global warming will take everything we have.

Getting the financial industry to shift, from being invested in perpetuating the climate crisis to being invested in solving it is no easy matter. Yet there are clear financial motivations to tackling climate change – at least for some. The Cambridge Institute for Sustainability Leadership argue that although we will need to take a short term financial hit, to properly face down climate change, halving the global growth rate from 0.7% to 0.3%, this best-case scenario, within 8-12 years we would end up seeing growth rates above any other possible model. In other words, there’s a smart case to be made for long term investors to back climate solutions.

Meanwhile for those who feel that pandering to the financial system is an abandonment of questions of justice, there’s good news – pushing investors towards climate-friendly solutions also has the potential to help reform the financial system – by reorienting it towards more long term investments, and empowering the sorts of investors who care about sustainable, well-governed companies over those out to make a quick buck. It’s not a comprehensive solution to the flaws of the industry, but given the destruction a short-termist focus has wrought, it’s a start.

Given the importance of finance to climate, it’s disconcerting then that we hear so little about it when it comes to discussing how to tackle climate change. Beyond headline grabbing pledges from the likes of Bill Gates, and the complex question of carbon trading, it’s a topic that barely registers in the frantic debate about policy and legislation. Over the next few weeks, we hope to provide an overview of exactly how the financial system might be harnessed towards a more sustainable future, what some of the barriers are to doing this, and what we, as citizens can do.

^[1] Author’s calculation, based on figures in the paper, but taken to remove pre-tax subsidies.

This article is the first in a short series on sustainable finance with Cambridge University.

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