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.

The post Sustainable finance: Funding a low carbon economy appeared first on New thinking for the British economy.

If I were to use my money to invest in part of a company I would be a shareholder. This term does not only apply to large players. As David Pitt Watson has noted,  if you hold a pension, or if you invest your savings in any way, you are a shareholder. This means that a wide swathe of the public are, in fact, shareholders. Being a shareholder of a company also gives you ownership of it to an extent, but with this ownership comes responsibility.

An owner of a company should be able to steer company policy? But what if there are thousands or even millions of owners? How does policy get decided? On a day to day basis, most of this is the job of executives, who are hired and paid for this purpose. But companies ultimately operate by majority vote, at executives and their actions are scrutinized at Annual General Meetings (AGMs). It is in such meetings that board members and company directors – those who set the policy – are appointed. Though the extent of this varies across states, shareholders also possess the power to submit motions of their own, setting out their expectations for corporate strategy in the upcoming year.  Here, shareholders can influence company policy by grouping together to vote in a certain way, putting forward resolutions to be voted on or even just standing up and speaking at these meetings.

Shareholders can also exert influence without even being in the room, by signing up to ‘proxy voting services’, such as ISS and Glass Lewis, which seek to influence companies by gathering large groups of votes, and using them to vote in line with certain principles and goals. Other, more specialised firms such as Hermes EOS, not only vote client’s’ shares, but meet with executives on behalf of their clients as a whole, in order to promote their interests. And in recent years, many firms such as Hermes have been championing sustainability on behalf of clients, insisting that generating long-term value means tackling questions of sustainability head-on.

This is how shareholders can make a difference, so why should they? As members of the public these shareholders have an interest in ensuring their company’s policy is sustainable in the long term. Typically, the interests of an individual with a pension or savings  are very different from those of high-frequency traders. They want assurance that their money will be around for the future, and are more averse to strategies that do not benefit the long-term bottom line. They therefore have an interest in stopping high-risk, short-terminist projects. Projects ranging from the the tar sands, to drilling in the Arctic to explore new oil reserves, which are widely-condemned by environmentalists and financial experts alike, may represent gambits by executives to make a quick buck, over ensuring long-term financial sustainability.

However responsibility can extend beyond ensuring long term investment returns. Natasha Landell-Mills, (Sarasin and Partners, a specialist asset management firm with a commitment to stewardship principles), comments that she personally thinks owners also have a responsibility to monitor their companies, and ought to challenge  behaviour they consider irresponsible or likely to cause harm. This responsibility not only applies to environmental issues, but also social and governance ones (ESG issues). Dr Michael Viehs, (Hermes EOS) argues that the application of ESG issues by shareholders in company policy “ultimately benefits the wider society and economy as a whole”.

In effect, the fact that we are all shareholders gives us a status akin to the voting rights we have as citizens. And when it seems as if major corporations, rather than solely governments, are the key players in so much of today’s globalized world, it’s perhaps time we started taking our position as corporate citizens more seriously.Catherine Howarth of Shareaction, an advocacy group which works to ensure the ethical and financial concerns of shareholders get heard, adds a further requirement to citizenship: “citizenship is a technical category (i.e. some people are formally citizens and some are not), it’s also a mind-set involving a commitment to being engaged and active”. Therefore all shareholders have the potential to be citizens, but not all act as such.

Landell-Mills personally thinks “perhaps the single most important power” shareholders possess is being able to vote directors off a Board. The system of company governance is democratic and can be used by voters providing they do not sell their shares. Such actions can have knock-on effects, as the firing of a director can have a major impact on share price, and is thus something companies often fight hard to avoid. So voting can become both a way of influencing broader policy as well as share price – without even having to sell shares.

Yet aspiring citizen shareholders often find themselves running into obstacles. For some businesses the governance system is not democratic enough for shareholders to have a say in policy. Additionally in certain markets shareholder rights are more limited. In these cases shareholder engagement would not be as effective, because it relies on the governance structure giving shareholders power. For example, in the US, shareholders can’t nominate directors onto boards unless the company explicitly permits it. Meanwhile in many instances shareholder votes are not treated as binding.

Moreover Howarth, Landell-Mills and Viehs all emphasise that dialogue between a company and its shareholders is key. “Shareholder engagement with a tobacco company to encourage the company to become a candyfloss company will fail” writes Howarth, “engagement works when it involves a discussion between shareholders and directors/executives about meaningful choices a company has”.

Overall Viehs personally views engagement as an important tool in the activist’s toolbox, because “constructive shareholder engagement through dialogue is perceived very well by companies”. Again, the reference to dialogue is key. Getting companies to support environmentally friendly policies and practices could be a crucial part of the future transition to a green economy.

The 2015 Paris Climate Agreement represents a significant step on the way to this, because it pushes climate change into corporate agendas. Viehs comments that Paris has made companies realise that there might be “future climate legislation likely to be introduced which might adversely affect the financial situation of companies”. New realities, like the possibility of a carbon tax, or a shift to renewable energy, become a part of how corporations budget and plan for the future.

Landell-Mills similarly thinks the Paris Agreement changes the dialogue surrounding climate risk, as government action looks more likely than ever. Decarbonisation has moved from being “a far-fetched risk”, to “a foreseeable outcome that they must comment on and prepare for”.

Thus, even in the financial world, the Paris Agreement was therefore a game-changer.Take for example the 2016 AGMs of ExxonMobil and Chevron, two of the biggest US oil giants. At both companies, around 40% of shareholders defied the advice of management to back resolutions telling the companies to assess whether or not their business models are in line with the prospect of keeping below a 2-degree temperature rise. “The US system of corporate governance is less shareholder-friendly than in the UK” comments Landell-Mills, “given this context, the very material votes in favour of the shareholder resolutions on climate resilience reporting at Exxon and Chevron were significant victories”. As Viehs noted, even though both votes fell short of a majority, the idea of shareholders taking companies to task over climate is relatively new, and these votes represented  “maybe even the most successful climate change proposals in history”.

On the other hand, Howarth is less optimistic, because votes were not given to some excellent resolutions. Howarth names Blackrock, Vanguard, Fidelity as some of the larger investors, whose vote could have swayed the decision, but did not. She suggests that such large institutional investors therefore need to be targeted with some tough questions about the way they voted.

Viehs is however confident that climate-related proposals will gain even more support in the future, because “shareholders are becoming more aware of environmental issues that companies are exposed to”. Landell-Mills emphasises that these changes take time, but is also hopeful, even suggesting; “perhaps shareholder democracy is beginning to take shape in one of the world’s largest democracies?”

In 2017 shareholders again brought resolutions to Exxon and Chevron, demanding that they account for the impacts of climate change in their business models. This time around, however, they passed with a majority of votes, showing that shareholders are indeed willing to defy corporate boards. Shareholders are waking up to climate change and realising they can use their position to shape the companies that shape our world.

The post Sustainable finance: Changing businesses from the inside out appeared first on New thinking for the British economy.

For as long as we live in a capitalist financial system, someone is going to profit while someone else is going to pay. Is it not better that they profit from financing lung cancer breakthroughs rather than tobacco outfitters; from investing in low carbon engines rather than a 3rd Heathrow runway; from buy up solar power rather than arctic oil reserves? Is it not better that they profit from improving lives rather than destroying them?  

Climate change may ultimately be a crisis of the capitalist system. The naturally omnipotent financial structures that have, without grace, risen to the top of such a system have been fuelled by one source: investment. But as far as the crisis of climate goes, we are in too deep and we have not enough time to shift our political or financial paradigm. If we are to pivot on our path in time to make a real difference, great and global in scale, we must harness the forces that drive our markets today. In this, socially responsible investment practices are a crucial tool in bringing our financial system in line with our own social goals. Together, allocation of capital and changing public attitude could be highly influential in our fight to mitigate climate change.

To set the scene, imagine you are managing money on the stock market. This money is spread across a portfolio of carefully selected assets: listed companies (like Apple or Facebook), bonds, derivatives and private companies or property. Actively making money above and beyond the benchmark (the market average) is no small feat and, aside from creating your own, there are plenty of different strategies to choose from: Active or passive; defensive or aggressive; value or growth. More recently, socially responsible investing, known as SRI, has taken a strong hold. At COP21 auxiliary events, the number of investment firms advocating this strategy, and those encompassed by the term under different names – such as green or sustainable investment – astonished me: socially responsible investment is growing and here to stay^[1].

Broadly speaking, SRI involves selecting assets which take responsibility for financially material factors, such as the social and environmental issues important for tackling key global problems^[2]. The strategy is based on this assumption: companies which currently seek to protect their natural and social resources are more likely to weather tough times and gain competitive advantage in the future^[3]. SRI has evolved out of the concept of an ethical investment fund, which is run with negative screens, automatically excluding certain companies. Ethical investment funds date back to the emergence of the value-laden investment demands from Quakers groups and church officials^[4], who could not condone portfolios of slavery, weaponry, or porn. Modern institutions are similarly not keen to be associated with particular endeavours: For example, educational institutions would be foolish to invest in child labour; health services would be hypocritical to invest in tobacco and it might seem morally wrong for conservation organisations to be invested in oil companies. As the public began to hold various institutions to what they preached, an ethical fund market sprung up in response.

However, problems arise when portfolios are limited by exclusion screens. For one, a single screen for carbon would not address problems of pollution, health or women’s rights. Furthermore, calculating the carbon footprint of a portfolio is complex and expensive in labour (modern standards calculate the total embedded carbon, including the carbon emitted from design, manufacture, use and disposal). Operating with a restricted investment universe can also mean that funds suffer badly when the market drops because it means leaving out many of the largest, most defensive stocks, which pay good dividends even when times are hard – such as British American Tobacco, BP and Shell etc. SRI, which instead picks investments based on positive qualities, is an attempt to take a more robust approach both to ethics and economics, by trying to reconcile the two.

The power of SRI lies in the way it combines disinvestment (divestment) with the next, crucial step: reinvestment. Managers are not sending money directly to companies when they buy up shares (unless it is an initial public offering (IPO)). Rather, they are paying the previous investor who has sold out, or an intermediary who handles such transactions. Importantly, this means that withdrawing money out of a socially or environmentally irresponsible company by selling shares may not damage said company’s finances as there is generally someone less scrupulous ready to buy. This means that managers acting alone, who are unlikely to own large proportions of any one stock, will barely cause a ripple on that stock’s share price.

This question of  divesting and reinvesting in publicly-traded stocks is closely debated. Some research does show that when institutions band together in they can trigger cascading changes in social norms, affect company reputations and challenge their subsequent debt financing^[5], making it more difficult for irresponsible companies to fund new projects. The financial case for such divestment and reinvestment is likely to increase further with green-tech/clean-tech advances^[6], so we should hope to see greater reallocation of capital to SRI-like funds. Less controversial, however, is the idea that investing in privately owned sustainable companies can help to support changemaking entrepreneurs in their pursuit of a better world (and/or riches). Venture capitalists, for example, are considered the “gate keepers” to new business: lending expertise and making high risk investments^[7], with a key role to play in the development of sustainable start-ups.

Whether private or public, socially responsible companies can be selected for SRI portfolios by asking the right questions, before looking thoroughly at the financial returns: How sustainable is the product that the company provides? Are management well incentivised for a long-term outcome? Is the employee turnover low? Is employee diversity high? Do people enjoy their jobs? Are health and safety standards good? Have externalities, such as pollution, been internalised? Would they suffer from future carbon tax legislation? Could their reputation be damaged by poor environmental, social or governance practices? (According to research by Cone Communications^[8], 90% of people surveyed would boycott a company if they learned of irresponsible business practices.) Asking these questions is not only about being morally responsible citizens, rather it can be about doing good business. For example, if a company’s operations rely on labour force based in country with a high HIV rate, investing in HIV awareness education and employee testing facilities could make economic sense. The health of employees is essential to the success of the business: if more workers take sick days, then less work is done and company costs increase. From an investment point of view, offering this type of social service is not so much morally right as it is smart business. Financial performance and strength of balance sheets always remain important metrics but are no longer the first things an analyst looks for. Endorsing SRI is not the end of our plight, but it could certainly help to promote some of our most important ethical and societal goals.

Integrating social and environmental analysis into an investment strategy can help managers reach beyond ‘good’ companies to highlight solution companies, those whose core aim involves making the future safer, healthier and more sustainable. An example would be a battery company, whose product can be incorporated into renewable power sources and electric cars. Not all stocks in a sustainable portfolio must provide a solution to climate change however. Low diversification translates to higher risk, meaning fewer clients are attracted and resulting in smaller shifts in capital (meaning the fund is less influential more likely to fail). Funds can diversify by investing in best-in-class companies as well as “pure” sustainability. For example, a well run environmentally conscious platinum mine could be considered part of our sustainable future because platinum is currently essential for reducing pollution from car engines. Of course, it must be addressed that what is classed as “solution” or “best-in-class” can be subjective, opening the door for ‘greenwashing’ marketing campaigns. Clients should speak to potential fund managers and understand what drives their investments, selecting managers based on value-alignment and transparency.

So how do we ask for change and from who do we ask it? The reality is that when it comes to their own money, many people are likely to choose higher returns over better environmental practices. To shift the investments of these people we need to prove that SRI is equally or more profitable relative to traditional investing, over the long-term. Although there are skeptics and, realistically, failures, the generally consistent answers from research literature suggest there is not a performance penalty for investing sustainably^[9] – Generation, Impax, Jupiter and Alliance Trust Investments are individual success stories. As well as making demands of investors and their money-managers, we also need to demand changes in government policy. The financial sector may be largely private but if it is the broader system we seek to change we should look beyond individual investment houses. Pressure from government agencies is gaining and there is evidence that a confluence between organisational and policy responses is beginning to emerge^[10]. For example, the latest Intergovernmental Panel on Climate Change (IPCC) report contains an entirely novel section on projections and recommendations for Investment and Finance^[11].) Together, these actors must remould the system so it becomes realistic and more profitable for individuals within it to act virtuously.

That same unsavoury feeling you get upon realising you are indirectly supporting the tobacco industry via your pension and inconspicuously advocating for deforestation through your public bank is exactly the feeling that will drive investment decisions over the coming decades. Younger generations are growing up with climate change as a defining issue and there is an increasingly urgent demand for action and value-expression. In North America alone, $30tn of wealth will be transferred from baby boomers to millennials over the next 10 years,^[12] presenting an immense opportunity to redirect and inject capital into a more sustainable financial model. As this generation inherits a rapidly-warming Earth, socially responsible investment has the potential to play a major role in securing our planet’s future.

^[1] For example, the 2015 New York Times “Energy for Tomorrow” International Conference where I worked as a microphone runner.

^[2] N. Bocken, S. Short, P. Rana, S. Evans. A value mapping tool for sustainable business modelling Corp. Gov., 13 (5) (2013), pp. 482–497

^[3] M. Russo The emergence of sustainable industries: building on natural capital Strategy. Manag. J., 24 (2003), pp. 317–331

^[4] Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10(3), 194–205.

^[5] Ansar A, Caldecott B, Tilbury J (2013) Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets? Oxford: University of Oxford.

^[6] Linnenluecke, M. K., Meath, C., Rekker, S., Sidhu, B. K., & Smith, T. (2015). Divestment from fossil fuel companies: Confluence between policy and strategic viewpoints. Australian Journal of Management, 40(3), 478–487.

^[7] Bocken, N. M. P. (2015). Sustainable venture capital – catalyst for sustainable start-up success? Journal of Cleaner Production, 108, 647–658. http://doi.org/10.1016/j.jclepro.2015.05.079

^[8]http://www.conecomm.com/research-blog/2015-cone-communications-ebiquity-global-csr-study

^[9] Sparkes, R. (2001). Ethical investment: Whose ethics, which investment? Business Ethics: A European Review, 10(3), 194–205.

^[10] Linnenluecke, M. K., Meath, C., Rekker, S., Sidhu, B. K., & Smith, T. (2015). Divestment from fossil fuel companies: Confluence between policy and strategic viewpoints. Australian Journal of Management, 40(3), 478–487. http://doi.org/10.1177/0312896215569794

^[11] http://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_full.pdf

^[12]https://www.accenture.com/us-en/insight-capitalizing-intergenerational-shift-wealth-capital-markets-summary

The post Sustainable finance: Can socially responsible investing mitigate climate change? appeared first on New thinking for the British economy.

How has divestment emerged as the leading response to the financial dimension of climate change, and why is there a need for a more critical and varied response?

Climate change campaigners continue to have a monumental task ahead of them. The threats posed by climate change are wide ranging and diverse, and the behaviours that continue to drive it are complex and thorny. In the face of such a problem, campaigners have to become polymaths, thinking simultaneously about education and policy change, about financial reform and about how we can change our daily habits. Yet when it comes to thinking about the financial dimensions of climate change, one approach has largely dominated amongst activists – that of divestment.

Fossil fuel divestment makes a simple demand – that shareholders sell all their shares in any fossil-fuel related industry. Led by charismatic environmentalists like Bill McKibben and Naomi Klein, a global campaign for divestment has rocketed to prominence since it first emerged in American university campuses in 2011. Indeed, it remains particularly popular within universities, although other major financial players, from the Gates Foundation to large pension funds, have been met with demands to divest. Prominent global players, including the Guardian Media Group and the Rockefeller Fund, have committed to divestment. Fossil Free, a project of 350.org, lists on their website a total of 701 institutions committed to divesting, representing over 5.2 trillion in assets (though, with some sleight of hand, this number represents their total holdings, not the fossil-fuel based shares they’ve pledged to divest).

There are a few reasons for the popularity of divestment as a tactic. For one, it’s eminently achievable – fossil fuels only represent a small proportion of any portfolio, and many investors are already moving away from the highest-carbon investments, simply because these have ceased to make financial sense. Divestment is also a clear, simple ask, with a compelling narrative. It’s got good guys, bad guys, and a clear way to fight back, all of which makes for good headlines and an easy, intuitive appeal. It also appeals to our sense of moral righteousness. If there are people doing bad things – recklessly trashing the climate in the name of profit – we ought to condemn and distance ourselves from them in no uncertain terms. Finally, given the range of actions one can champion with regards to climate, divestment is relatively easy. It’s a lot simpler to campaign for your institution’s fund managers to shift their portfolio than it is to go vegan, stop flying, or pursue engagement strategies.

But all of this begs a bigger question: does divestment work? Here things are less clear. For one, divestment involves selling shares at a discount, in order to unload them. This almost inevitably means they’ll be snapped up by someone else, and that the new owner is unlikely to share the same scruples over investing in a fossil fuel company.

This becomes a question of balance: on the one hand, divestment can be used to delegitimize those seen as propagating the climate crisis, by generating negative press and challenging their social legitimacy to operate. On the other hand, divesting is unlikely to harm these companies’ bottom lines, and by giving up one’s position as a shareholder, one loses the ability to claim that the company ought to work for you. Simply put, divestment can generate a lot of attention in the short-term, but it may mean giving up the sort of long term influence in corporate governance granted to shareholders.

The larger problem, however, may be in defining what comes after divestment. Prominent pro-divestment groups, such as 350.org and People and Planet, have only recently begun to give considered thought as to where to sustainably re-invest freed up funds. At present only a few basic resources on re-investment exist, as against the reams of material on how to run a divestment campaign.

Looking at things in terms of carbon, this may be the wrong way around. Because divested shares are likely to be snapped up quickly, and because there is only a loose relationship between a firm’s share price and their ability to raise the capital they need to operate (most of which comes from banks) divestment is unlikely to cut emissions by driving fossil fuel firms out of business. Whether such creates sufficient stigma and pressure to lead to strong regulation is a different question. But meanwhile it’s clear that we need to move a lot of money into sustainable solutions, and fast. The IEA, for instance, estimates that we need to put $44 trillion into renewable energy technology, and an additional $23 trillion into energy efficiency to have any hope at a two-degree warming limit. This suggests that pulling money from fossil-fuel companies may do less good in fighting climate change than simply funding the competition, which is an act that doesn’t necessarily require divestment to pursue.

Divestment and sustainable re-investment aren’t necessarily opposed. But there is also a prominent tendency amongst divestment campaigns to pursue divisive campaigns. Campaigners have referred not only to fossil fuel companies, but anyone who invests in them as ‘morally bankrupt’, and students have taken universities to court over such claims. Institutions such as universities, charities and pension funds are hardly paragons of greed, and painting a picture of black and white morality may do more harm than good in alienating such potential allies who may have the potential to support other solutions. This simplistic narrative is great for the peace of mind for the campaigners, and for the worldwide unity of the divestment movement. But it can also poison the debate, ultimately resulting in a toxic stalemate, in which institutions refuse to divest, and campaigners refuse to admit ‘defeat’.

Finally, pursuit of divestment as a sole objective can lead to an unhealthy attitude towards the roots of the problem. The ‘social mandate’ for fossil fuel companies does not come only from the shares that we hold in them, but from our consumption of fossil fuels. It is unclear how far divestment should reach – how can it be wrong to invest in Shell, but permissible to invest in a car manufacturer, producing cars that run on petrol? As long as we continue to consume fossil fuels, divestment is largely a case of Pontius Pilate washing his hands. Meanwhile, other actions such as switching electricity provider may have a more direct impact on one’s carbon footprint, but lack the symbolic punch of divestment.

We shouldn’t abandon divestment – it can be appropriate in some circumstances. But the singular focus on divestment that characterises most climate finance activism at the moment is unhealthy, simplistic, and counterproductive. Climate change is a complex problem, and it’s unlikely to warrant a simple solution. With a range of complementary alternatives out there, it’s time that we opened up the debate.

The post Sustainable finance: the divestment approach appeared first on New thinking for the British economy.

Is it possible for citizens to rein in the financial system and demand that it works in their interests?

The finance industry is critical for our future. Without an effective system which can collect our savings, and invest them in sustainable projects, there is little hope we can address the economic, social and environmental challenges of the twenty first century.

Yet the forces of finance are often considered the enemies of sustainable development. Indeed many campaigners might look at the activity of financial markets in terms of the irresponsible behavior of companies which it sanctions and encourages, and conclude that, if we are to create a sustainable responsible economy, financial institutions need to be opposed. Sometimes they may be right in that contention.

But here is an extraordinary event that speaks to another perspective. In the run up to the Paris Climate Conference delegates received a petition from the pension funds and fund managers of the world. There were 348 of them and they represented $24 trillion in capital. That is about 25% of the entire investment of the world. They were calling for a tough line to be taken to ensure a sustainable planet; that carbon should be taxed, and subsidies eliminated. In other words the finance industry, often seen as the bogeymen of progress, was more radical in its demands than were the policy makers.

So how come?

The most immediate reason was that the customers of our financial institutions had asked them to take action. They had lobbied for change, and, within those institutions were staff with the skill and the influence to take a more progressive stance. Indeed one of the remarkable changes of the last generation in finance has been the development of responsible investment, such that now, through the Principles for Responsible Investment (PRI), $50 trillion of investors have now made at least some commitment to responsible investment practice.

But these developments are not strange aberrations to the laws of economics. They are not a sign that capitalism has, out of thin air, developed a conscience. Rather they are a sign that the institutions of invested capital, just like the institutions of democratic politics, should reflect the needs of the societies they serve. But, just like political structures, they will not do so unless they asked to do so.

Here is the perspective that many miss. Capital in the early twenty first century is not owned by a few tycoons. Most of the shares of most of the companies on the stock exchange belong to pension and investment funds. Typically those funds represent the savings of millions of ordinary workers, who have set aside their capital in order to provide an income in retirement. It is they, or put another way, it is we who are the new capitalists. The biggest pension fund in Europe represents the public servants of Holland, in the UK it is telecom workers, in the US it is university teachers and the public servants of California. The largest block of capital in Norway is its sovereign wealth fund; there to benefit all the people of that nation. It is these millions of people whose capital is represented on the stock exchange. They are the people for whom every CEO insists they are “creating shareholder value”. Of course such savers need the companies they invest in to be profitable; no profit, no pension. But it makes no sense to generate profit without regard to environmental or social consequences. Savers won’t enjoy a pleasant retirement in a world whose climate is out of control. So if financial systems were working properly, responsible investment should be the norm and the petition to the climate negotiators the rule, not the exception.

But this is only going to happen, if citizens-savers ask that it happens. All of which should be familiar territory to those who subscribe to Open Democracy. We all support democracy and human rights; but we also know that these will only be delivered if we demand them. Indeed it is that combination of open institutions and active engagement which creates a civil society.

As in politics, so in economics. Every company gives some sort of report on its activities, and every board member stands for some sort of election. But how often do the share owners, (that is you, me and our families) engage in that process? If we did, the prize would be huge; a civil economy, reflecting the same sort of checks and balance as civil society.

Here is a story which illustrates how big the prize might be; but also how far we have to go. It is about a shareholder campaign, run by a remarkable NGO called Share Action. Its aim was to encourage the pension-funds which owned a significant proportion of a large pharma company, to tell that company to desist from suing developing country governments. By suing those countries the company risked undermining the global agreement which gave access to medicines to poor people in the developing world—an agreement which has saved countless lives. I met a fund manager afterwards who had been lobbied. “Wow” he told me “that was a successful campaign. I got more letters, calls and emails on that issue than I have had on everything else for the past three years”. “And how many emails did you get”, I enquired. “Six” he replied. Six emails changed the world.

The tragedy is how little activity takes place. I recently visited a world leading university that is committed by its statutes to promoting research. Within its endowment is one major research company. The company’s executive pay system penalizes the CEO for investing in research, but not for failed acquisitions—that is against the very ethos of the university. Yet the shares of their endowment will have voted in favour of that remuneration package, because no one will have brought it to their attention.

The finance industry is largely indifferent to the stewardship of the companies it owns on our behalf – and this is a huge gap. There is, for example, one US investment fund which spends over $130 million in marketing how responsive it is to look after savers’ money; yet it employs only one person to vote the shares of the 10,000 companies it owns on their behalf.

But this indifference is also a huge opportunity. In the past, the finance industry did not serve us well. This is apparent in its poor delivery of the vital services it should be providing to us.

But this problem can be solved. “The price of liberty”, as Thomas Jefferson apocryphally remarked, “is eternal vigilance”. The same price needs to be paid for a finance industry which delivers responsible investment, and responsible services.

David Pitt-Watson explores these issues further in a book entitled What They Do With Your Money, co-authored with Stephen David of Harvard and Jon Lukomnik of the IRRC Institute

The post What good is finance? appeared first on New thinking for the British economy.

Image: EPA

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.

The post Sustainable finance: short-termism, climate crisis and the need for a transition appeared first on New thinking for the British economy.