How climate change is finally changing economics
Climate change was the star of the show at this year’s World Economic Forum in Davos, Switzerland where activist Greta Thunberg rebuked global financial leaders for their inaction.
For years, climate change has been viewed as a secondary priority for businesses concerned with short-term earnings and government officials who sided with the skeptics. Yet, with the widespread climate disasters like the bushfires in Australia or the heatwaves in Europe, and the growing climate activism movement, political and corporate leaders are now forced to pay attention.
It is undeniable that climate change impacts a wide variety of sections. According to Morgan Stanley, climate disasters have cost North America $415 billion in the last three years, mostly due to wildfires and hurricanes. Meanwhile, extreme rainfall events have caused billions of dollars in losses for farmers and ranchers in the Midwest. As a result of climate change impacts, the Midwest is projected to lose up to 25 percent of its current corn and soybean yield by 2050. Furthermore, but according to a 2011 National Academy of Sciences report, for every degree Celsius the global thermostat rises, there will be a 5 to 15 percent decrease in overall crop production. Rising temperatures and extreme heat events will also lead to a decrease in labor hours, more disease vulnerability and uncertainty in supply-chain operations.
In 2018, the Carbon Disclosure Project asked more than 7,000 companies to assess their financial risks from climate change. The CDP found that, unless they took preemptive measures, 215 of the world’s 500 biggest companies could lose an estimated one trillion dollars due to climate change, beginning within five years. For example, Alphabet (Google’s parent company) will likely have to deal with rising cooling costs for its data centers. Some companies have already been impacted by climate change-related losses, like Western Digital Technologies, which suffered enormous losses in 2011 after flooding in Thailand disrupted its production.
Recently, the Bank for International Settlements, in Basel, Switzerland released a long report signaling the potentially devastating effects of climate change on central banks and the banks’ inability to cope with changes. Given climate change’s ability to render thousands of miles of real estate land uninhabitable, banks have plenty of incentive to avoid another housing crisis like in 2008. Furthermore, central banks also have the power to influence financial markets and steer private investors to acquire bonds in sustainable corporations by shifting market interest rates and excluding debts of polluting corporations.
Prior to the conference, BlackRock, the world’s largest asset manager, said it would make environmental sustainability one of its core goals and promised to rethink its investment strategy. “Usually, the conversation immediately pivots to sort of far off long-term risks,” Brian Deese, BlackRock’s global head of sustainable investing, told Time Magazine in Davos. “Those risks, while they do accelerate out into the future, are more pressing on the market today than most market participants understand.” After divestment protests in front of its offices, BlackRock has said it would cut off certain investments which “present a high sustainability-related risk” like fossil fuel companies. Because of BlackRock’s major presence in the financial sphere, other corporate money managers or investment banks may follow suit.
In addition to BlackRock, a group of investors — called the Net-Zero-Asset Owner Alliance — has committed to having a zero-emissions portfolio by 2050 grew to more than $4 trillion in assets. “Momentum is growing at an incredible pace,” said Edward Mason, head of responsible investment at the Church of England, which joined the alliance at Davos. “It really feels like we have reached a tipping point so that we can do this.”
In December, 631 institutional investors managing more than $37 trillion in assets called for governments to phase out thermal coal power worldwide, put a price on carbon, end subsidies for fossil fuels, and strengthen nationally-determined contributions. In the statement, they warned the current government commitments leave an “ambition gap” that will not prevent global average temperature from rising beyond the 1.5 degree threshold that scientists warn could trigger catastrophic and irreversible effects of climate change.
“The global shift to clean energy is underway, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks,” the investors wrote.
At the forum, Davos leaders discussed various policy concerns like how to structure a carbon tax, how to end subsidies for fossil fuel producers, and how to create a more accurate measure of societal wellbeing than GDP. “The version of capitalism we have today in our world must be reformed,” said Gore at the conference.
On the other hand, many still bring up the point that in order for ambitious climate action to be executed, governments still need to get involved. And, with the spectrum of inaction—from the United States rolling back environmental regulations to the developing countries struggling to maintain their Climate Agreement promises—there is still so much work to be done.
However, the acknowledgment of climate change at Davos—despite Greta’s distaste in their inaction—was still a step forward, no matter how small. It represented a changing tide from capitalism based purely on earning to a “better capitalism,” one which does not solely base economic health on GDP. Capitalism and environmentalism rarely see eye to eye, but with these new efforts from institutional investors, major corporate leaders, and political figures, perhaps their goals will finally unite.
