In 2005, Hurricane Katrina ripped through New Orleans, causing massive damage both to lives and infrastructure: over 1300 people died and $125 billions of damage was caused. This is the future of the economy with climate change: controlled by the forces of nature blind to the predilections of mankind. Hurricanes are expected to be 13% more likely to hit category 4 or 5, when temperatures rise by 2°C. Climate change will have a huge impact, so how can it be stopped?
Recently, a British investor, Chris Hohn, seems to have an answer. Using the financial muscle of his $30bn hedge fund, he is attempting to force change from within. He has started to inveigle his way into companies with high carbon footprints to try make them consider the environmental costs of their businesses, whether through dumping their shares or through an activist takeover. He aims to force climate change to be part of company agenda and management incentive; using markets and economics to do what tighter regulation and government policy should do but does not due to the structural issues. Politicians prioritise local economic growth today over larger global issues, as that short-term mindset gives rise to political success. Politics values the short-term urgent over the long term vital. There is never enough political will to make decisions that sacrifice economic growth for solving climate change; especially in a world where countries are jostling for global relevance and dominance; a classic tragedy of the commons. As a result, MPs are unlikely to divert both time and money onto legislation whose effectiveness will be learnt 10 or 15 years down the line. Therefore, the requisite regulation never comes, and even if it does come, companies either find ways to circumvent it or lobby to kill it. The immediacy of markets may consequently be the best way of solving this.
Recently, more environmentally conscientious funds have been created. But can you serve two masters of returns and environmental conscientiousness? All three of the world’s largest asset managers, Blackrock, Vanguard and State Street offer ESG (environment, social, governance) funds, aimed at sustainable investing, but with the trade-off of lower rates of return, it remains a niche segment. This is because the current system is stacked against companies who care. The irresponsible can free ride. This is changing as the climate strikes ever closer: forest fires are no longer isolated in faraway Borneo and the Amazon but in Sydney, in California, encroaching closer to the lives of the uber 1% who seem to dictate both politics and the zeitgeist. Investing in a company that haemorrhages away the climate will become like investing in a company that makes money through serial killing: profitable but absolutely catastrophic. When Chris Hohn joins forces with Greta Thunberg, perhaps the tide has turned, and not a moment too soon. The environment can no longer be swept under the carpet. It is part of the key performance indicator and as Charlie Munger says, “Show me the incentive and I will show you the outcome”.