Climate Change.

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May 18, 2020

How the Private Sector Can Combat Climate Change foreignaffairs.com/articles/world/2020-04-13/unlikely-environmentalists

There’s a reason climate change is often described as a “wicked problem.” Fully

decarbonizing the economy will require not only completely transforming the global energy

infrastructure, at a cost of many trillions of dollars, but also retrofitting all of the world’s

buildings, remaking the planet’s agricultural practices, and revolutionizing transportation

systems. It is difficult to see how this can be accomplished without some kind of global

carbon tax or regulatory regime. But putting such a system in place is proving to be

enormously difficult. The 2015 Paris agreement on climate change was a good first step, but

many countries show little sign of meeting the commitments they made as part of that

agreement, and the United States’ withdrawal from the process has presented a significant

barrier to further progress. Given the slowing global economy and the slide toward populism

and nationalism in much of the world, the prospects for any kind of comprehensive global

accord seem increasingly remote. So far, at least, the public sector is failing to confront the

problem.

BlackRock CEO Larry Fink, center, with French President Emmanuel Macron, right, in Paris, July 2019

Michel Euler / AP

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But the private sector has begun to step in to fill the vacuum. In January, Larry Fink, the

CEO of BlackRock, the largest asset manager in the world, declared that “climate risk is

investment risk” and announced that going forward BlackRock would ask every firm in its

portfolio to disclose its carbon emissions. BlackRock has roughly $7 trillion under

management and is one of the largest shareholders in nearly every publicly traded firm in the

world. So companies around the world paid attention when Fink went on to say that

BlackRock would consider voting against boards whose firms “do not make sufficient

progress” in addressing climate-related risks and would cease to invest altogether in some

fossil fuel projects.

Fink is not alone. Many of the world’s largest asset owners are coming to the conclusion that

climate change is the most important risk to the long-term health of their portfolios. More

than a third of global invested capital—about $19 trillion—is controlled by the world’s 100

largest asset owners. Nearly two-thirds of this money is in pension funds; the remaining

third is in sovereign wealth funds. These funds are now so large that they are sometimes

referred to as “universal owners” or “universal investors” since, in effect, they hold the entire

market. For that reason, they cannot diversify away from the risk of climate change—a risk

that Mark Carney, who until earlier this year was the governor of the Bank of England,

suggested could result in an abrupt financial collapse, potentially wiping out as much as $20

trillion of assets. To avert that kind of calamity, major asset owners are starting to push the

companies in their portfolios to address climate change.

For the world’s largest asset owners, climate change is not an externality—it is a profound threat.

This trend is not driven by altruism or a deep commitment to the environment: it’s a function

of economic interests. For the world’s largest asset owners, climate change is not an

externality—it is a profound threat to their long-term returns. It will, after all, be significantly

harder to make money in a world where most of the major ports are underwater, harvests are

failing on a routine basis, and hundreds of millions of people are on the move.

As more and more major asset owners come to this realization, it is creating increasingly

strong incentives for them to cooperate with one another in support of large-scale

decarbonization. Together, they are pressing the firms in their portfolios to set concrete

targets for emission reductions and to make progress toward meeting those targets,

potentially solving the problem posed by firms’ unwillingness to cut their emissions unless

they can be assured that their competitors will follow suit. Someone, however, will need to

monitor that progress and sanction firms that lag behind—a role that would be best filled by

government regulators. The need for such public-sector involvement will likely increase

private-sector support for the policy changes required to drastically reduce carbon emissions.

In this way, private-sector pressure may serve as the force that finally breaks the political

logjam that has long blocked the public action needed to solve the climate crisis.

MONEY TALKS

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One of the most promising examples of what this might look like in practice is Climate Action

100+, a nonprofit affiliation of more than 300 investors who collectively control nearly half

of the world’s invested capital. The group was founded in 2017 with the goal of persuading

the world’s 100 largest private-sector carbon emitters to “cut the financial risk associated

with catastrophe” by putting in place board-level processes to assess their climate-related

risks and oversee plans for dealing with them, pledging to clearly disclose those risks, and

taking action to reduce greenhouse gas emissions across their value chains rapidly enough to

help meet the Paris agreement’s goal of limiting the increase in the global average

temperature to well below two degrees Celsius.

In December 2018, a group of investors belonging to Climate Action 100+ published a letter

in the Financial Times listing some specific steps they were demanding of companies in

which they invest, including “the rapid elimination of coal use by utilities in EU and OECD

[Organization for Economic Cooperation and Development] countries by no later than

2030.” Six months later, investors from the consortium pushed the oil giant Shell to

announce short-term targets for limiting its greenhouse gas emissions and persuaded BP to

support a shareholder resolution that binds the oil company to disclose the carbon intensity

of its products, the methodology it uses to consider the climate impact of new investments,

and its plans for setting and measuring emission targets. More than half of the 40 oil and gas

companies with which the group has engaged have set long-term quantitative targets for

reducing their emissions. And the group has helped persuade the shipping giant Maersk and

two of the world’s largest mining companies, ArcelorMittal and Thyssenkrupp, to commit to

becoming carbon neutral by 2050.

These kinds of commitments are sometimes dismissed as mere greenwashing: public

relations stunts designed to buy time. And sometimes they are. But they might also help

catalyze an economic transformation that could play a major role in arresting climate

change.

Of course, large asset holders are not the only players who shape a company’s incentives:

employees and consumers do, as well, and they are increasingly insisting that firms go green

—and rewarding them when they do. For example, after the consumer goods giant Unilever

announced that it planned to cut its carbon footprint in half and double its revenue at the

same time—and then followed through by transforming its operations, brand by brand—the

firm joined Facebook, Google, and Microsoft on LinkedIn’s list of the ten most desirable

employers in the world. Sales of Unilever’s “sustainable living” brands—which include Ben &

Jerry’s, Dove, and Vaseline and which Unilever claims “contribute to achieving the

company’s ambition of halving its environmental footprint”—are growing 69 percent faster

than the rest of the business and providing 75 percent of the company’s growth.

Shifting public attitudes about climate change and public policies intended to combat it have

also created clear business opportunities. Solar and wind energy are both multibillion-dollar

businesses. The market for plant-based alternatives to meat is exploding. And global

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recycling could generate close to $400 billion in the next five years.

RISKY BUSINESS

But embracing the innovation that is required to exploit new opportunities is often risky and

expensive. The venture capital industry lost at least $10 billion between 2005 and 2011

investing in clean energy technology. An electric utility that commits to phasing out coal

plants might reap the benefits of declining solar and wind energy costs, but it could also

misjudge the market and significantly increase its costs. An automobile company that invests

in developing electric vehicles might leap ahead of its competitors, but it could also risk

losing out to more cautious rivals.

Universal investors can help mitigate those risks by funneling capital to firms that are willing

to make the first move. This can be transformational in itself, since companies that decide to

embrace new opportunities can often persuade an entire industry to follow them. Walmart’s

massive investments in energy saving and waste reduction, for example, have helped

persuade many other companies to take similar steps. Since 2010, the price of battery storage

has fallen by at least 73 percent, a change driven largely by the electric vehicle company

Tesla’s significant investments in the technology, which spurred the company’s competitors

to invest more than $90 billion in the development of electric vehicles.

Major asset holders can also push companies to commit to aggressive targets for

decarbonizing their business models and insist that they report on their progress. In this way,

universal investors may be able to force every firm in an industry to act, solving the collective

action problem inherent in tackling climate change. Firms don’t naturally act collectively—for

all kinds of reasons, including antitrust law. But when there exists a clear business case for

doing so and cooperation can be credibly enforced, voluntary cooperation can be an effective

means of creating or preserving public goods. Nearly half of the world’s inshore fisheries are

managed through some form of cooperative agreement. Most of the rules governing

international trade are designed and enforced by the International Chamber of Commerce, a

voluntary association founded in 1919.

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Tesla Model X electric cars recharge their batteries in Berlin, Germany, November 2019

Fabrizio Bensch / Reuters

Some of the world’s largest firms are increasingly exploring whether these kinds of voluntary

agreements might be an effective way to reduce emissions. For example, after Unilever came

under pressure from activists to stop using palm oil, the cultivation of which contributes to

deforestation, Paul Polman, who was then the company’s CEO, was able to persuade many of

his fellow consumer goods CEOs that continuing to purchase conventionally produced palm

oil presented a significant threat to their own brands. Partly as a result, more than 60 percent

of the world’s traded palm oil is now covered by sustainability commitments. Similar

agreements with respect to soy and beef have greatly slowed rates of deforestation in the

Amazon River basin. And companies in industries as diverse as airlines, food, retail, apparel,

travel, hospitality, construction, health care, and high technology have begun to coordinate to

reduce carbon emissions across supply chains, so that no single firm is placed at a

disadvantage by going green.

Such arrangements produce a wealth of knowledge about what effective decarbonization

might look like on the ground. As one might expect, however, they are often unstable and

difficult to enforce, since no mechanism exists through which to punish firms that drag their

feet or refuse to conform. Here, universal investors might be able to make a significant

difference by acting as enforcers. If BlackRock, for example, follows through on its threat to

vote against the boards of companies that do not adequately disclose their climate emissions,

every major firm in every industry will be forced to report—in an auditable, replicable way—

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the degree to which it is meeting its commitments. And if the world’s major investors then

vote against the boards of those companies that are falling behind, investors could catalyze

the transformation of entire industries.

THE EARTH LOBBY

Arresting climate change will still require government action, of course, and the changes

afoot in finance and the corporate world could ease the path. As firms commit to reducing

their carbon emissions, they are increasingly recognizing that the most effective way to

ensure that they are not undercut by lagging companies is to press for regulation. Together,

they are creating a constituency for effective climate policy.

In 2017, for example, when U.S. President Donald Trump declared that he was going to

withdraw the United States from the Paris agreement, the CEOs of more than 50 U.S.

companies, including Apple, Gap, Google, HP, and Levi Strauss, published an open letter

urging him to rethink the decision. When Trump stuck to his plan, Elon Musk, the CEO of

Tesla, and Bob Iger, then the CEO of Disney, resigned from some of the president’s advisory

councils in protest. More than 2,000 companies have joined a collaborative effort called “We

Are Still In,” a group working to ensure that the United States meets its commitments under

the agreement despite the administration’s withdrawal. The group includes not only

businesses but also states, cities, religious organizations, and universities. Together, they

represent 68 percent of U.S. GDP, 65 percent of the U.S. population, and the source of more

than half of all U.S. carbon emissions. Such action independent of the federal government

could make a big difference. According to America’s Pledge, a nongovernmental organization

that tracks local progress toward emission reductions, the “full achievement of already on-

the-books policies from state and local actors—paired with rapidly shifting economics in the

power sector—would reduce emissions 19 percent below 2005 levels by 2025 and 25 percent

below 2005 levels by 2030.” This would be a significant step toward the approximately 50

percent reduction in emissions that the UN’s Intergovernmental Panel on Climate Change

estimates is necessary to avoid the most dangerous potential outcomes of climate change.

These efforts and others like them also have the potential to change the nature of the political

conversation around climate change. In an increasingly partisan world, firms occupy a

unique position. According to the 2019 Edelman Trust Barometer, an annual survey

measuring credibility and trust, business is now the world’s most trusted institution, and 71

percent of employees around the world agree that “it is critically important” for the CEOs of

their companies “to respond to challenging times.” A broad-based movement among the

world’s biggest companies to tackle climate change could help legitimate the idea that climate

change is a real danger, that acting to avert it could be a major driver of innovation and

economic growth, and that appropriate public policy could be enormously helpful.

Such a movement could also put increasing pressure on companies that resist decarbonizing.

One of the reasons that climate regulation has stalled in the United States is that a small

minority of firms have invested billions of dollars in actively lobbying against it. If their peers

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start to push for regulation and highlight the dangers inherent in continuing with business as

usual, those laggards will be compelled to change their behavior. One day soon, flooding the

political process with money to defend the burning of fossil fuels could be seen as an

unacceptable reputational risk—or even as morally indefensible.

For many years, experts have assumed that the fastest and most efficient route to global

decarbonization is coordinated state action. But as the world’s political institutions have

come under pressure, such action has become increasingly elusive. Against this background,

the growing understanding that climate change presents a profound threat to the long-term

returns of the world’s largest asset owners provides some reason for hope. As investors push

for change and the realization dawns in more and more boardrooms that the benefits of

climate action will outweigh the costs, it is possible that leading-edge firms could trigger a

cascade of reinforcing reforms, transforming the economics of individual industries and

creating a significant constituency for political action. For decades, when it came to

addressing climate change, large asset holders and big companies acted more as obstacles

than as catalysts. Those days may soon be over.

REBECCA HENDERSON is John and Natty McArthur University Professor at Harvard

University and the author of Reimagining Capitalism in a World on Fire.

MORE BY REBECCA HENDERSON