A multitrillion-dollar climate rescue is on the way - but will investors pick up the bill?
To save the Earth from climate change disaster, maybe we need a crash on Wall Street. That sounds like a non sequitur, but for the trillions of dollars promised at the COP26 UN climate summit to materialise, there needs to be a revolution in investor psychology of the kind that perhaps only a market shock can bring.
Debate about who will pay to finance a climate rescue operation appeared finally to be getting real with the November 3 announcement by the Glasgow Financial Alliance for Net Zero (Gfanz) that over US$130 trillion of private capital is “committed” to transforming the economy to net zero.
That is a very large sum of money, equal to more than one year’s global gross domestic product; but where is it supposed to come from? Chiefly, it appears, from financial institutions that have an aggregate US$100 trillion or so of assets under management. But are investors really committed enough to commit on that scale?
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Are equity and bond holders (whether individually or via mutual funds and exchange traded funds, members of pension funds, holders of insurance policies or whatever) really willing and able, in effect, to subsidise the cost of transitioning to net zero and absorb the financial losses involved?
Estimates of how much that transition will cost vary from US$2 trillion to US$4 trillion a year between now and 2050, so US$60 trillion could be a ballpark total for a start. That is largely for new investment in renewables and replacing fossil-fuel-burning plants “stranded” by tougher emission laws.
Which brings us back to Wall Street and equity investors’ love affair (or dance to the death) with tech stocks, which they believe (like bitcoin ) can only go onwards. Will they acquiesce in a shift from short-term speculation in glamour stocks to long-term investment in climate rescue?
The problem with everything having to do with financing the battle against climate change is that it is so “fuzzy”, as one Wall Street specialist suggested to me. That seems to apply as much to the Gfanz initiative as it has done for a long time to ESG ” environmental, social and corporate governance ” and other forms of “green” investing.
Gfanz says it is a “global coalition of leading financial institutions in the UN’s Race to Zero that is committed to accelerating and mainstreaming the decarbonisation of the world economy and reaching net zero emissions by 2050”. All well and good but the devil is in the lack of detail.
According to the Glasgow announcement, “over US$130 trillion of private capital is committed to transforming the economy for net zero. These commitments, from over 450 firms across 45 countries, can deliver the estimated US$100 trillion of finance needed for net zero over the next three decades.”
These are very large sums. But money on the balance sheets of financial institutions and companies is not the same as investment dollars in the bank dedicated specifically to climate change mitigation. Spending potential and spending power are two different things.
Can the Gfanz convince enough individual and institutional investors to switch their money out of Wall Street and market-favoured stocks and bonds into climate areas? Someone will have to pay ” whether taxpayers or investors, or both ” for the great climate clean-up.
The alliance is big on name power and ambition. Its two co-chairmen are former Bank of England governor Mark Carney, now UN Special Envoy for Climate Action, and Michael Bloomberg. Its vice-chairwoman is former US Securities and Exchange Commission chairwoman Mary Schapiro. “Through Gfanz, the best of the global financial system has committed to net zero,” says Carney.
Yet, one of the few concrete initiatives taken so far has nothing to do with Gfanz. It involves the Asian Development Bank and several key financial institutions in a joint venture to cut emissions by buying coal-fired power plants, closing them and replacing the lost output with renewable energy.
Another big name who supports the kind of practical action taken by the ADB is BlackRock CEO Larry Fink who has stressed the need to empower multilateral development banks to deal with the situation.
Carney also talked in Glasgow of a “new plan” to scale up private capital flows to emerging and developing economies via multilateral development banks. But what is needed is not just the capital flows but the ability of the multilateral development banks to create pipelines of climate projects.
For all its claimed financial clout, Gfanz does not seem about to deliver more emissions-cutting actions like the ADB’s.
The buck keeps getting passed from one player to another. The only way it will stop is if governments empower multilateral institutions to create carbon control projects and to raise funds to pay for them. That would give Wall Street something worthwhile to invest in once it comes to its senses.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.
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