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INSIGHT: Capitalism Steps Up as Climate Change Threatens to Reshape Markets

Feb. 13, 2020, 9:00 AM

It’s only February, but it is already clear that 2020 will be a critical year for action on climate change.

As politicians lag behind science-driven recommendations, the world’s largest corporations are filling the climate leadership vacuum.

The World Economic Forum in Davos has more or less become a big climate conference. JetBlue, one of the largest U.S. airlines, announced it will become carbon neutral on domestic flights by the middle of 2020. Microsoft, one of the most valuable companies in the world, pledged not only to go carbon negative by 2030, but to remove all the carbon it has emitted since it was founded in 1975.

This was followed by the ambitious pledge from BP, one of the oil majors, to cut almost all of the carbon emissions from its operations and the products it sells to customers by 2050.

Greenwashing is being replaced by substantive action from big business in carbon-intensive industries.

Climate Risk Is Reshaping the World of Finance

Finance might be about to take the leading role.

Larry Fink, the CEO of BlackRock, the world’s biggest asset manager, wrote a letter to CEOs in January that may prove an inflection point in financial markets. BlackRock, with around $7trn of assets under management, is the most influential shareholder in the world. It is taking action to back up its previous statements on climate, demanding companies disclose their risk from climate change and creating new sustainable investment options.

This reflects broader pressure: Fink framed this move as driven by demand from BlackRock’s clients and said he’s taking action not as an environmentalist, but as a capitalist. Is this the moment that business and markets begin to lead on climate action?

Finance will be a necessary catalyst in moving the world to a lower-carbon economy. If the cost of climate change is priced into financial decision making, investors will reallocate capital to reflect the risk of stranded assets and physical disruptions, accelerating the transition to a lower carbon economy. Even if you didn’t believe in the science of climate change, do you want to bet—or invest—against BlackRock?

Unfortunately, the large reallocation of capital foreseen by Fink and others could result in an abrupt and disorderly rush to the door, rather than a smooth transition.

One investor, David Burt, who made millions of dollars shorting the subprime mortgage market, sees similarities in the current mispricing of the climate-related risk in real estate. Regulators are alert to this. The task force on climate-related financial disclosure, headed by Michael Bloomberg and Mark Carney, unlike most well-intended global task forces with little teeth, has succeeded in influencing actions.

In addition, more than 50 central banks have come together under the Network for Greening the Financial System to share best practice in managing climate-related risks. Stress testing banks and insurance companies for their climate-related risks will begin in earnest in several large economies in 2020. Climate change is already driving investment decisions and will create new winners and losers.

World Is Feeling the Devastating Consequences of Climate Change

With businesses, money managers, and regulators stepping up, climate change will also rise up the political agenda in 2020. Real world consequences will be felt by voters, in sometimes surprising ways.

Wildfires interrupted the Australian Open tennis tournament, with players finding it difficult to breathe because of smoke from fires hundreds of miles away. California has suffered devastating wildfires for several years, but in 2019 utility companies cut off the supply of electricity to avoid starting fires in hot and dry areas.

This preemptive power outage increased the number of people affected from thousands to millions. Hotter weather means grumpy vacationers in amusement parks overheating in long lines, and suffering heat-induced health problems. As the daily reality of the changing climate spoils sports events, interrupts access to electricity and ruins holidays, the issue will move up the political agenda.

In the business world, climate has transformed from a marketing issue to a business-critical risk. In finance, the world’s largest money manager says climate will reshape the whole industry. Regulators fear it could cause the next financial crisis. Climate change, the biggest challenge humanity has ever faced, is already reshaping the world around us.

Bloomberg Law is operated by entities controlled by Bloomberg.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Joseph Lake is chief operating officer at The Climate Service and formerly the managing director for climate risk at The Economist. The company’s Climanomics® platform puts a price on climate risk for investors and businesses.

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