By Katharina Pistor / New York
â¢ It is perfectly understandable that large corporations and private financial institutions are rallying to new disclosure standards and other market-based measures to tackle climate change. It is an approach that allows capital owners another way to avoid a real calculation
Heat waves, floods, droughts and forest fires are devastating communities around the world, and they will only get worse. While climate change deniers remain powerful, the need for urgent action is now recognized far beyond activist circles. Governments, international organizations and even business and finance bow to the inevitable – at least it seems.
In fact, the world has wasted decades tinkering with carbon trading and âgreenâ financial labeling systems, and the current vogue is simply to design fancy hedging strategies (âcarbon offsetsâ) in disregard of the simple fact that humanity is sitting in the same boat. âCompensationâ can serve individual asset holders, but it won’t do much to avert the climate catastrophe that awaits us all.
The adhesion of the private sector to “green capitalism” seems to be another gadget to avoid a real calculation. If business and finance leaders were serious, they would recognize the need for a radical change of course to ensure that this planet remains hospitable to all of humanity, now and into the future. It is not about substituting brown assets for green assets, but about sharing the losses that brown capitalism has imposed on millions of people and securing a future for even the most vulnerable.
The notion of green capitalism implies that the costs of tackling climate change are too high for governments to bear alone, and that the private sector always has better answers. Thus, for supporters of green capitalism, the public-private partnership will ensure that the transition from brown capitalism to green capitalism will be cost-free. Profitable investments in new technologies will supposedly prevent humanity from sinking into the abyss.
But it sounds too good to be true, because it is. The DNA of capitalism makes it unfit to cope with the fallout from climate change, which is largely the product of capitalism itself. The entire capitalist system is based on the privatization of gains and the socialization of losses – not in a nefarious way, but with the blessing of the law.
The law offers licenses to outsource the costs of plundering the planet to anyone smart enough to establish a trust or corporate body before generating pollution. It encourages the discharge of environmental obligations accumulated through restructuring in the event of bankruptcy. And it holds entire countries hostage to international rules that prioritize the protection of the income of foreign investors to the detriment of the well-being of their own populations. Several countries have already been sued by foreign companies under the Energy Charter Treaty for trying to reduce their carbon dioxide emissions.
Two-thirds of total emissions since the industrial revolution come from just 90 companies. Yet even if the leaders of the world’s worst polluters were prepared to pursue rapid decarbonization, their shareholders would resist. For decades, the gospel of maximizing shareholder value has reigned supreme, and leaders know that if they stray from orthodoxy, they will be prosecuted for breaching their fiduciary duties.
No wonder big business and big finance are now pushing climate disclosures as an issue. The message is that shareholders, not managers, must drive the necessary behavior change; solutions must be found through the price mechanism, not through science-based policies. The question of why investors with an easy exit option and plenty of hedging opportunities should be concerned about disclosing future damages to certain companies in their portfolio remains unanswered.
More drastic changes are obviously needed, such as carbon taxes, permanent moratoria on the extraction of natural resources, etc. These policies are often dismissed as market-distorting mechanisms, yet they idealize markets that do not exist in the real world. After all, governments have generously subsidized the fossil fuel industries for decades, spending $ 5.5 billion (before and after tax), or 6.8% of global GDP, in 2017. What if fossil fuel companies should one day run out of profits to make up for these tax breaks, they can simply sell themselves to a more profitable company, thereby rewarding their shareholders for their loyalty. The scenario of these strategies has long been enshrined in mergers and acquisitions law.
But the mother of all subsidies is the age-old process of legal encoding of capital through property, corporate, trust and bankruptcy law. It is the law, not the markets or the companies, that protects the owners of fixed assets even as they place enormous responsibilities on others.
Supporters of green capitalism hope to continue this game. That is why they are now lobbying governments to subsidize asset substitution, so that as the price of brown assets goes down, the price of green assets rises for the better. compensate asset holders. Again, this is what capitalism is. Whether this is the best strategy to ensure the livability of the planet is a whole other question.
Instead of grappling with such issues, governments and regulators have once again succumbed to the siren song of pro-market mechanisms. The new consensus focuses on financial disclosure, as this path promises changes without having to make them happen. (It also happens to generate jobs for entire industries of accountants, lawyers, and business consultants with their own powerful lobbying arms.)
Unsurprisingly, the result was a wave of greenwashing. The financial sector happily invested trillions of dollars in assets labeled green that turned out not to be at all. According to a recent study, 71% of ESG thematic funds (supposedly reflecting environmental, social or governance criteria) are negatively aligned with the objectives of the Paris climate agreement.
We are running out of time for such experiences. If greening the economy was really the goal, the first step would be to eliminate all direct subsidies and tax subsidies for brown capitalism and order an end to carbon âproliferationâ. Governments should also impose a moratorium on protecting polluters, their owners and investors from liability for environmental damage. Incidentally, these measures would also eliminate some of the worst market distortions. – Project union
â¢ Katharina Pistor, professor of comparative law at Columbia Law School, is the author of The capital code: how the law creates wealth and inequality.