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How climate change is remaking finance



A shift is afoot in the west's financial markets that represents the most important economic change since the emergence of the new financial instruments in the 1990s that ultimately led to the global financial crisis. It is the embrace of climate change by many of the world's biggest financial players. It is likely to result in a new way of thinking about money, which will change the substructure of developed economies.

Grant Siermans on a Fonzarelli Arthur electric scooter, Michelle Nazzari on a Fonzarelli NKD electric motorbike and Sara Davenport on a Fonzarelli X1 electric scooter pose ahead of the Electric Vehicle Show 2019 at Sydney Olympic Park on 25 October 2019. (Photo by Mark Kolbe/Getty Images)The enormity of what is occurring has been sketched out by the governor of the Bank of England, Mark Carney. He referred to 'an estimated $US90 trillion of infrastructure investment expected between 2015 and 2030' in which 'nearly 95 per cent of electricity supply will need to be low carbon, 70 per cent of new cars electric, and the CO2 intensity of the building sector will need to fall by 80 per cent'.

In similar vein Laurence Fink, the chief executive of Black Rock, which has about $US7 trillion of assets under management (making it the world's largest asset manager), recently said he believes we are 'on the edge of a fundamental reshaping of finance' because of a warming planet.

Black Rock is large, but the really big hitters in the financial system are the insurance companies and pension funds, who invest tens of trillions of dollars. Re-insurers such as Hannover Re and Swiss Re have been worrying about the impact of climate change for a long time, but now the insurance companies themselves are weighing in.

Carney referred to an international network of investors that have over $US80 trillion in assets under management: the UN Principles for Responsible Investment, that is 'committed to considering Environmental, Social and Corporate Governance factors in their work'. There are other alliances of insurance companies that represent tens of trillions of dollars.

These are big numbers and they will shape how we set up the monetary system, which in turn determines what kind of society we have. Two first order consequences will be a change in how risk is assessed by insurance companies, and how much investment goes into fossil fuels and how much into new technologies that can reduce carbon emissions.

Resources companies may have significant political clout, but in simple fiscal terms they are outgunned. The biggest are only worth around $US100 billion; these amounts are in the trillions or tens of trillions.


"It should come as a surprise to no-one that there is a venal motive behind all this manoeuvring."


So we are saved, right? Those articulate, well-dressed financiers fighting the good fight on behalf of the climate are going to really make a difference, aren't they? Well, not quite.

It should come as a surprise to no-one that there is a venal motive behind all this manoeuvring. In the case of the insurance companies, it is probably just a variant of the pricing of risk — their core activity — so that is perhaps unremarkable. But it is this writer's suspicion that the reason climate change is attracting so much attention is that it offers a way out of the cul-de-sac that is 'late stage' Western capitalism.

Capitalism is in trouble. Because fertility rates are collapsing the increase in the level of new demand that is needed to keep the industrial system going will not materialise. At the same time, production systems are steadily increasing in efficiency, resulting in oversupply in most industry sectors. That imbalance is leading to stagnation and chronically weak growth. To keep the ball rolling the first response, in the 1990s, was to invent money out of thin air using derivatives (gambles that are derived from conventional finance, like bonds and shares and currencies).

When that absurd activity nearly led to total collapse in the GFC, central banks responded by progressively lowering interest rates to keep demand sputtering along. But that has resulted in unsustainable global debt levels, which are well over three times global GDP (which in turn means keeping interest rates low in order to stave off a complete collapse of the banking system).

There is no room to lower interest rates any more, so financiers in the west are looking for a way out. Enter climate change. If they can create new kinds of transactions around climate fears — perhaps a vastly expanded version of the (largely counter-productive) emissions trading scheme — then they may be able to prevent the capitalist system from collapsing.

What may be in prospect is the monetising of people's behaviour in relation to 'sustainability' — a new kind of transaction. One possibility is to link the monetary system (perhaps using a mechanism such as a universal basic income) to changing the population's climate-related behaviour.

When Carney talks of 'new finance for a new economy', it points to how developed societies are about to change. Developing sustainable, non-polluting systems is a powerful imperative but the risks are high. As the poet Ezra Pound observed, if a culture gets money wrong, it gets everything wrong.



David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Grant Siermans on a Fonzarelli Arthur electric scooter, Michelle Nazzari on a Fonzarelli NKD electric motorbike and Sara Davenport on a Fonzarelli X1 electric scooter pose ahead of the Electric Vehicle Show 2019 at Sydney Olympic Park on 25 October 2019. (Photo by Mark Kolbe/Getty Images)

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As always, interesting article. Thanks David

Steve Sinn | 05 February 2020  

Thanks for telling it like it is... "inventing money out of thin air"; "that absurd activity". Interesting to note that days after quitting Europe, UK PM Johnson announces radical changes to vehicles and transport infrastructure in the very near future (no petrol or diesel cars by 2035).

Richard | 05 February 2020  

Financial markets having "A venal motive”? My first hint that the financial sector was interested in climate change came in the 90s when I heard an accountant promoting investment in renewable energy. It would be “Money for jam” with “the mug taxpayer” footing the bill. Al Gore went from being worth $2 million in 2001 to $300 million by “being an inside investor in government-backed renewable energy projects, many of which went belly up after the insiders made off with millions, leaving hard-working US taxpayers with the bill” says Deep Green Resistance. Meanwhile pensioners in Australia can’t afford their electricity bills. But I’m confident that entrepreneurs will find solutions thanks to the profit motive. US researchers have found a way to use sunlight and artificial photosynthesis to turn CO2 into methane, the main component of natural gas; MIT found an energy-efficient way to remove CO2 from thin air; and Lausanne Polytechnic has patented a process that cuts truck emissions by almost 90% by capturing CO2, converting it into a liquid and turning it back into fuel. I’ll have trust in the financial sector when I see Fonzie riding one of those pictured Arthur Fonzarelli electric motor scooters.

Ross Howard | 07 February 2020