"Credit Crunch versus Climate Crunch"
A personal view by Michael Gill, EIO Founder:
(This piece is an expanded version of a letter published in The Independent letters column Monday October 13th 2008- Black Monday, and also appeared in the LSE newspaper "The Beaver". See also BBC news Prince Charles warns of "climate crunch")
So you think the credit crunch has been disruptive? The credit crunch was a cyclical response to inflated asset prices that has happened many times before.
A global climate crunch has never happened within recorded history, never mind with six billion people on the planet.
I have maintained a sceptical view of the investment world's over complexity and decision-making competence for many years. Of course the "bonus racket" is objectionable and the derivatives nonsense an expensive merry go round. But for me the principal concern is the abject failure of the investment system to recognise such a fundamental issue as Climate Change, for which it is largely responsible.
Why do I say that? Well, where did all the capital come from that has developed the technologies that have got us into this mess in the first place?
I don't think there is anything too controversial in saying there is a widespread disrespect by the investment community towards ecological and human values. The people running that system do not exactly stand up as bastions of long term concern for human and planetary welfare. Is this a suitable standard for people entrusted as guardians of other people's money and our children's inheritance?
In my view a "climate crunch" would make the credit crunch look like a garden tea party. Think of the recent financial and economic turmoil as a mild warning. Think of it as an invitation to set the world's financial and economic system on a new path.
There needs to be recognition that Governments cannot do this on their own. The problem is people jump straight to business as the culprits but miss a crucial link in the chain of command.
I have been trying to argue that if the investment system supports the cause, corporations will have no choice but to follow. Not just some, not just the "best in class", but all Companies, throughout the world. In the proposed model, any business undermining such an effort through its bad practices or inertia would be starved of capital. And ultimately investors can use their authority to remove incumbents and elect new Directors. I would argue that an investment manager has a fiduciary responsibility to prevent a long-term threat to the value of their investments. No Government can micro manage the investment system to pursue its policies. To succeed, a solution needs to be generated from within the investment system and operated according to the logic of that system.
The Copenhagen summit, like the Kyoto Agreement before it, risks becoming another historic example of how the tail (the Political System) is trying to wag the dog (the Business System) and finding the dog does not respond.
Eventually, if the problem really does need fixing, one has to get ones hands dirty, investigate how the system causing the problem works and from that basis work out what can be devised to "fix" the "fault". We need to insert a "smart chip" into the financial system so it can be utilised to give positive environmental instructions into the corporate system.
As I tried to say in my book published in 1997 (written in 1994), we need to move beyond the commonly perceived notion of what ecological, ethical and SRI type investing is trying to achieve. It must be a sign of systemic insanity that the same thing still needs to be said 15 years later.
Think of all the words and policies and speeches that have been made on this subject since 1995. Where has it got us? Yes, there are thousands of examples of positive progress, by individuals, by companies, by Governments. But still, the carbon counts goes up. Why?
We are never going to solve a problem of this magnitude until a more fundamental role for the investment industry is found.
Why? Because the investment industry is the link between the long-term environmental interests of ordinary investors and the behaviour of the business system.
The "fund management industry", both in this country, in the rest of Europe, in America, and in fact anywhere, has failed to use its influence, exercised on behalf of its many millions of retail investors and pension fund holders, to do something about this large and growing problem of future environmental risk.
Whether you are an environmental sceptic or a passionate eco warrior, the concept of risk is fundamental to what we are dealing with here. At what point do we decide as a society that a risk is not worth taking? And how far are we prepared to go to avoid that risk?
If a qualified mechanic tests your brakes and tells you that the car is dangerous to drive, would you ignore that advice? And what about if your children were in the back seat?
So, if the question of risk is inherent to the decisions we make, who do we turn to to advise us on how big a risk we are taking? I am not a climate scientist and you probably aren't either. General conversation about climate change is in my opinion a waste of time. If the Met Office is telling us that the risk of a global temperature rise exceeding six degrees by 2100 is, based on current knowledge, a plausible risk if we delay global C02 stabilisation by a mere 15 years, then it's surely time for the penny to drop.*
Whether that warning be right or wrong, what right do we have to ignore it?
*as quoted in a letter written by Michael Gill in the Independent Newspaper and published on "Black Monday", October 13th, 2008, the day the global financial system very nearly collapsed.
For a direct link to the aforementioned article in The Independent please click here.