Extract from Book - A Solution to Global Warming...
This abridged version of the original Environmental Tracking publication has a single aim: to explain a strategy for the worldwide reduction of corporate CO2 emissions within a 10-15 year time frame.
The task at hand is to reduce this multi-faceted problem down to its essence. Then to lay out our solution in as straightforward a manner as possible.
Environmental Tracking is an investment mechanism designed to create a fundamental economic pressure on companies listed on the world's stock markets to change their behaviour and reduce their greenhouse gas (GHG) emissions.
Companies produce goods and services which we as individuals use. As pressure is exerted upon companies to reduce emissions, these improvements will be passed on via the goods and services we consume, reducing emissions across the board.
Why propose the world's stock markets as the focus for a solution to this problem?
Firstly, the urgency of the climate crisis, the speed and scale of the actions required to reduce the dire risks facing us - obvious to any rational observer - are in reality beyond the grasp of most people's time frames and day-to-day priorities. This is Problem No. 1.
Secondly, many of those professionally involved in this issue who grasp the fundamental urgency of the situation are too narrow in their focus. To date there has been no serious effort to harness the resources of the global financial system in the fight against global warming. This is Problem No. 2.
It is therefore the bold assertion of this book that the solution to the climate crisis lies in the hands of the global investment community.
It is a further assertion of this book that this solution can be enacted independently of, and parallel to, governmental initiatives, plans and agreements.
The adoption of this strategy requires the adoption of a new frame of mind, one which recognises that we are faced with a global emergency: a frame of mind in which decisions by key players that might normally take months, if not years, are made in weeks and days, if not hours.
Currently, the main obstacle we face in tackling global warming is the lack of incentives for businesses and individuals to act. In order to address a problem of this magnitude, and have any chance of success, we need to take a “macro approach” to creating incentives for change; we simply cannot afford to rely on individual conscience and acts of consumer choice to turn the system around.
We are proposing to insert an incentive right into the heart of the investment and business decision-making process, by making a company's share price dependent on its absolute carbon emissions.
We are too reliant on government action. While government action will always play a central role in any eventual mitigation of manmade climate change, governments are fighting an uphill battle. In order to take the measures necessary to bring about the emissions reductions required, governments would have to impose policies unlikely to be popular with voters, and would in all likelihood not get back into power. How many governments are going to do that? And even if they did, there are insurmountable problems with political negotiations between 150+ nation states, as recently witnessed at the Copenhagen Summit. The commendable strategies of some countries prepared to lead by example does not guarantee a global result, and certainly not within 10 years.
Furthermore, there are fundamental issues of equity and fairness at the heart of such political negotiations, not only between states, but within their societies. A matter often overlooked.
And whatever agreements are finally reached, the real challenge remains unsolved: implementing the required actions at the level of day-to-day business decision-making across thousands of different companies.
So why not go directly to the heart of the problem? Why not create a simple investment mechanism in which corporations are rewarded or penalised according to their absolute carbon emissions, without waiting for the outcome of a complex political process?
If we look at how we arrived at this problem, we will recognise the role played by the investment system in how it directs its (our) capital. It has propelled the juggernaut of development across the world following the industrial revolution and the invention of financial markets. Free-market capitalism has brought us many things in the name of profits and “progress”. Sadly one of the things it has also brought is much environmental degradation, of which climate change represents the apex. Within the investment system profit and share price are king, which usually means that the environmental damage resulting from the actions of business is not factored in, with “Corporate Social Responsibility” often acting as a hollow smokescreen.
These "Externalities", those outputs which remain unaccounted for, are the Achilles heel of the free-market system. While giving carbon a correct price might incentivise radical innovation, it is unlikely to happen anytime soon. According to Dimitri Zenghelis, one of the authors of the Stern Review, at least $40 a tonne would be a fair valuationii, with the International Energy Agency saying at least $50, later rising to over $100.
Short of a worldwide revolution, we have to devise a method to enable the freemarket system to achieve a different result. An idea which incorporates subtle environmental pricing into the existing free-market framework of the financial system, which would damage a company’s share price if it pursued an environmentally detrimental course, might just, with your support, enable a solution to this predicament.
The concept of Environmental Tracking and its logical offshoot, an ET Carbon Index, is based on a clear view of the overriding urgency of solving the climate crisis in an emergency timescale. Not within 50 years, or 100, but 10. How does it propose to achieve such a radical result that seems far more optimistic than any current strategy on the table?
Environmental Tracking rests on four key principles:
Firstly, it places the focus and responsibility for this timescale firmly on the investment system and the organisations that administer it.
Secondly, it requires the Carbon Ranking of large companies by absolute GHG emissions across all Scopes (to be explained shortly) as the basis for weighting those companies in a range of global index funds.
Thirdly, it requires those absolute emission figures to be externally verified, and employs an incentive system within its index structure to reward those companies who verify emissions before those who do not.
Finally, it penalises companies who do not make comprehensive emissions data publicly available, this being the lynchpin of the ET Carbon Index system, by placing them in the bottom category of the index.
The logic of Environmental Tracking rests on a subtle re-balancing of the following key concepts: climate risk; investment risk; investment reward; and, economic incentive. All working at a global scale through the ubiquitous power of the global investment system.
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