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💸 Here’s a story about the limits of company action in a framework that not only fails to mandate but undercuts it. It was to much fanfare that Mark Carney unveiled the Glasgow Financial Alliance for Net Zero (GFANZ) at COP26. Having attracted commitments from 450 financial institutions representing $130T, the coalition announced that the “capital committed to net zero [is] now at over $130 trillion.” Sort of. In reality, just a fraction of the $130T was earmarked for the Paris Agreement. Members were free to keep financing fossil fuels with the rest. Still, what’s a few dozen trillion between financial firms? Quite a bit, actually—if you’re a competition lawyer. Meet the latest challenge to climate action: antitrust law, a.k.a. the framework protecting consumers from monopolies. It turns out that collaborating on fossil fuel activity constitutes an antitrust violation if prices rise and you’re not in OPEC, making covert green cartels of coalitions facing pressure to coalesce and commit to net zero all $130T of the $130T previously committed to net zero. Which is what happened to GFANZ in June, when standard-setter Race to Zero added the mandate “no new coal projects” to membership criteria. Cue a tide of defection by banks and pension funds citing litigation fears. Rebuked as a “flimsy legal pretext” for inaction by Race to Zero, the risk was sufficient to force a U-turn on coal and strict targets.

🤹 Antitrust litigation is just one factor behind the recent retreat from sustainability initiatives. Thanks to the anti-ESG rhetoric sweeping the US, coupled with an uptick in greenwash-related lawsuits, ‘going green’ isn’t the strategic slam dunk it once was. Nor, however, can corporate exhibitionism be retracted. Following GFANZ defections, ECB supervisor Anneli Tuominen warned banks risk being sued if they fail to “meet the targets they have announced,” or “follow the strategy they have communicated.” It’s bad news for firms in the habit of saying one thing (e.g.: “we’re a global leader in responsible investing”) while doing another (e.g.: sponsoring foundations that campaign against responsible investing), regardless of affiliation or litigation. “The real harm is the reputational risk,” lawyers told the FT, and reputational risk is as much a consequence of wish-wash as it is greenwash. “Companies with fuzzy net zero targets, trying to keep both sides happy, will be in the crosshairs,” said Race to Zero’s Hale—as, indeed, World Bank president David Malpass and BlackRock discovered at UNGA. The system needs an overhaul, reports the New York Times, which begins with better rules for companies and investors. “Voluntary action builds momentum,” says Hale, but it needs the backing of mandatory policy and regulation. He concludes: “The rules governing the economy need to catch up.”

Story of the week: Greed is good

“It’s insane for the world to rely on underfunded NGOs to police capital markets,” Race to Zero’s Nigel Topping told the FT recently. “Governments need to step up.”

It’s insane, too, to rely on capital markets to police capital markets. In a framework that directs competition towards profit, voluntary corporate action is no match for market dynamics and no substitute for political parameters. On its own, ESG isn’t going to move the needle. Fiduciary duty (and capitalism, and human nature) dictates that financial statements take precedence over climate disclosures.

Denial about the limits of capital markets isn’t badly intentioned. In the court of public opinion, greed isn’t good. Green is. Those connotations matter to business leaders and fund managers, because our reward systems go wild for social approval.

Denial has two consequences.

First, governments are less likely to act, because the private sector has it in hand. This is great for politicians, for whom social rewards are the personal and professional incentive: Green policies may have hefty price tags or downside risks that prove unpopular. It’s less great for the climate, however, because the private sector isn’t equipped to limit temperatures to 2°C above pre-industrial levels, singlehandedly.

Second, the myth that greenness satisfies goodness and greediness makes related tradeoffs harder to accept. ‘Green capitalism’ is a misnomer. Economic growth = resource consumption = environmental degradation, even for the greenest societies with the cleanest technologies. Steeped in economic and environmental costs, the energy transition is a case of relative—not absolute—benefits.

Do you: 1. Reject reality (“Capital markets have it under control”), 2. Reject the system (“Capital markets can’t get it under control”), or 3. Accept the reality of the system and bend it to your objectives (“Under the right conditions, capital markets could get it under control”)?

How do you change incentives?

One extraordinary advantage of capitalism is its capacity to drive innovation—at least, under the right (read: financially compelling) conditions. Industrial revolutions are turbocharged by economic carrots, not social sticks, though the fact they happen at all is a testament to what good greed can achieve.

Outside of natural events, governments alone can cultivate the right conditions for low-emission products and industries. Boosting demand, as per the recent Inflation Reduction Act (IRA), is a popular and effective lever. Despite rising costs of capital, renewable energy is booming on the back of soaring fossil fuel prices and supportive stimulus. It makes economic sense “even if you’re a climate denier,” according to a new Oxford University study. In the US, tax breaks present an opportunity too good for investors and oil majors to ignore. Not only those based in the US, either: Global companies are steering renewable energy projects to American soil.

Popular decisions have unpopular consequences.

IRA-induced demand for renewables has put enormous strain on supply, as evidenced by the 500,000 clean energy jobs that have been cited as a “a major bottleneck” by 80% of solar companies in the US and an “underestimated element of the energy transition.”

The critical link in the renewable supply chain, mining companies, too, are under growing pressure to scale. That could prove politically unpopular. We’ve said it before: Building renewables is a mine-digging, energy-burning, acid-leaching, waste-dumping—but incontrovertibly necessary—business. Mining isn’t the only environmentally contentious part of production. Natural habitats are doubly damaged by renewable park development.

For a constituency that believes in the dichotomy of green-good and brown-bad, will those tradeoffs be readily accepted? How about in the year when biodiversity (SDG 15: Life on Land) is in the spotlight, as, allegedly, “the fastest developing ESG theme in global capital markets,” and set to soar on the back of an impending nature-related corporate disclosure framework?

From the FT: “Nils Torvalds, a European Parliament member working on the EU’s Renewable Energy Directive, says the environmental lobby can be obstructive. “Everyone knows some small species on the verge of extinction and that emotionality makes it difficult to find functioning solutions.””

On p.19 of our latest research report, Impact Investment Leaders & Laggards, we uncover the extent of the paradox: For investors, metal mining has the worst direct impact on biodiversity, yet further along their value chain, renewables—bar wind farms!—have the best.

If governments direct markets towards low-carbon projects, investors and businesses can pursue growth (and greed) without shame and exert their ‘powers for good’ on something within their wheelhouse: managing value chains responsibly. Should they gloss over the politically unpopular drawbacks of the transition, however, nature-related corporate action will fall into the same traps of its climate-related predecessor.