Eco:nomics – Where ‘Green’ Capital Is Arbitrary. For Now.
We’ve landed in an era that environmentalists 40 years ago could only dream about. It ain’t science fiction but these days the game’s all about timing nevertheless. As companies embark on going green, there’s a need for guidance on what makes production processes green. Banks and credit institutions appear to be taking over from governments in setting benchmarks.
For a long time the onus has been on government institutions to stimulate businesses to ‘green up’. But the agenda appears to have been hijacked by credit institutions. So if you’re interested in environment matters and are not so familiar with the boys in the pin striped suits, you might soon be. Even though the world is largely ruled by official policy makers, politicians have a knack for being too slow when it comes to the environment.
Complaints environmentalism might have been declared dead by Michael Shellenberger and Ted Nordhaus (authors of The Breakthrough) but let’s not drop the donkey just yet.
True, the Wallstreet is putting much-needed momentum in the efforts to reduce greenhouse gas emissions, all the more so because the Yanks will want to outcompete European efforts. But a nasty side effect of competition is that it’s too ruthless for balanced judgements on what is fair. The European financial markets have been involved in environment based products for much longer and have developed a competitive edge that will be difficult to beat.
Last week, the Green Exchange, started trading. The new exchange, part of the New York Mercantile Exchange (NYMEX) will have a hard time competing with the European climate exchange. Last year, $62 billion (E40 billion) worth of carbon credits were traded in Europe, which was a massive hike of 80% compared to the year before.
In the absence of practical regulations aimed at reducing corporations’ carbon emissions, trading carbons might be one way of getting the rule structures in place. But this is where the business gets tricky. The funds that invest in these carbons are imposing their own requirements of what makes a carbon neutral business.
And it’s the Wild West all over; invent a common sense bunch of rules and shout loud in the industry and to shareholders and you won’t even have to market your fund. Now that sensible humans no longer risk their personal reputations if they take global warming threats seriously, the free for all is really taking off. Everybody involved knows that there is no such thing as a non-ulterior motive in the investment business. And many awkward situations arise.
The run on everything green is massively driven by oil prices. At the moment there are some 75 environmental funds compared to only a few three years ago. These are mostly hedge funds (derivatives contracts funds).
Skepticism voiced from within the world of finance itself underline that these funds are merely investment opportunities which are cleverly marketed. But they don’t necessarily resolve any of the world’s problems. The same banks that run the environmental hedge funds have dual policies in place; on the one hand their fund management department will invest in ‘ethical’ companies that have been subjected to rigorous research and the corporate finance department will finance the very companies that are responsible for heavy handed pollution, often without any ethical issue questions asked.
True, the ratings agencies are going to provide new ratings on how green a company is and link their credit risk to global environmental issues. All that is great, but who mandates the rules? Who assures that these assessments are implemented in a fair way? When regulation is left up to the finance industry itself, conflicts of interest easily arise.
One high profile official of Duke Energy, the US power company, recently complained to The Economist that the same banks that stipulate new rules on funding of (polluting) power-plants are failing to tighten loan terms for the power plants’ parent companies.
One finance expert and climate change skeptic, Steve Milloy of the Free Enterprise Action Fund, claims the banks’ environmental initiatives are “at best greenwashing, and at worst value-destroying”.
Theoretically it’s of course up to the government legislators to eke out the rules. But, as so often, reality by-passes politics. Climate change is increasingly seen as a major risk and due to the European finance sectors’ longer track record, the Americans are jumping on the bandwagon now with reckless abandon.
“Corporate boards have a ‘fiduciary duty to analyze risk’, according to Mindy Lubber a fund manager responsible for $5 trillion worth of ethical funds who recently spoke at the Wall Street Journal’s ECO:nomics conference. She argued that the way forward is by getting the market to put a price on carbon so that companies can take the lead to limit emissions. Lubber bets on the prospect that a technological revolution will result from this type of herding, something that’s very much alive in the Green IT sector itself, judging from the address by a Sun Microsoft Systems official at a Vancouver conference yesterday.
Steve Milloy, who shared the stage with Lubber, said that this ain’t nothing but hot air. He believes that so-called social activists are simply by-passing the government and going directly to the corporate sector with a bunch of false claims. The result, he said, is that companies are failing to really execute change. He also has little time for the few initiatives in Capitol Hill and slagged off the Lieberman-Warner Bill as ‘an economy killer’ on a par with ‘Don Quixote technology’ wind turbines.
The need for proper guidelines was underscored last month, when a group of the 40 top institutional investment houses (with combined funds of $1.5 trillion) officially requested that the US Congress introduce a mandatory national policy to reduce greenhouse gas emissions by up to 90% below 1990 levels by 2050.
If anything is clear from the viewpoints of these two people who both make investment decisions every day that affect the world in ways we have yet to discover, it is that there’s a huge dichotomy between opinions and investment styles. The strange thing is that both are supported and can carry the day even in a total absence of regulations. But both the experts know that the winner is no longer automatically the one that makes the most money. This is where real values take on a new kind of meaning.
There is lots more to report on these issues. Stay posted here for updates on how the rules for corporations are taking shape. Or better still, subscribe to our RSS feed.