On the back of news that John and Ann Doerr have given $1.1 billion to Stanford’s new School of Sustainability, public debate is returning to questions about the role of universities in tackling climate change. While big sums are being given by those in business, some big names who teach it are going in the opposite direction. Notable figures in U.S. business schools have been jumping on the anti-ESG bandwagon as of late, decrying what they view as the “fallacy” of climate change as a financial risk. Yet instead of looking at the evidence, their loyalty to theory has them opposing the most basic principles we teach to our students. They are missing the point about why sustainability matters in the first place.
Fortunately, these voices within leading U.S. universities don’t doubt that man-made climate change is real. Instead, some lean on technical arguments about the mandate of financial regulators like the SEC and the Federal Reserve to intervene. Others go further by stating that while climate change may be bad for people and the planet, it’s not a problem for firms. And since their theory holds that the social responsibility of firms is to increase profits, why on earth would regulators require firms to disclose what they presume to be non-financial information?
The point these critics ignore is the empirical evidence about climate-related risks. Over the past decade, a growing body of researchers has been exploring how climate hazards affect the real economy. We now have numbers to back up the intuitive links proposed to us by practitioners. Drought affects publicly-traded food companies. Climate vulnerable sovereigns pay more for their debt. The value of oil & gas companies is changing as renewables become cheaper. Carbon emissions are already a form of risk premia priced by equity markets. The question for those paying attention is not “if”, but rather “how long” this has been going on.
One challenge to understanding these new price signals is that climate change is rarely a stand-alone risk. More often, it appears as an amplifier interacting with other factors. Take the Netherlands, for example. The country is already underwater, yet we don’t think of the Dutch as future climate refugees. Why? Because they are relatively rich and well prepared. So, does solving the climate challenge mean the whole world just needs to get a whole lot richer? In many ways, yes. But should we accomplish that by dumping dirty technologies on developing countries? Certainly not.
Soaring rhetoric from politicians and business leaders maintains that the goal of holding average warming to 1.5 degrees C is “still alive.” Privately, most admit that the window is now closed. The residency time of the greenhouse gases in our atmosphere coupled with the impossibility of an immediate halt to fossil fuel use means that the world will breach that goal. We’re now entering into a realm of radical uncertainty, in which climate, economic, and social factors will shape firm-specific cash flows and industry cost of capital.
Many finance academics are proponents of markets as the ultimate arbiter of value. So, it’s ironic that some have become so vocal about a “fad” of climate-aware investing when the numbers tell a different story. Smart investors know that something big is happening. Many, in their own financial self-interest, are demanding that companies tell them about their climate-related financial risks. For companies dragging their feet, regulators should compel them. That’s not about saving the world. It’s a matter of fiduciary duty. A concern for factors (whether new or old) that shape asset values is Finance 101. Those who teach it need to open their eyes to the world changing around us.
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Charlie Donovan has dedicated his career to harnessing capital markets for a global shift towards clean energy, climate resilience, and nature-based solutions. He is a Senior Economic Advisor at Impax Asset Management, a firm dedicated to investing in opportunities that arise from the transition to a more sustainable global economy. At the same time, Charlie is a Visiting Professor of Sustainable Finance at the University of Washington in Seattle. Mr. Donovan has held several positions of leadership including as the Founding Director of the Centre for Climate Finance and Investment and Professor of Practice in the Department of Finance at Imperial College Business School, and as an Academic Co-Chair at the Coalition for Climate Resilient Investment.