We are three months from COP24, the 24th time governments have met to affirm their intention to address climate change. As the physical impact of climate change worsens, with global climate-related losses running at record levels, the rhetoric from most governments – and now many non-state players – is truly impressive. But the reality is that next to nothing has been done to materially address climate change. We now face the need for emergency action if the worst impacts are to be avoided. With the exception of petro-state apologists in Australia, Canada, the USA and the like, the facts are not in doubt. 2017 saw the highest levels of carbon dioxide recorded, governments failed to reduce the subsidies going to fossil fuel companies despite committing to eliminating them completely by 2025, investment in renewables actually fell while investments in fossil fuels increased. Meanwhile, record temperatures are occurring in the Arctic, parts of Asia and the US which may well trigger potentially irreversible climatic feedback loops.
The option of a gradual transition path to prevent temperatures rising above 2°C limit – as governments agreed in Paris in 2015 – is now clearly off the table.
Sadly, the option of a gradual transition path to prevent temperatures rising above 2°C limit – as governments agreed in Paris in 2015 – is now clearly off the table. We have left it too late for anything other than emergency action; climate change is now an immediate existential risk to human civilisation as we know it. That is, a risk posing large negative consequences which will result inter alia in major reductions in population via forced migration and spikes in weather-related mortality (often in countries that have done least to cause global warming), accelerated species extinction, disruption of economies and social chaos including major population movements. Importantly, the risk is immediate in that it is being locked in today by our insistence on expanding the use of fossil fuels when the carbon budget to stay below sensible temperature increase limits is already exhausted. In short, dramatic action is needed and only civil society is able to get this ball rolling. Dramatic change is called for from all parties. Think wartime regulation rather than the voluntary incrementalism that business typically favours and many others, campaigners and NGOs included, have come to accept.
Everyone needs to make this paradigm shift and for climate advocates and campaigners this means switching from calling for divestment to pushing for ‘sterilisation’.
But why this dramatic action just when, in the top echelons of the global corporate and investment communities, climate risk seem to be finally reversing decades of ‘wilful blindness’? Of course, we welcome the recent movements by, amongst others, the Task Force on Climate-Related Financial Disclosure (TCFD). In Australia for example, legal opinion has confirmed that: “company directors who fail to properly consider and disclose foreseeable climate-related risks to their business could be held personally liable for breaching their statutory duty of care and diligence under the Corporations Act.”. Regulators in several countries seem to be finally waking up to the fact that climate risk has the potential to create a crisis far greater than the 2008 Global Financial Crisis, emphasising that: “climate risks are foreseeable, material and actionable now”.But even the climate leaders within official and corporate circles are not yet ready to accept the implications of existential climate risk. Despite the fact that market-based measures so beloved by the corporate and financial worlds and neoliberal governments, are insufficient for this task, many specialists – including CSR and ESG professionals whose job is to promote incrementalism by the corporate and investor worlds respectively – are likely to be critical of this call for emergency action. This is as pointless as railing against gravity – the science has been available for many years for any who were willing to listen to the increasingly urgent warnings from leading scientists, and we have simply been rewarded with a horrid procrastinator’s penalty. Part of the problem is that climate denialist vested interests, along with their political camp followers, have brow-beaten international institutions such as the IEA, IPCC and the UNFCCC into adopting consensus processes that are incapable of addressing climate change in the limited time now available. These interests have also neutered realistic carbon pricing and effective emissions trading systems. Tellingly, those who favour a geo-engineering miracle cure have been largely silent as the earth’s natural carbon sink – forests – have been decimated.
All of which points to the need for a fundamental reframing of climate change policy and action within an existential risk management framework. So what would this reframing imply? The divestment movement is a good starting point to highlight the type of civil society-led change required.
Divestment has been enormously valuable in raising the profile of climate risk and the need for rapid action. In the process, it has brought large numbers of the public on to the streets and forced investors into a whole raft of defensive PR actions. But divestment – or its technofix cousin, portfolio decarbonisation – is not a solution in itself. If we are to stay below a 2°C limit, not only must there be no new fossil fuel projects, coal, oil or gas, but many existing fossil fuel operations must shut down before the end of their normal working life.
And this analysis gives humanity only a 66% chance of staying below 2°C. Would you get on a plane if you had the same odds of arriving? For a more credible 90% chance, there is no carbon budget left today, meaning that all fossil fuel consumption should halt immediately. Obviously that is not going to happen, but our point is simple: we must see much more rapid emissions reduction than the ‘realists’ propose.
With no carbon budget and a halt to new fossil fuel projects required, divestment is no longer sufficient. If fossil fuel reserves are sold off to third parties, particularly where those parties may have less stringent environmental standards than the original owner, subsequent development – presumably the intent of the purchase – will almost certainly result in worse climate change outcomes.
In these circumstances, those reserves must stay in the ground. In short, they must be ‘sterilised’. The theoretical underpinnings for cutting off, or sterilising, fossil fuel supply, are set out in recent papers by Fergus Green and Richard Denniss.
Similarly, the sectors which are heavy users of fossil fuels – autos and energy utilities especially – should be instructed by their investors to implement transformation plans to align with the Paris Agreement or net zero by 2050.
Put simply, when climate risk becomes existential, as it now is, if corporations and investors want to retain their ‘social license to operate’, then ethical and moral standards must leap frog over the lax standards of recent times. Those claiming climate change leadership supposedly accepted the climate science long ago. Whilst it is undoubtedly within the letter of the law to divest, it is ethically and morally indefensible to be seeking financial advantage in selling off assets knowing full well the potentially catastrophic climate implications if they are subsequently developed.
Why should investors do the really hard work that is needed when they can get away with some extra investment in green bonds, a somewhat better portfolio decarbonisation score than their peers and 1-2 high-profile divestments?
Likewise, it is no longer good enough to wait reactively for governments to set the climate change rules; companies and investors must now proactively lead in contributing to create stable climate conditions within the Paris objectives. For long-term and diversified investors, it is totally in their own self-interest to do so. But even sectors like US autos, that are privately supportive of Trump’s efforts to water down emissions targets, risk losing out to global competitors from China and Japan, who see emission reduction as a competitive advantage. This happened in the 1990s – and investors in US autos (and employees) paid the price. Diversified long-term investors also have a duty to challenge the use of shareholder money to lobby governments by vested interest sectors. Clearly, such lobbying – legalised bribery in many countries – may delay the inevitable by some years, maybe even a decade, but only by significantly increasing the risk to the rest of the portfolio. It also makes for “crazy politics”, as the BBC has described recent events in Australia, whilst tellingly failing to even list corporate capture as one of the driving forces.
Sterilisation raises the thorny issue of taxpayer bailouts. Many companies, including Rio Tinto, Anglo American and BHP, have recently sold off fossil fuel assets, particularly coal, or withdrawn from leases, supported by governments. Climate science has long been available, so these companies have no justification for seeking compensation. If compensation is to be paid, it should go to pension funds that will face losses as valuations prove to be wrong.
Investment in low-carbon energy has slowed recently, but capacity expansion has held up, partly the result of lower costs. But without doubt, the investment move away from fossil fuels has to be dramatically accelerated. An essential step must be the removal of fossil fuel subsidies, which still massively outweigh support given to low-carbon alternatives. In particular, removing the largest subsidy of all by introducing a realistic price on carbon to reflect the external costs of using fossil fuels, such as health and climate impact. Only in the context of an emergency sterilisation programme will it become possible to do this – for as long as new extraction is seen as profitable, there will be subsidies.To summarise, muscular regulatory action is now essential to have a serious chance of avoiding the worst outcomes of climate change. Pressure also needs to be put on laggard governments. What is needed today is a carbon price with border adjustments that penalises the US and other climate denialist governments. China would be well placed to lead the world to do this, given the sanctions that have already been imposed on it. In turn, this requires a fundamental rethink of investor attitudes, because without strong investor support, governments will not be brave enough to challenge the vested interests that have caused this crisis. What we are proposing is not easy. But either we act, or humanity has a bleak future. The right allocation of investment is going to be absolutely critical in determining that future. As long as campaigners reward investors for divesting from a few fossil fuels stocks, there is little chance that investors will rise to the challenge of being forceful stewards across all the high impact sectors. Put simply, why should investors do the really hard work that is needed – for example, using their influence as owners of banks to get these banks to switch off loans for new fossil fuel projects or stopping re-financing their debt investments in the fossil fuel sector as a whole – when they can get away with some extra investment in green bonds, a somewhat better portfolio decarbonisation score than their peers and 1-2 high-profile divestments? As Alex Steffen, the futurist has noted, “incrementalism is the new denialism”.
NGOs, independent commentators and financial media have an important opportunity to show whether they can hold investors to greater account than has happened to date this week, as investors meet in California to showcase their climate ‘achievements’.
These are very big asks but we have done this before. The organisational infrastructure is now in place within the investment community with the creation of Climate Action 100+, which allows investors to coordinate their stewardship activity globally. The strap line for this new initiative is correct in one very important way – investors do indeed need to drive change. Where it’s not quite right is the focus on business transition; what we need is transformation in many sectors. The time for gradual transition has long past. And we need the CEOs and CIOs of the member organisations to roll up their sleeves and take a hands on role – as happens with the Business Roundtable or WBCSD. Delegating the work to the head of an ESG team is certain not to be enough, however good she or he may be.
The abolition of slavery (which also required huge bailouts), the mobilisation for WWII and the post war reconstruction (the Marshall Plan) are examples of what is needed. As wartime leader Winston Churchill reminded us, “It’s no use saying, ‘We are doing our best.’ You have got to succeed in doing what is necessary.”
Ian Dunlop was formerly an international oil, gas and coal industry executive, chair of the Australian Coal Association and CEO of the Australian Institute of Company Directors. He is a member of the Club of Rome.
Raj Thamotheram is Founder and Chair of Preventable Surprises, a research and advocacy group focused on systemic risks and what investors can do about them.