My friend Tom Gosling makes arguments for challenges that the GFANZ and other NZ (NetZero) alliances (particularly) financial ones face.
On the limits of GFANZ, @GoslingTj argues for the limitations of GFANZ and the problems of committing to a 1.5c world when the world is committing to (median scenario) of 2.7c. There is still much use in the planning tho. tom-gosling.com/blog/one-cheer…
His overall point that corporates can not attempt NZ by themselves without governments, policy and other supporting actors is well made and I think understood by those at the frontier. He makes other points about the compromises and difficulties of a world where the median policy scenario is looking at 2c to 3c heating (2.6c or so at latest assessment I’ve seen, but with error bounds etc.) but companies are being asked to support a 1.5 to 2c scenario.
Tom argues that for many investor mandates this would be incompatible with fiduciary duty. This is the legal concept - with variation between countries - that an investor has to act as “prudent person” would and this is typically interpreted to mean to maximise risk adjusted financial returns depending on the mandate. Tom’s argument is that investing for eg. a 1.5c world would harm risk adjusted financial returns and not be “prudent” given the policy scenario.
To this particular argument, I believe the legal answer is “it depends” or as lawyer might say, it depends on “fact and degree” (not legal advice yadda yadda) . Certainly, (not investment advice yadda yadda) I could construct an equity portfolio that is plausibly in-line with a 1.5c to 2c scenario and that plausibly will make better or at least as good risk adjusted returns as the benchmark on a 7 year or longer horizon.
And, in fact, the equity portfolios I manage are aligned with the Paris agreement, and I believe will produce better risk adjusted returns than their benchmarks. There are two observations and a caveat that I will make. First, the caveat. I am very of the “fair share” carbon budget analysis that determines temperature alignment at a company level. I judge there is limited \ no science basis for the estimates that go into fair share analysis. They are social-political judgements. This is less of an issue at a country or sector level, but a big problem at a company level. This was hit home to me listening to Prof Simon Dietz at the LSE, Climate Transition \ Grantham | TPI team. So when you see you a rating organization claim company X is aligned to eg. 3.2c this number has so many dubious assumptions behind it to be borderline fictional. [The challenge is that you need to assign a company its “fair share” of the global carbon budget for a 2c world (at 66% probability)]
My first observation of why such portfolios are possible to manage in line with fiduciary duty is relatively simple maths. If the world is on track for 2.6c, (66% chance) then some companies and sectors are approximately heading to a 3.6c world and some are heading to a 1.6c world (given ALL the massive uncertainties I briefly highlighted some of, above). It seems entirely plausible that you can construct high returning portfolios from those below average companies.
My second observation is you can plausibly see this from bottom up calculations. There are 1000 over companies with Science Based Target approvals (there is a large separate debate on how robust the SBT process is, but it is plausibly as good as other processes) and you have a good number of companies such as Microsoft which have produced good financial returns and are plausibly aligned with a NZ world.
Still, while NZ and fiduciary duty in my view is compatible. It certainly is possible to break it. Hence the answer, it depends. But, for instance, 30 to 35% of Americans do not believe in man made climate change, and many investor mandates will want asset managers to ignore climate in the way they ignore (at first order at least) poverty, pandemic risk, nuclear risk, pollution and many other negative systems risk. This does not address the complexity of systems thinking, universal ownership or a possible systems view of fiduciary duty. But, it is certainly possible to break this in a mandate. A catholic mandate may be broken by investing in a prophylactic maker, a global mandate is broken by not investing globally. These may seem almost trivial except that it does show that the “customer” or end investor wishes in this case are primary.
Also, broad index funds eg representing the 2,000 largest companies in the world. Those type of funds are likely not aligned to a 1.5c - 2c world currently (they are likely to be aligned to board where the world is heading if govts make good on their commitments), and their mandates may well not be suited for a NZ commitment.
In any event, Tom’s blog makes several noteworthy points for climate and Net Zero thinkers to ponder, even if the legal nuances of fiduciary duty, in my view (not legal advice, yadda yadda) simply depends on the actual circumstances. Subscribe now
David Wallace-Wells raises the challenge of the fact that the median science now points to a 2c to 3c world and not a 4c+ world.
Five years ago, scientists talked about 'business as usual' warming between four and five degrees celsius. Now they talk about two to three. What does that jagged new world look like? A tour of life at 2C. (1/x)
That this is progress, but that damage will still arise. Some activists advocate for representing a more alarmist world in order to garner more action. Others believe sticking closest to the median science is more truthful. This is not only a challenge for climate but crosses into pandemics and other areas.
Is it better to be Straussian or “on the nose” ? (Do you even know what I mean by that?) My moderately held belief is that truthful is mostly better, but there are definite counter examples. (It is possible that Utilitarian thinker Peter Singer is purposefully not advocating views he holds because he believes this will produce more utility, consequentialist second order thinking for those who might follow such things)
Noted libertarian leaning, conservative leaning thinker, Bret Stephens has an essay on changing his mind on climate. He now views it as definitely a problem, and one that “markets should solve.”
“A trip there changed my mind about climate change while reinforcing my belief that markets, not government, provide the cure.”
But a careful reading of even just this opinion piece shows that these are not quite “free markets” as such, or at least as interpreted by the 1000+ comments on the article. They are markets that are created, incentivised (or not) by government and NGO actors. This is where a reading of Jacob Soll and his history of free market ideas I think is useful. See my previous blog here.
“Most of this innovation will be driven by free-market capitalism, with important incentives from government and NGOs.” (quoted in the essay).
Stephans argues:
1) Engagement with critics is vital.
2) Separate facts from predictions and predictions from policy.
3) Don’t allow climate to become a mainly left-of-center concern.
4) Be honest about the nature of the challenge.
5) Be humble about the nature of the solutions.
6) Begin solving problems our great-grandchildren will face.
7) Stop viewing economic growth as a problem.
8) Get serious about the environmental trade-offs that come with clean energy.
9) A problem for the future is, by its very nature, a moral one. A conservative movement that claims to care about what we owe the future has the twin responsibility of setting an example for its children and at the same time preparing for that future.
I would say the above sums up a possible centre-right manifesto on climate.
I think, perhaps, the simplified debates over “free markets” vs state control are unhelpful in the abstract. In the abstract, society typically at the nation-state level (but it can be at higher or lower levels at times) decides through a political process where the state should have skill\capacity (with classical liberals and conservatives cautious about the states ability to act, and (what we now view) as left leaning liberals and social democrats more optimistic about government’s ability), and then the state though policy, incentives and regulation develops markets or systems to meet society’s chosen needs usually [today] with a welfare security element (smaller for conservatives, and larger for others).
But the details really matter, most libertarians still advocate for defence, police, justice, basic science research and some other areas all to be done at the government level but they disagree even amongst themselves as to how much regulation there should be on finance or the environment.
Re: environment, two ideas potentially compatible with classical liberals or libertarians would be a carbon tax\price (with neutral redistribution) and relaxed permitting for new energy infrastructure eg wind farms and solar panels.
I currently view the permitting challenge as one of the main shadow battle ground taking place across most developed nations. Certainly in the UK where permitting ends up will set the medium term direction of much more than perhaps the average person realises.
Permitting for new energy infrastructure should also be a cause for leftist supply-side policy people (eg.Ezra Klein in the US). Let’s see where that develops.
The left view is - more easily understood - for more government actions possibly across all of regulations/standards, innovation direction and infrastructure and less reliance on mobilisation from the private sector.
Some thinkers here, go so far as to argue that company pronouncements on eg NetZero are a dangerous placebo that is slowing government action.
I circle back to Jacob Soll and examining the economic history work of Mark Koyama (also see previous podcast). Many solutions have been a blend of government or nonprofit actors in market formations although within this you have examples across the spectrum.