Short-Term Strategies Don't Work for Wall Street or the Planet
The fiscal crisis on Wall Street is a painful lesson in how entire industries can delude themselves into ignoring the most fundamental issues -- in this case, the hidden risks from easy sub-prime mortgages. It also reveals the vast pitfalls of an economic system obsessed with short-term gains and growth at all costs while ignoring essentials such as building long-term shareholder value and protecting the future of the planet. As we confront global climate change -- perhaps the biggest challenge mankind has ever faced -- business and government leaders have an opportunity to learn from the ongoing Wall Street debacle and get it right.
As with sub-prime mortgages, climate risks present far-reaching hidden risks, and the financial industry should be paying closer attention. Wall Street research analysts, bond rating agencies and banks should all be scrubbing their portfolios to weed out sub-prime carbon assets that may prove toxic in the years ahead.
Assuming that you can safely invest in carbon-intensive assets because carbon can be emitted for free is a strategy fraught with risks. Countries all over the world are setting limits on global warming pollution, which means putting a price on carbon emissions. High-emitting capital assets such as coal-fired power plants, SUV-producing auto factories and the tar sands oil production in Alberta, Canada will be especially vulnerable.
Carbon emission allowances in Europe are already trading at $38 a ton under the European Union's three-year-old cap-and-trade program. A similar cap-and-trade program is just being launched in the Northeast U.S., focused on the region's 233 power plants, dozens of which are coal-fired plants that emit more than 50 million tons of CO2 into the air every year. Forcing the operators of those coal plants to pay for every ton of CO2 they emit will impact their bottom line.
Yet, despite these trends, many leading financial players in the U.S. are undervaluing climate risks and continue bankrolling carbon-intensive projects that will make it all but impossible to reduce global warming pollution to the levels scientists say are needed. 'Dirty' financing is especially problematic in countries such as China, which many observers say is the real battleground for winning or losing the global warming fight.
A recent Ceres report evaluated climate governance practices at 40 of the world's largest banks, including several of those dissolved last week by the sub-prime meltdown. The report found that only 14 of the 40 banks had adopted risk management policies or lending procedures that address climate change in a systematic way. Only six of the banks were formally calculating carbon risk in their lending portfolios. And no bank had a policy in place to avoid investments in carbon-intensive projects such as new coal-fired power plants or oil extraction in Canada's tar sands.
There are some positive signs. Soon after Ceres released its report, Morgan Stanley, Citi and JP Morgan Chase announced that any future lending for coal-fired power and other carbon-intensive projects would face increased scrutiny, using new Carbon Principles, to better assess financial risks and alternatives. Bank of America, Wells Fargo and Credit Suisse have also announced they will use the same principles in their lending practices. Bank of America has also shown leadership by being the only bank to set a specific target to reduce the rate of greenhouse gas emissions in its lending and and by disclosing publicly that it will use a $20 to $40 per ton cost of carbon in evaluating loans.
These actions are encouraging but they won't reverse the rise in greenhouse gas emissions and slow the earth's warming.
As we learned from the Wall Street meltdown, an unfettered free market does not always act in the best interests of society. We desperately need policies and regulations that reflect the enormity of the climate crisis before us - and the true environmental and social cost of CO2 pollution. Until strong national and international climate limits are enacted, capital will flow too easily to the lowest common denominator -- quick speculative projects that ignore long-term consequences.
Decades of deregulation allowed the financial industry to "innovate" new financial products and structures at an astonishing rate without any supervision and monitoring. By playing on the worst of human instincts -- greed -- we now have have a flood of mortgage foreclosures and a global economic recession. Failing to address global warming without tough governmental policies could have even bigger economic consequences.