A Green New Deal Is a Smart Deal for Investors
In February 2019, representative Alexandria Ocasio-Cortez (NY-14) and Senator Edward Markey (MA) introduced the Green New Deal as a non-binding resolution. The resolution lays out an ambitious federal strategy to decarbonize the U.S. economy and thereby increase clean power, create good jobs, improve air and water quality, while increasing U.S. global competitiveness. The carbon reduction goals of the Green New Deal are informed by the scientific consensus about the increasing impacts of global warming as set forth in the latest report, Special Report on Global Warming of 1.5°C, by the Intergovernmental Panel on Climate Change (IPCC) released in the fall of 2018. The Green New Deal concept is not new, but it is gaining clarity and momentum and has catapulted climate change to the forefront of national dialogue at a critical time.
The IPCC report states that we have a narrowing window in which to act to avoid catastrophic climate impacts. Global human-caused greenhouse gas emissions need to fall nearly 50 percent from 2010 levels by 2030 and decline to “net zero” around 2050. “Net zero” requires emissions to drop essentially to zero and any remaining emissions must be balanced by removing CO2 or other greenhouse gases from the air. The IPCC report projects an alarming difference in global impacts between limiting warming to 1.5°C versus 2°C and beyond.
Source: World Resources Institute
The effects of climate change are complex and unpredictable but are understood to be incredibly destructive and harmful to the stability of the global environmental systems upon which human society and the economy depend. Climate impacts present broad portfolio risks to investors who hold interests in companies and industries across all sectors of the global economy. Awareness of the systemic risk that climate change poses to the global economy is developing in influential institutions. For example, the Network for Greening the Financial System, a coalition of 36 central banks, was established at the end of 2017 with the purpose of helping to achieve the goals of the Paris Agreement and manage risks to the financial system. Frank Elderson, chair of the Network for Greening the Financial System, forcefully stated that “a transition to a green and low-carbon economy is not a niche nor is it a ‘nice to have’ for the happy few. It is crucial for our own survival. There is no alternative.”
Letting the current “business as usual” approach run its course is going to be devastatingly costly for investors. Recent research has put the costs of inaction at trillions of dollars. A report by CDP showed that, based on companies’ self-reported analyses, climate change could cost a combined total of almost $1 trillion, with much of this occurring in the coming five years. The companies accounted for in the report represent only a slice of the market; the report does not count major corporations with outsized risk like oil and gas giants Chevron and Exxon, which have refused to disclose critical climate-related data to CDP.
An industrial green policy in the spirit of the Green New Deal with the goal of solving climate change would spur massive amounts of innovation, new markets, and businesses — a vast opportunity for investors. According to economist Mariana Mazzucato, director of the Institute for Innovation and Public Purpose in University College London, a Green New Deal “should create new opportunities for investment, so that growth and sustainability move hand in hand.”
The shift toward a decarbonized global economy is already happening. The issue now is the pace of transformation. China and the European Union are positioning themselves as leaders in innovation for the emerging zero-carbon economy. The longer the U.S. procrastinates, the more it will suffer missed opportunities and resultant economic consequences. Just think of who will dominate the solar and wind markets, the emerging energy storage market, the electric vehicle market, and all the untold products and services needed to decarbonize the rest of the economy. While China introduces policy to support clean energy vehicles, the U.S. is attempting to roll back fuel efficiency standards to benefit oil companies and car manufacturers.
A truism of markets is that business does not invest unless it sees an opportunity for growth. The Green New Deal would spur market opportunity. By clearly establishing that this is the direction our country is headed, corporations would be better able to plan for necessary change, secure competitive advantage, respond to new opportunities, and mitigate against the risks posed by climate change. Such policies would not only help in limiting climate related risk but also create an abundance of opportunity for the investment community. Recent research projects a potential direct economic gain of $26tn by 2030 if bold climate action is taken. Nobel-prize winning economist Joseph Stiglitz has endorsed the idea of a Green New Deal touting that it would be good for the economy by stimulating demand, creating jobs, and likely ushering in a new economic boom.
Given what a Green New Deal could do to protect and unlock future value in investor portfolios, what can the investment community do to support its core principles? Investors must be vocal about what they have to lose and gain in face of the growing climate crisis and must support the solutions needed to prevent massive value destruction. Investor support for the concepts embedded in the Green New Deal is clearly growing. This was recently demonstrated by an investor letter organized by As You Sow with support from more than 50 investors representing more than $60 billion in assets under management. The letter was sent to every representative and senator on the 116th congress, urging action. Investors must also incorporate this urgent message into engagements with corporations. As You Sow’s 2019 resolution with oil and gas company Chevron, for example, calls for the company to explain how it can align its business model with the Paris Agreement — a request very much in line with what the Green New Deal aims to achieve. Investors must ensure that the companies in which they invest provide information to understand the risk and opportunity their business actions are creating and have a clearly communicated vision for how they will align with Paris net zero targets.
Finally, investors should reflect on their own investment strategy. As mentioned previously, central banks and financial regulators are becoming more acutely aware of the risk and corresponding financial materiality of climate change. As such, the fiduciary duty of investors regarding climate change is under scrutiny. Recently a panel of financial experts from Harvard, Stanford, and other respected institutions advising the New York State Common Retirement Fund concluded that “the fund pursue alignment of its entire portfolio with a 2-degree or lower future by 2030 in accordance with the climate science consensus.” This view is similar to As You Sow’s call in a 2018 report — 2020: A Clear Vision for Paris Compliant Shareholder Engagement — calling on investors to ensure that the oil and gas companies in which they invest have low carbon business transition plans in place to help ensure alignment with the Paris Agreement goals of keeping global warming at or near 1.5°C.
Ultimately, the ethos of the Green New Deal should be embraced and supported by investors. If carried out comprehensively, it would bring about ambitious policy solutions commensurate with the magnitude of the climate change emergency, create a clear pathway forward to protect investment interests, transform and decarbonize the U.S. economy, minimize risk of climate breakdown impacts, and maximize opportunities in the low-carbon economy.
Daniel Stewart is As You Sow’s energy program fellow.