Excerpt of Climate of Hope: Financing The Needed Climate Revolution

From CLIMATE OF HOPE by Michael Bloomberg and Carl Pope. Copyright © 2017 by the authors and reprinted with permission of St. Martin’s Press, LLC.

How We Invest

In the tragedy of the commons, people use common resources in ways that benefit them individually while imposing harm on society. Think of a fishing company that depletes an area before moving to the next, leaving nothing for local residents who rely on fish for food and income. 

In the tragedy of the horizon, people use resources in ways that benefit them without accounting for costs that are likely to materialize down the road. 

There may be no better example than climate change. Preventing it will require more than goodwill and government regulations. 

It will require us to employ a force that makes the world go round, but that many environmentalists have traditionally seen as an enemy: profit motive.

Some investors have tried to use the market to combat climate change by creating socially responsible investment funds. That industry has grown over the years, but it remains a niche in the global financial system, and probably always will be. Enlightened beneficence is not going to solve the problem of climate change. Only when self-interested acts are also climate-friendly acts will success be possible. 

In other words: reducing carbon must offer profit opportunities for us to win the battle against climate change. This is not only possible; it’s already starting to happen.

Accounting For Climate

The biggest obstacle standing in the way of investors and climate-friendly investments: the opacity of the market. Which companies are most vulnerable to climate change? How big a financial impact might climate change have on a business and over what time frame? Which are best prepared? Which are taking action, and which are doing nothing? It is currently difficult or impossible for investors to answer those questions. 

That’s a market failure. Transparency makes markets more efficient by allowing investors to value companies more accurately. The less transparency there is, the more companies are overvalued and undervalued, and the harder it is to allocate resources to maximize returns.

My company is a testament to that idea. When I started it in 1981, real-time pricing of stocks and bonds basically did not exist. Firms taking buy/sell orders could build in big spreads (commissions), because customers had no good way to compare prices. That benefited firms at the expense of their customers, but the lack of transparency also harmed firms by forcing them to make investment decisions with limited and out-of-date information. By computerizing financial data and making it available in real time, Bloomberg changed all that. 

Today, spreads on trades are tiny compared to what they used to be, and firms make investment decisions informed by real-time data. To help the financial industry understand the investment implications of the energy revolution, we offer Bloomberg New Energy Finance, which analyzes the industry and identifies trends within it. 

But now investors are seeking climate-related data beyond energy.

In the mid-2000s, while I was mayor, the company decided to begin collecting data on various sustainability measures. But data was difficult to obtain, and what data did exist was often in forms that were not comparable. Without disclosure standards that allow investors to make apples-to-apples comparisons, sustainability information can be virtually useless.

When I left city hall in 2014, I began chairing the Sustainability Accounting Standards Board, or SASB, which develops sustainability disclosure standards across different industries in the United States. The board is creating an accounting framework that helps companies determine which sustainability metrics should be reported and how. It also helps investors understand how to use that information. Our goal is to standardize disclosure practices among leading securities issuers in ways that are helpful to investors, accountants, law firms, and regulators.

Demand for data on sustainability is also growing because investors are increasingly sensitive to the environmental impact companies have. Money managers who are investing pension fund money and college endowment money—big pools of capital—are demanding to know more about companies’ environmental policies. They ask the management of the companies: What is your carbon footprint? What are you doing to reduce it? When big investors talk to management and indicate that this is an area of concern, you better believe that CEOs pay attention.

Bringing transparency to climate risks can direct capital away from carbon-intensive investments toward cleaner ones, but market transpaency is only one piece of the puzzle. Other obstacles are preventing investments in a low-carbon future as well—particularly in infrastructure.

Credit To Where It Is Due

Cities don’t need a miracle to beat climate change. They don’t need to choose between economic growth and saving the planet. These are not technological challenges. They are challenges of policy, governance, and leadership.

This was exactly the argument a group of eighty-five mayors made on the world stage at the 2016 UN Habitat III conference in Quito, Ecuador. Led by Mexico City’s Miguel Angel Mancera, Barcelona’s Ada Colau, and Madrid’s Manuela Carmena, the mayors called for access to international climate funds and greater control of their own finances. 

“Cities must have direct access to funds, direct access to financial institutions,” says Mayor Colau.

There are a number of other steps we can take to speed up private finance in public projects. Cities’ proposals for climate investment are often written by sustainability experts, not financial professionals, which means that many projects wind up being touted for their environmental benefits, not their financial returns. 

As a result, lenders often don’t have the information they need to decide whether to invest. Helping cities measure and explain return on investment in sustainability projects will bring more of them to life. Technical assistance—something that the Global Covenant of Mayors helps to facilitate—can often be just as important as technological breakthroughs.

I firmly believe that markets are the most effective way to organize resources in a world of scarcity. I’m an ardent supporter of capitalist institutions, and I’ve spent much of my career working to make them more efficient. Our society can’t function without business, which means we can’t solve the climate puzzle without business involvement.

Mitigating climate change and moving to a low-carbon economy will be an investment-intensive effort that presents opportunities both for savings and for economic growth. The capitalists who seek to stay stuck in a fossil fuel past forget that progress is its own economic stimulus. 

The old railroad barons thought they were in the train business. They weren’t. They were in the transportation business, and soon the automobile displaced rail as the dominant mode of transport. Failing to recognize disruptive innovation is a mistake that corporate leaders make time and again. But while some fossil fuel companies cling to their market share, more investors and CEOs recognize that the earth is shifting beneath their feet.

The single most important development in the fight against climate change hasn’t been the Paris Agreement, or the U.S. shale gas boom, or even the advancement of solar and battery technology. All have been critically important. 

But the most important has been that mayors, CEOs, and investors increasingly look at climate change not as a political issue but as a financial and economic one—and they recognize that there are gains to be made, and losses to be averted, by factoring climate change into the way they manage their cities, businesses, and funds.