Finance vs. ‘Climate Finance’ (Lisa Sachs’ Problem)

“… the doctrine of ‘social responsibility’ involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses.” (- Milton Friedman, 1970)

Lisa Sachs, director of the Columbia Center for Sustainable Investment, is all-in with climate alarmism and forced energy transformation. No debate allowed about fundamental premises, despite my best efforts to persuade her otherwise.

Today, she is tangled up in the subjectivity and contradictions of “socially responsible” investing. Business is the process of winning profits and avoiding losses, with distractions such as “socially responsible” minimized. Yes, ethical norms should be respected, as Milton Friedman clearly stated in his seminal essay, “The Social Responsibility of Business is to Increase its Profits.” But business is not government or a charity. It has a fiduciary responsibility to shareholders to maximize profits and minimize losses. Otherwise, it is investor beware!

Here is Lisa Sach’s latest coming out of “Climate Week” in New York City. “Over the past decade, while the field of climate finance has grown,” she began, “it has also become more confused and conflated.”

Today, definitionally, climate finance encompasses many distinct imperatives, involving as many distinct institutions. The conflation has led to misdirected efforts, illogical politicization, unnecessary debates, and ineffective strategies, irrespective of the diverse “climate finance” goals.

Let me disaggregate a few components [this is where it gets very complicated!]:

1) *financing climate action*: there is the imperative of allocating finance to rapidly decarbonize the global economy, enhance natural carbon sinks, and support adaptation and resilience to the growing impacts of climate change.
2) *prudent risk management*: Investors and financiers are primarily concerned with the unprecedented, interrelated ways climate change affects the value of assets or financial returns, in order to make more informed decisions.
3) *risk distribution*: Insurers focus on pricing and distributing rising climate risks.
4) *economic and financial stability*: Central banks and financial oversight bodies are attentive to ensuring climate change does not destabilize markets or economies.

She continues:

Each of these imperatives sits at the intersection of climate and finance, but they serve very different goals and require distinct strategies. Of these, only financing climate change mitigation reduces the underlying risks; all others react to the rapidly mounting climate risks, which are wise to understand, anticipate, prepare for, and manage, as best we can.

“The shame,” Sachs continues, “is that these distinct imperatives have been terribly conflated in practice, with mandates, strategies, and metrics reflecting that confusion.”

This has undermined the effectiveness of each, politicized prudent risk management, and consumed endless time and resources in unproductive or needlessly contentious activities.

Importantly, even for those of us interested in financing the decarbonization of the world economy, there is frankly no need to call it “climate finance.” Much of what is good for the climate is simply what is best for energy security, efficiency, resilience, and affordability. The same is true for innovations in mobility and building efficiency. Much of this investment is pursued to save costs, improve competitiveness, or enhance societal well-being; the climate benefit is one imperative, but far from the only one and not the one that determines whether or not these investments are financeable. (This is also affirmed in Alastair Marsh‘s article today: https://lnkd.in/eK8KYHt6)

Stop right there. So if “climate finance” should be considered just finance, is it profitable in its own right (without government) “to save costs”? And are “competitiveness” and “societal well-being” objective and profitable? Sachs does not say–or want to say, probably. She continues:

We can/should do better in both risk assessment, risk distribution and management – and we must do better in financing global decarbonization and adaptation. But the first step is that we really must distinguish these very distinct goals, what institutions/information/information is relevant for each distinct objective, what the challenges are, and how we can collectively address those challenges.

Comments

We should do a better job…? Back to first steps? Collectively address? Ouch!

Remember Green Enron? Green ‘beyond petroleum’ bp? ESG Sunnova and Sunnova founder John Berger who received the “Lifetime Achievement Award” for energy sustainability? “Climate Bank” SVB? Also note how Big Oil’s investments into politically correct energy projects have been economically incorrect, from solar to biofuels.

It is time to revisit first principles before taking first steps. I emphasized two a quarter-century ago:

Corporate policy makers entering the [climate] fray should be guided by two principles…. First, mandatory GHG programs should be rejected in favor of voluntary approaches….  Second, voluntary actions by corporations should not go beyond win-win ‘no regrets’ initiatives. Control practices that are uneconomic penalize either consumers or stockholders and politicize the issue of corporate responsibility.

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