The Climate Summit of Money
By Katy Lederer
Between
2002 and 2008, I had a day job as a recruiter at a quantitative hedge
fund in midtown Manhattan. I was callow and loquacious, and I would
wander from office to office at lunch asking the quants if I should buy
an apartment. Everyone knew there was some sort of bubble—interest
rates on mortgages were artificially low, and the cost of buying
relative to renting was historically out of line—but almost no one
imagined how bad it would turn out to be. My fear was not so much that,
after committing every penny of my savings to the purchase, I might lose
a little money on the deal, but that, when the bubble finally burst, I
might end up deep underwater on my mortgage and lose everything. “If you
‘lose everything,’ ” I remember one quant telling me, “You will have
much bigger things to worry about than making mortgage payments because
that will mean the world economy blew up.”
I
was put in mind of this period of my life at the end of last month,
when I attended the seventh Investor Summit on Climate Risk,
co-sponsored by the U.N. Foundation and the nonprofit sustainability
group Ceres, on the heels of the historic Paris Climate Summit.
Five hundred investors representing twenty-two trillion dollars in
assets convened at the U.N.’s iconic East Side headquarters, where they
heard from some of the negotiations’ highest-profile players, including
Christiana Figueres, the U.N. climate chief; Ségolène Royal, France’s
minister of ecology, sustainable development, and energy; and Michael
Bloomberg, who currently serves as the U.N. special envoy for climate
change and cities. The event was, in essence, the Climate Summit of
Money, and the question being posed was how to finance the clean-energy
transition that Paris promised—a transition that scientists and
economists agree must happen quickly if the world is to avert the worst
economic impacts of climate change—within the strictures of fiduciary
duty. “The tools that you design, the financial structures that you
develop, the blends that you are able to put together,” Figueres said,
setting the agenda for the day in her address. “All of that, in the next
five years, will decide the quality of certainly the energy and
certainly the quality of the global economy for the next thirty-five
years, and hence the quality of life for everyone else for hundreds of
years.”
The International Energy Agency has estimated
that it will cost sixteen and a half trillion dollars for the world to
meet its collective Paris goals, and the presenters at the conference
sliced and diced this ambitious mandate from a variety of angles. Panels
on the disruptive potential of electric cars took place alongside
conversations about how to bring power to the more than one billion
people who are living without it. (Many speakers at the conference
touted investment in clean energy as an economic stimulus program,
opening up new markets and revitalizing old ones.) The environmental and
financial perils of remaining invested in fossil fuels was cast in a
pixelated PowerPoint relief. “I call this ‘divestment through value
destruction,’ ” Michael Liebreich, the founder and chairman of the
advisory board of Bloomberg New Energy Finance, said while pointing up
at a scary-looking graph of coal’s recent precipitous decline. Mark
Lewis, a managing director at Barclays, estimated that if companies and
investors don’t adequately anticipate shifts in the energy markets,
roughly thirty-four trillion dollars in value is at risk. “Investing in
the wrong type of assets,” he said, “in fossil-fuel assets specifically,
in an environment where we’re moving to a much less carbon-intensive
world, damages your wealth.” This analysis assumes that, if investors
don’t effect what economists call “an orderly transition” by
thoughtfully deflating the fossil-based energy markets, climate change
will catalyze its own much more “disorderly” transition—deflating not
only the fossil-based markets but, eventually, the world financial
system as we know it.
The often
dramatic projections of market dislocation from, on the one hand, sudden
shifts in the energy markets to, on the other, the shocks of climate
change itself are based on the concept of “the carbon bubble,” which was
formulated in 2011 by the nonprofit climate-finance think tank Carbon
Tracker and popularized in a 2012 Rolling Stone article
by Bill McKibben. The concept is simple enough: in order to limit the
rise in average temperature to two degrees Celsius or less, the world
can afford to burn roughly nine hundred gigatons of carbon (an allotment
known as “the carbon budget”). According to the most recent estimates,
the world is sitting on twenty-eight hundred gigatons of proven
reserves—at least three times the available budget. (Elizabeth Kolbert
has written here about what Earth would look like if we burned “all of the fossil-fuel resources known to exist”—in short, Waterworld.)
Once
a niche analogy, the comparison of the dangers posed by carbon assets
to those of the speculative market in housing has been gaining momentum.
Last fall, Mark Carney, the governor of the Bank of England and head of
the Financial Stability Board, an entity organized in the wake of the
2008 crash to head off such crises in the future, characterized climate
change as a systemic threat to the global economy, and a recent panel
at Davos asked whether business should prepare for “a fossil-fuel-free
future” (roughly eighty per cent of the audience polled answered “yes”).
In his passionate address, delivered in front of a panoramic view of
the East River and the Long Island City waterfront, Al Gore, who has
long compared carbon assets to subprime mortgages, enjoined those
assembled to divest altogether from their fossil-fuel holdings. “The
assumption that the twenty-one trillion dollars of carbon-based assets
that are marked to market on the books,” he said, “will all be put to
their intended use and burned is an assumption even more absurd than the
assumption that someone who can’t make a monthly payment is a good risk
for a home mortgage.”
In 2015,
investments in clean energy totalled three hundred and eighty billion
dollars, which was a record for the industry, but still far short of the
trillion in annual investments that Ceres says is required for the
world to stay—both literally and financially—above water. Why the
persistence of the gap despite the evident risks that climate change
poses to the global economic system? One answer is that there aren’t
nearly enough large-scale clean-energy investment opportunities.
“Windmill parts in Europe are so vastly oversubscribed,” Erik van
Houwelingen, a board member of the behemoth Dutch pension fund ABP,
said. Other panelists described the competing responsibilities of
maximizing returns while safeguarding against the financial risks of
potential climate cataclysm. “My job is not one of having to convince,”
Vicki Fuller, the C.I.O. of the New York State Common Retirement Fund,
the third-largest American pension fund, said. “It’s really finding the
best way to implement or consider climate change as both a return driver
and a risk driver in the portfolio.” If the perfect is the enemy of the
good, fiduciary duty, it became readily apparently after ten straight
hours of listening to institutional best practices, is the enemy of
anything even remotely resembling the fast.
As
the sun sank below the rows of buildings on First Avenue, the attendees
repaired to the Networking Reception, where we nibbled on triangular
slices of cheese while discussing the imminent and, no matter how we
looked it at, absolutely terrifying transition to a clean-energy
economy. The atmosphere brought me back to the summer of 2007, when I
had attended a party in a spacious, vaulted room that overlooked the
Hudson River. After filling a small plate with fruit and pastries, I had
settled at a table with a quant that I respected. I asked him—as had
become my habit—if he thought that it was finally time for me to buy my
own apartment. “I don’t think so,” he said. “No.” He had been seeing
things, a pattern in his model that was troubling him. “I’m not talking
about just some correction. What I’m talking about is something much
scarier than that.” In August of 2008—in what now seems like a
preternatural act of market timing; I had tendered my resignation months
before—I finally left my job. I was really glad I hadn’t taken out a
mortgage.
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