Corporates should end the greed and go green
If campaign donations and lobbyists are deployed to tackle climate change in the same way the banks use them to kill laws against their financial interests, the US could become a leader in making the planet safer.
Gordon Gecko famously said, "greed . is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind." Now as we recover from the horrific images of grotesquely harmed wildlife and humans emanating from Australia's wildfires and recall similar tragedies in California, could human greed provide a solution to climate change and prevent similar tragedies in the future?
Gecko's famous words in the 1987 film Wall Street have served as the perfect shorthand to describe the financial world's obsession with short-term wealth maximisation. The implication is that some poor sucker pays the price over the long-term after the music has stopped and the financiers have left the dance floor with their fat bonuses. This conventional wisdom is slightly unfair to Gecko because he was also referencing greed's positive qualities - its ability to drive evolution in thought, and the pursuit of goods humankind deems valuable.
The idea that the greedy men of finance could contribute to climate change mitigation is not so far-fetched after Blackrock's CEO Larry Fink's potentially transformational letter on January 14. Fink's words matter for one simple reason: Blackrock is the world's largest asset manager with over $7 trillion in assets under management. Fink claims that we are on the 'edge of a fundamental reshaping of finance,' because climate change 'has become a defining factor in companies' long-term prospects.'
Fink's missive is couched in economic terms - arguing that cities may not be able to afford infrastructure requirements, that mortgage lenders may not be able to price in the risk of climate change related events such as fire and flood, and that inflationary risks may increase because of food shortages as droughts and floods become more common. He predicts that in 'the near future - and sooner - there will be a significant reallocation of capital.'
Coevally, Blackrock also announced that climate will become integral to its portfolio construction and that the firm will exit sectors such as thermal energy which have a high sustainability-related risk.
Whilst the epistle looks good on paper, Blackrock's actions have not been particularly pretty. It has frequently voted against climate-related shareholder proposals and been the subject of activists' ire for enabling environmental destruction. The firm also has shares worth about $87 billion in fossil fuel companies according to an investigation by the Guardian in 2019. The Guardian report also found that Blackrock and Vanguard voted against climate-related shareholder proposals at fossil fuel companies on 4 out of every 5 occasions during 2015-19. To be sure, Blackrock's divergence between talk and action can be explained by the pressures it faces from its diverse clients including sovereign wealth funds, pension funds, and other groups not similarly inclined to pursue social justice initiatives.
Further, Blackrock's gap between aspiration and reality is not unique - it is typical of many companies. For instance, Vanguard and State Street together held about $198 billion in shares in fossil fuel companies in 2019. And despite the grandiloquent pronouncements of CEOs such as Fink that 'purpose is the engine of long-term profitability,' companies rarely, if ever, take leadership on the climate issue contenting themselves with speeches and cosmetic actions rather than meaningful change.
It is also folly to assume Fink's prediction about a significant reallocation of capital will come to pass. If we have learned anything from the past, it is that the world of finance is characterised more by herding, fear, and path dependence than true leadership.
Businesses will continue to engage in cheap talk and virtue signalling whilst pursuing the most efficient means to maximise wealth following tried and tested approaches rather than risk the unknown.
There are other reasons to be skeptical about Blackrock's proposals to positively impact climate change - their solution is to provide more information disclosure and ask shareholders to act. We already know what happens - disclosure overload, inability of shareholders to agree because of divergent interests, and the indifference of large institutional shareholders. Finally, social transformation cannot depend on the changing preferences of shareholder activists who have their own agendas.
This does not mean that Wall Street cannot be part of the solution to the climate change crisis. Its most meaningful contribution could be by leveraging its vast influence over politics and politicians. Wall Street and Corporate America typically get what they want from legislators and the government - political funding and lobbying all but guarantees that their interests are immunised. If you don't believe this consider the reversal of legal burdens imposed on banks after every financial crisis promptly after public memory has faded.
So, if Fink and Wall Street are serious about climate change, there is an obvious way to tackle it - governmental action. And if campaign donations and lobbyists are deployed to tackle climate change in the same way the banks use them to kill laws against their financial interests, the United States could become a leader in making the planet safer for coming generations.
In the end, Blackrock should save its letter-writing for birthdays and holidays. It's sheer size and influence have the potential to shift the political and legal landscape but that requires Fink to do more than buy postage stamps. As Fink knows, investing in electing better legislators, enacting sustainability-enhancing laws, and pushing government agencies to combat climate change is both greedy and good. Now is the time to act.
- Sandeep Gopalan is the Vice Chancellor of Piedmont International University, US