In international affairs, the US likes to lead. On climate change, that’s going to be difficult, when it has spent the last four years sulking in the corner. But old habits die hard.
As GlobalCapital discusses in a recent report on how the Biden administration will tackle greening the US economy and financial system, the US will need to find a new rhetoric to engage with other countries on climate — but President Biden will be ideally suited to the job, being a consensus-builder.
Since the Paris Agreement was signed, China and the EU, in their very different ways, have made all the running in greening the financial system.
But their efforts, though influential overseas, still directly reform only what happens on their own territories. Truly global climate finance mechanisms and rules — if these are needed — remain on the drawing boards of networks of activists and investors.
The US’s reappearance at the climate table should lead to rapid progress. For one thing, it will complete the party — all major economies will now be pulling in roughly the same direction, towards net zero carbon emissions by mid-century.
But the US is not just any large economy. Its inherent clout and — when not led by science-denying Luddites — its skill in capital markets, legal affairs and diplomacy, will enable it, if its ministers and envoys have sufficient vision, to unlock agreements no other country could.
Rapid catch-up
If the US is to lead internationally, it will have to put its own house in order.
Beginning in 2018, the EU went from nought to 60 with its Sustainable Finance Action Plan, laying a mesh of regulations across what had till then been a purely private activity. So it still is in the US.
Galling though it may be for those who have wrangled and sweated to bring the EU’s many-headed monster of sustainable finance regulation to birth, the US could catch up remarkably quickly.
Legislation is likely to be barred by Republicans who prefer to live in an oil-guzzling 1970s. But in the US system, that may not matter. The Federal Reserve is independent, and although it has been muzzled on climate for four years, its staff clearly get climate change. It has already in the past few weeks joined the Network on Greening the Financial System.
The Dept of Labor, which governs corporate pension funds, will be in Biden’s control.
The Securities and Exchange Commission is run by five commissioners. With the chair vacant, it will be evenly split between Democrats and Republicans until Biden can get what will probably be a reluctant Senate to confirm his choice as the new chair.
But once that is done, the levers of financial regulation will be on Biden’s desk. Making new rules could be easier for him than it was for the EU, in which everything has to be originated by the European Commission — which sometimes has bizarre ideas — then bashed through a grinding mill of 27 member states and the European Parliament.
Cherry-picking time
Just as importantly, the US will have second mover advantage. If it is wise, it can see what the EU did well and badly, and copy only the best bits.
Moreover, in some areas, the EU has not actually got very far. Monetary policy is one. The European Central Bank has uncharacteristically left it to the national central banks of the eurozone to do most of the early legwork on incorporating climate considerations into their oversight of banks. But they cannot, singly, influence how the ECB spends its vast wads of printed cash. As a result, quantitative easing, which has such a powerful influence on capital markets, is so far agnostic on climate change.
Five fronts for action
In an article published earlier this month, Steve Waygood, chief responsible investment officer at Aviva Investors, and one of the best informed and connected advocates for sustainable finance, put forward a five point plan for Biden, setting out how the US should lead in climate finance.
Waygood demands ambition from the US, calling on it to fill in the Paris Agreement’s gaping lack of an effective mechanism for financing the transition to net zero.
It should focus its Covid recovery stimulus on climate-smart infrastructure; set a carbon price using a variety of taxes and regulations; and carry out Biden’s pledge to “apply a carbon adjustment fee against countries that are failing to meet their climate and environmental obligations”.
The Fed, Waygood argued, had in the first three quarters of 2020 spent $4tr — out of $9.7tr of corporate QE in total — buying investment grade bonds from companies in the car, transport, chemicals, metals, mining, oil and gas and utility sectors. That lowered the cost of capital for these firms, when it should be being raised.
Finally, Waygood trained his sights on international regulation, especially the often neglected Financial Stability Board of the G20, which the US shepherds, and which Waygood accused of inertia. It should wake up and use its power to guide business leaders to truly face up to the existential risks of climate change.
Four short cuts
Waygood’s five points are all bold and important steps that the Biden administration must take. The world is still wandering far off the track that leads to climate salvation, and in the next four years, the US has a unique, but brief, chance to lead it back towards a safer path.
Unlike any previous US president, Biden gets the urgency of climate change. In that spirit, GlobalCapital has its own plan to suggest, complementary to Aviva’s, of four things that would save time.
If not all these ideas are quick or easy to implement, they would still certainly be faster and more direct than alternatives.
1. Do use symbolic actions, but don’t waste time on them
Some would see the US Treasury beginning to issue green bonds as a victory for the climate. Others argue the big prize is greening QE, to tilt the cost of capital in favour of greener companies, or at least, those making minimum disclosures such as those recommended by the Task Force on Climate-Related Financial Disclosures (TCFD).
In reality, green bonds hardly ever change anything in the real economy. They are a way of badging green activities that are already going on, so investors can feel good about having backed them.
The idea that the Fed — the temple of American capitalism — should use QE to steer the economy in a green direction is probably a step too far for this society, for a few years to come. It is also questionable whether this is a desirable lever for environmental policy.
What both these ideas have in common is symbolic force. Biden’s Treasury should start a green bond programme. It would be an eloquent signifier that the US — and its financial system — were going green.
The bond programme must be set up as a long term feature of the Treasury calendar — its potential for influence rests on signalling a lasting change of course.
But it is crucial this does not take up much management time for the administration, which should be concentrating on more significant actions. Create a working group of senior civil servants from each department and let them get on with it. Announce the green Treasuries’ arrival modestly — they are not saving the world.
A green Fed would have more real power. The best thing central banks can do on the climate, which they so far seem uncomfortable doing, is just to talk to the banks under their control and ask them when and how they are going to get their houses in order on climate change. It doesn’t need much in the way of complicated metrics or data crunching.
But any sort of greening of the Fed would be hugely influential in teaching the financial markets that times were changing.
2. Reform corporate governance and disclosure
Corporate governance in the US is very weak and uneven. The SEC under President Trump sucked up to corporations by making it harder for shareholders to challenge them. This must be changed as radically as possible, to make it more difficult for the pendulum to swing back again in future.
The process for submitting shareholder motions at AGMs is cumbersome and stacked against shareholders. Unfortunately, some of the biggest investment firms like BlackRock, Vanguard and State Street also let the side down by only rarely voting for motions on issues such as climate change and human rights, and often voting against them.
Even responsible investors who practise active ownership put most of their effort into merely asking companies to disclose what they do — let alone requesting them to improve.
This is a waste of everyone’s time. As well as reforming the proxy voting process, the SEC should devise a simple and terse but comprehensive list of basic disclosures every company is obliged to make.
This should include: greenhouse gas emissions (Scopes 1, 2 and 3, all categories); other important pollution; gender and ethnic pay and seniority breakdowns; all involvement in lobbying; all political donations and the purposes for them; and all due diligence policies to prevent human rights and environmental abuses in the supply chain.
Shareholders should get an automatic vote at every AGM on every one of these reports — a simple yes/no approval of the report, as they do on accounts and reappointing directors.
These disclosures would also do a good part of the work that the sustainable finance community wants to be accomplished by official sustainable accounting standards, which are certainly a must-have, but will take longer to devise.
BlackRock and friends may like to handle companies with kid gloves, but good luck to a future president who actually tries to take information away from them.
3. Don’t price carbon, ration it
Cigarettes, alcohol and petrol have been loaded with sin taxes for decades, but people still smoke, drink and drive SUVs.
Putting a higher price on carbon would certainly help, but we haven’t got decades to gradually nudge consumers to use cleaner technologies. It’s also a clumsy instrument, economically — regulators rarely set prices well. Get to the point and tell people what they have to do.
The most efficient way to green the economy would be what environmentalists knew before the Kyoto Treaty in the 1990s — cap and trade. This means legally requiring that less carbon is burnt each year than the one before, then letting the market sort out how to allocate those emissions to those who need them most, and price them.
Sadly, the US torpedoed Kyoto and we have the much weaker, voluntary Paris Agreement. But the fact remains that carbon emissions have got to come down, only much faster, because we have wasted decades. Waygood quotes the UN Environment Programme’s estimate of 7.6% a year.
A fully rational, all-encompassing cap and trade scheme is probably too ambitious to hope for just now. But the world is creeping in that direction.
Over a hundred countries have set net zero emissions targets, and Biden says the US will join them. These are basically cap and trade without the detail or the teeth — preliminary sketches of carbon rationing.
The US government must declare, not just when it aims to reach net zero, but how much it will reduce emissions by each five-yearly point on the way.
Then make companies publish their plans to get to net zero, on a similar basis. The market would accept this as common sense, since it would show how companies were aligning with the future direction of the economy.
The plans don’t have to be perfect, but they should have some semblance of realism and be continually improved. Give companies one year to comply, no more. The Science-Based Targets Initiative has done great work already, helping over 1,100 companies do this, including banks.
As the Climate Bonds Initiative and Credit Suisse have pointed out in their guidance on transition finance, purchased offsets shouldn’t count — until they are locked in contractually. It is too easy for everyone to vaguely promise imaginary offsets when no one knows if these will genuinely exist.
Compelling publication of these plans might require legislation. That could be possible — a few Republican senators are climate-aware. But even without a law, much could be accomplished by cajoling companies to do it — especially if investors get tough on the issue and vote for motions on it (BlackRock).
The carbon price will be a result of carbon scarcity, not the cause of it.
4. Don’t bother with a taxonomy
The EU decided it needed a Taxonomy of Sustainable Economic Activities. The idea was to have one handbook of what was green, to make it easy for investors to choose green investments.
Supporters still believe it’s going to help unlock more green investment. We’ll see. There’s a lot of appetite for green investing already, before the Taxonomy has even come into force.
Predictably, the Taxonomy is both too complicated and simplistic at the same time. It will be slow moving and hard to change. Its first version, due out in January, looks set to reinforce atrocious greenwashing such as classing biofuels as sustainable, when they cause carbon emissions similar to fossil fuels and sometimes worse.
The whole premise that investors need to read from a single hymn sheet what is green is flawed. They ought to be encouraged to apply their own minds to the problem as much as possible.
Every significant industry or form of pollution is already regulated, in much more detail than can be included in a taxonomy designed for financial markets. Let investors use those real standards, written by experts, rather than a simplified version.
Biden’s administration must cut to the chase. Work on the real economy — create policies that support green infrastructure and behaviour there, and ban or disincentivise harmful activities. The financial markets will have no trouble at all finding the right horses to back.