Free markets can reverse climate change

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If Karl Marx was right when he asserted that, above all else, economic factors determine the course of history, there may finally be some real hope that the issue of climate change will be addressed with the seriousness it requires. Business and financial leaders are stepping up to the challenge, giving every indication that the private sector will work to find solutions to global warming and other pressing environmental problems, even as elected officials in this country remain deadlocked.

Last August, the Business Roundtable, an influential group of chief executive officers from a broad range of industries, which at the time was chaired by Jamie Dimon of JPMorgan Chase and is now headed by Walmart’s Doug McMillon, released an updated statement on the purpose of a corporation. Among the five guiding principles included in the document was a commitment to “support the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.”

Other prominent figures in the financial sector are also speaking out. Reporting from the World Economic Forum in Davos, Switzerland, The Wall Street Journal recently quoted Stephen Schwarzman, CEO of private equity firm Blackstone Group, as saying, “You can’t watch the news literally anywhere without seeing giant fires and storms happening on a regular basis. There’s little doubt that something very profound is going on, and it ought to be addressed,” adding that his company is intent on enhancing the sustainability of the businesses in which it ­invests.

Larry Fink, chairman and CEO of BlackRock, an investment management firm, put the imperative for companies to operate in harmony with the environment in stark economic terms last month. In his annual letter to CEOs, Fink stated that concerns about climate change will transform capital markets and bring about a redistribution of financial resources.

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” he wrote. … “They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs and demand across the entire economy.”

The components of the economy that Fink expects to be affected by environmental problems go to the heart of mass market retailing. With hundreds or thousands of stores and other facilities across the country — and in some cases around the world — the danger that floods, wild fires and extreme weather pose to infrastructure and inventory is considerable. Moreover, the same threats loom over the companies that make the products sold in stores. With multiple points of vulnerability, significant supply chain disruptions are likely, and the cost of maintaining, insuring and, in some cases, replacing assets will grow.

In light of those challenges, which impact businesses across the economy, Fink predicted that investors’ attitudes will undergo a sea change: “Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.”

BlackRock is advising investors to think differently. In a letter to clients cited by Fink, the company indicated that it will make sustainability a central pillar of its investment strategy. The motive is not only to do what’s right by the environment, but to maximize financial results.

“Our responsibility is to help clients navigate this transition,” Fink said in his letter to CEOs. “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”

In keeping with the Business Roundtable’s principles, Fink argues that to be successful going forward enterprises must work to do well by doing good: “A company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients — these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.”

That dynamic is sure to command the attention of retail executives and other business leaders. With an increasing number of consumers making decisions about where to spend their money based, at least in part, on corporate policy on sustainability and other social issues, the invisible hand of free markets, first propounded by Adam Smith, may be the force that staves off the worst effects of climate change.


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