The New York Times recently published a piece titled Dilemma on Wall Street: Short-Term Gain or Climate Benefit?

It’s written by Lydia DePillis. Here are some extracts:

• A team of economists recently analyzed 20 years of peer-reviewed research on the social cost of carbon, an estimate of the damage from climate change. They concluded that the average cost, adjusted for improved methods, is substantially higher than even the U.S. government’s most up-to-date figure.
• That means greenhouse gas emissions, over time, will take a larger toll than regulators are accounting for. As tools for measuring the links between weather patterns and economic output evolve — and the interactions between weather and the economy magnify the costs in unpredictable ways — the damage estimates have only risen.
• It’s the kind of data that one might expect to set off alarm bells across the financial industry, which closely tracks economic developments that might affect portfolios of stocks and loans. But it was hard to detect even a ripple.
• In fact, the news from Wall Street lately has mostly been about retreat from climate goals, rather than recommitment. Banks and asset managers are withdrawing from international climate alliances and chafing at their rules. Regional banks are stepping up lending to fossil fuel producers. Sustainable investment funds have sustained crippling outflows, and many have collapsed.
• So what explains this apparent disconnect? In some cases, it’s a classic prisoner’s dilemma: If firms collectively shift to cleaner energy, a cooler climate benefits everyone more in the future. But in the short term, each firm has an individual incentive to cash in on fossil fuels, making the transition much harder to achieve.

The article notes that “it’s difficult to steer a portfolio to climate-friendly assets while other funds take on polluting companies and reap short-term profits for impatient clients…. without a uniform set of rules, someone is bound to scoop up the immediate profits, disadvantaging those that don’t — and the longer-term outcome is adverse for all.”

Well, this shouldn’t be a surprise to those of us who’ve been surveying the landscape in hard-headed behavioral terms. A few years ago I quoted ISSB Chair Emmanuel Faber’s post-implementation vision as follows:

• Each company will have to report on its targets on CO2 emissions and its pathway to reduce that. If a company is ahead of its plan, the market will look at this positively. If you’re late, it means that there are some capital expenditures that you need to do in the future. That will mean additional debt. So immediately, the valuation of companies in the stock market will be impacted.
• Which means as for profits, when you are ahead of your forecast, you get a bump on your share price, and a bump down if you’re super late on your emissions trajectory.
• Suddenly you can be compared, within peers, within an industry. And you start having a situation where the capital allocation can be based not only on profit but also on carbon. So it’s a huge change.

I suggested that this seemed “to assume a perhaps improbably high degree of collective rationality, and went on: “Given the likely continued frenzied chase after market returns, and noting that even in an environmentally challenged world this won’t be the only thing that affects stock prices, it’s far from clear it will always work that way. Even by Faber’s own version, the valuation-impacted and bumped-down companies would likely strike many as a short-term buying opportunity.” And that’s exactly what we’re seeing now. But I didn’t foresee the extent to which such anti-environmentally-aligned investing would come to be not just viable, but a sign of virtuous defiance. A second Trump term would be uniquely hostile even to relatively benign sustainability initiatives, an attitude further baked in with his choice of running mate:

• Mr. Vance has said climate change is not a threat and has said he is skeptical of the scientific consensus that warming of the earth’s atmosphere is caused by human activity. “It’s been changing, as others pointed out, it’s been changing for millennia,” he told the American Leadership Forum. Mr. Vance is a strong supporter of the oil and gas industry — which is dominant in his home state — and has voiced opposition to wind and solar energy, and electric vehicles.

The next Canadian election will almost certainly send this country in the same general direction. And in the meantime, the feckless Canadian regulators demonstrate no sense of urgency whatsoever in implementing the ISSB’s standards, whether verbatim or in modified form. Surely it’s the case that if Faber’s vision has any remote chance of being realized, the time to get going on it is now, while there’s at least some awareness of a possible alternative paradigm, and before the aforementioned prisoner’s dilemma collapses into a free-for-all jailbreak, markets hungrily chasing after even the dirtiest and most short-term of profits, regardless that only oblivion lies on the other side of the wall.  

The opinions expressed are solely those of the author.