In March 2015, leading investment consultants gathered at the residence of a leading UK financier to discuss dangerous climate risk. This is a hypothetical letter from one of the participants.
Dear Finance Minister, I’m writing to you as a parent and grandparent as much as the CEO of the UK’s most influential investment consultancy.
Let me be blunt. Governments and investors are together at risk of repeating similar errors to the ones that caused the global financial crisis. Today, it is ‘sub-clime crisis’. Put simply, the economic well-being of the clients and beneficiaries of the funds my firm advises, and that of citizens of every country, is seriously at risk.
Why am I not writing using my firm’s letterhead? Appearing to be close to tree-huggers is not career-enhancing, even if I spoke for all my senior colleagues, and sadly I don’t. So while these are deeply held views, I cannot yet speak for my organisation.
I admit I’ve followed the news, but familiarity about a crisis that is so existential that it can be pratically ignored does breed contempt. Or at least disinterest.
It’s only the badgering from my daughter, and now her son, that has broken through my denialism and complacency.
You and I know that practically all the world’s climate scientists agree things are bad. Compare this with the GFC and our excuse that the majority of economists didn’t see any problem. In public they say we’re on track for a world that could well be 4ºC or more warmer before the end of the century. In private their warnings are even more dire.
You’ll be aware that in December 2015 governments will gather in Paris for the latest climate negotiations, known to climate geeks as COP21.
What I want to say is simple. It’s based on careful research by a former senior UK investment banker and fund management CEO, Howard Covington. He calculates that the VaR due to climate change of our whole portfolio by 2030, just 15 years away, could reach 20%. And he’s using lots of conservative assumptions.
But on the upside, he shows that a rapid energy transition would halve that figure. What’s not to like?
The good news is some investors are doing good work on portfolio decarbonisation. Others are taking a more forceful stewardship line or directing capital to low-carbon developments.
I really do think large institutional investors are ready to co-lead a rapid energy transition and you could do a lot to help to get us to really mobilise.
I’m no policy wonk, but at the most minimal level governments need to agree the long-term goal of doing whatever is needed to stay within 2°C and build this into the follow-on process.
Specifically, you need to approve a ratcheting mechanism that is fit for purpose. And you really cannot allow spoiler nations or vested corporate interests to get in the way. Your voters are as short-term as my customers and staff. But that is why you are elected to be leaders.
We all know we have to take action now. We have shared responsibility for restoring trust. It would be catastrophic for our societies if it turns out that out we failed to call this ‘mother of preventable surprises’. I hope you will give me and others in the finance world a wake-up call. There’s a huge upside. Today we have nowhere safe to direct long-term capital. A new Marshall plan to get climate resilient could be that.
I couldn’t bear to look my kids in the eye in a few decades and say, I didn’t try my best. I hope the same goes for you.
Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University