Lancaster University - Transforming Tomorrow

15 A Pentland Centre Research & Impact Digest, 2023 Financial markets are not naturally designed to incorporate climate issues into their operation. Professor Mark Shackleton explains how changes are afoot that could represent a sea change. Historically, many shared resources have been managed informally and cooperatively for prudent exploitation. Tragedy occurs when individual resource users, acting in their own selfinterest, overexploit a common resource to the detriment of all. The problem of managing atmosphere, oceans and river resources fits in this context, as does the burning of fossil fuels with attendant increases in atmospheric CO2 levels and rates of climate heating. Economics treats such resources as “external” to its system: this either indicates the discipline cannot comment on informal management, or that these resources need formal inclusion by the creation/allocation of private property rights. The role of Finance Finance is mainly viewed as dealing with money, specifically by large bank entities controlled by an elite few. However, these institutions do not operate independently of mass marketplaces, e.g. bond markets, that exert powerful disciplining mechanisms. In volatile stock markets, fund managers have little ability to predict aggregate behaviour across millions of investors. Thus, financial systems are subject to mass crowd effects where the opinion of noisy individuals is averaged out. In the past, such waves have contributed to unsustainable investments, but this is changing. Many climate change solutions involve the creation of rights (e.g. for pollution emissions) to trade and then cap such activities. However, carbon taxation initiatives require agreement and enforcement. Subject to political influence, this slows progress. Another form of collective, apolitical action is coming to the fore. The role of Financing Aside frommanaging existing assets, financiers select new projects to fund. Through the issuance of long-lived and hard to revise legal contracts (equity and debt), they ensure the likely future survival of significant business interests. In the past these have been in coal, oil and gas, although investor governance is moving stock market listings away from these stranded assets into solar and wind energy. Green v. brown and risk Led by the Financial Stability Board, the finance community has realised its own system is at risk from climate change. Firstly, from the immediate physical events associated with weather extremes, but secondly because new investments need to be future proofed. In a world where decarbonising is normal, what are the financial prospects for oil/gas investments? Lower trading liquidity and growth will hamper their attraction long before their eventual closure. Taking it to the masses So-called ESG (Environment, Social and Governance) measures have entered the mainstream, and investment advisers now examine individual initiatives. These interventions are not as low level or empowering as the micro-credit of Yunus Mohammad (Grameen Bank engaged with millions of un-financed women), but they represent a sea change at this more global level of activity. Risk mitigation is changing what growth we seek Financial markets will continue, but participants now realise “value maximisation” is about what those assets will do for the world and how returns will be used. As the world dematerialises, and more of the economy depends on intangible assets, finance will still be available for ideas that resonate with perceptions of new growth that does not deplete natural capital. Although the innovations finance has brought have taken centuries of practice to refine, it is starting to be used alongside older stewardship methods. If you would like to discuss the issues raised in this piece further, contact Professor Mark Shackleton, Un-sustainability Tragedy of unmanaged commons: (c) Anthony Quintano, CC BY 2.0 (