What does COP26 mean for business?
What does COP26 mean for business?
A primer on the impact on asset pricing
1-12 November 2021, Glasgow, United Kingdom. The earth decided to stay standstill, while global leaders knock up an agreement to keep the planet’s rising temperatures down. They said 2 degrees Centigrade in 2015 when they met in Paris, with an aspiration of 1.5 degree Centigrade in comparison to pre industrial times. But the reality is that the planet is already more that 1 degree warmer above pre-industrial times. They will still try to re-negotiate these targets one (hopefully) more time.
We all need to remember that ‘net zero’ is an essential target, not a sufficient target. An even then, we are making very little progress towards net zero. Finance can be a great enabler, but it cannot act alone. I see 4 distinct pillars that are necessary for this transition in policy intent :
Finance
Regulation
Litigation
Transactions
and they are underpinned by ‘asset pricing’. I’ll explain further as we go on….
The current state of financial assets is that the impact of climate change is not baked into prices. So essentially our current form of capitalism does not consider natural, human and social capital as assets and hence financial assets are mispriced. When that market correction takes place, it will cause significant financial instability, lasting much longer than any other periods of recession or depression we have seen in the past. But the question is why should this market correction take place, can we not avoid it altogether?
For global policy action to be successful, the 4 pillars I mentioned above, should hold the structure watertight, on top of a foundation of asset pricing.
For all those who think that divesting from fossil fuel is an impossible, here’s a link for you to take a look at. The reality is that it is not difficult at all.
What is the impact on business? How does that impact inequality? We know that globalisation reduced inequality between countries but exacerbated inequalities within countries. Is this another force of the same kind?
So what does that mean for business, and how does that impact financial assets?
Businesses will be looking for talent, and that means more jobs.
A greater awareness of the impact on the environment, social and human capital means that a highly engaged, and dynamic workforce will evolve in the next few years to decades.
More emphasis on innovation, new technologies, new materials, new means of living, and that means that capital can take a new avatar, as ‘a force of good’.
Changes in customer preferences are taking place even now, but will accelerate further. This means that the real ‘green’ businesses will benefit from the transition.
We can expect to see a highly litigous decade in between, so businesses should take due care of their green claims.
Green finance will slowly but definitely become mainstream, and monitoring ‘green’ covenants, and indicators will become the norm in the next few years.
Public expectations are changing drastically and hence voting behaviour will also change. A new breed of public policy will evolve over the next few years, driving regulation, both for the financial sector as well as the real world.
Do you think these changes will happen? Do you think that businesses can thrive in a ‘green’ economy?