Saving capitalism from dishonesty.
Editor’s note: This is the latest installation of a longer essay published earlier this year by Tariq Fancy.
At the turn of the 20th century, there was a Cambridge University economist named Arthur Cecil Pigou. He wrote The Economics of Welfare and introduced the idea of “externality,” an economic term that describes the side effects, or consequences, of commercial activities that affect other parties without being reflected in the cost of the goods or services involved.
The concept is at the heart of the economic and financial debate on the role of the private sector and government response to climate change. A hundred years later, after a Nobel Prize was awarded to William Nordhaus for applying this idea to climate change, we would have been shamed into taking this approach seriously.
The double standard of corporate rhetoric and lobbying
The opposite is happening. Others, including the recently dismissed Stuart Kirk, formally head of Responsible Investing at HSBC Asset Management, point out that private interests around the world are campaigning behind the scenes to prevent Pigou’s ideas from being applied to preserve the public interest.
And the reason is simple to understand. Kirk, myself and many others are using the public consequences of climate externalities as an essential reason for government regulation. He and other former corporate insiders turned public watchdogs offer an intriguing glimpse into how the system works.
The fact is that corporate incentives and structures are too short-term to address the climate challenge – which is precisely why government regulation is required. If you take Pigou’s idea seriously, you cannot accept the need to empower governments to use taxes and regulations to support society’s goals. The opposite is happening. No one should be surprised that despite oceans of rhetoric, endless conferences and earnest proclamations, no progress is being made.
If we agreed to follow the experts on COVID-19, even when it required the government to enforce inconvenient economic sacrifices, why can’t we follow them on climate change?
Larry Fink is right that stakeholder capitalism must take root. But he needs to be corrected about how it will come about: It can only come about if we subject the most important provisions to mandatory rather than voluntary compliance.
If we agreed to follow the experts on COVID-19, even when it required the government to enforce inconvenient economic sacrifices, why can’t we follow them on climate change?
Corporate short-termism trumps government regulation
Fink is just the most vocal of many business leaders whose usual response to the need for more regulation is to say that it is a correct policy response in “theory” but not possible in the “real world” because it’s politically impossible to get anything done right now, especially in the U.S. As such, it’s better to do what can be done through a voluntary system, such as net zero pledges by 2050, rather than the alternative of short-term regulation.
While it seems like a fair point on the surface, it is an utterly disingenuous argument. These are the same business leaders making misleading public statements while investing heavily in political spending and lobbying to ensure nothing is done.
What makes this all the more ridiculous is comparing what the ESG and marketing teams are saying to consumers with the political influence of their public policy teams down the hall.
It is now the accepted industry norm for CEOs like Fink to deliver easy-listening talking points and selective story-telling.
BlackRock, Disney, Boeing and Netflix, four major U.S. corporations, all eagerly post all kinds of CSR and ESG work while their public affairs team block, dilute or stall any regulatory oversight, disclosures or penalties.
It is now the accepted industry norm for CEOs like Fink to deliver easy-listening talking points and selective story-telling. If we hope to progress on climate change, there must be a stop to this blind adherence to an illogical model of stakeholder capitalism based on voluntary compliance.
Delivering easy-listening talking points is cheap climate action
Business leaders that paid lip service to flatten the greenhouse gas emissions curve but don’t support related regulatory actions are impeding climate action and essential democratic functions in Western democracies. This glaring double standard does not go unnoticed: It’s part of a broader pattern that has led the young to conclude that it’s not even worth fixing the system. Less faith in the system means less interest in improving it, a vicious cycle. The two generations alive that no longer believe in capitalism are, unsurprisingly, Gen Z and Millennials.
Climate action should not be a left-right economic issue, as anyone young – or old with a moral compass – understands.
If we are serious about tackling climate change, we must begin with honesty. Society did not respond to revelations that smoking causes cancer by undertaking one-by-one whack-a-mole-style proxy fights against tobacco companies to demand they voluntarily sell fewer cigarettes. We regulated them. And in doing so, we saved eight million lives in the U.S. alone, eight times the country’s COVID-19 death toll.
The fact that we’re blinded from having this debate on the need to fix the rules is no accident, nor is it an accident that conservative anti-climate libertarian activists like Peter Thiel would very much prefer Larry Fink to be their intellectual opponent in such a critical debate. With foils like Fink, this anti-regulation libertarian can pretend that the ESG marketing decoy is real while conveniently misleading us all into false narratives.
The clock is ticking, and the arc of history is slowly being cemented for future generations to celebrate someday or lament.
Both Adam Smith and Milton Friedman would likely have agreed that the science of climate change is real. This demands systemic regulation, decided by democratically elected leaders, to address dangerous negative externalities to the natural environment and political stability.
The clock is ticking
Meanwhile, ESG mood music continues to pollute the airwaves, masquerading as the business community’s best and most honest answer to society’s challenges. A friend in Miami was buying a house recently and seemed happy that my previous work was heavily focused on climate risks, including extreme weather events that affect Miami. I felt bad breaking it to him: “Carlos, we’re not trying to save Miami from getting wrecked by climate change. We’re trying to get our money out before it hits.”
Albert Camus once wrote: “In any situation, no matter how confining, you have a choice. To believe you do not is to choose not to choose.” The clock is ticking, and the arc of history is slowly being cemented for future generations to celebrate someday or lament. Fortunately, we’re still thinking of ideas. The real issue is how much sacrifice we are willing to turn those ideas into effective climate policy.
