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According to Prof. Dr Kolmar, capitalism's biggest promise is its ability to unleash innovations and make the lives of the many better. In his essay he invites us to use capital purposefully and start fighting climate change.

Hard Choices

Prof. Dr Martin Kolmar

“Growth for the sake of growth is the ideology of the cancer cell.”

― Edward Abbey

“Men argue. Nature acts.” 

― Voltaire

Does capital have a purpose?

The major justification for capitalism is its unparalleled ability to unleash a stream of innovations that allows the many to have better lives. According to this rather optimistic view, capitalism’s ultimate goal is to promote human prosperity. This belief has been shattered for many people over the last decades, and there is also a growing skepticism towards economic elites, the idea of meritocracy, and the ‘uplifting force’ of capitalism. As well as a general feeling of disenchantment and disillusionment, noted economists like Robert Solow and Thomas Piketty even fear that capitalism and democracy have only been in a forced marriage during the time of the Cold War and that there is the risk of capitalism’s espousal to authoritarianism.

 

The ultimate test of the legitimacy of capitalism will be its ability to successfully transform and decarbonize the economy.

As the warnings and consequences become more dire, the skepticism becomes more entrenched, resolute, and warranted when one focuses on climate change and the losses in biodiversity that we are facing. As far as the eyes can see, these are the most important issues for the rest of this century, and maybe much longer. Climate change will soon imperil the Western way of life, transforming regions, imposing substantial costs on the economy, and harming the health of virtually every citizen and future generations. The ultimate test of capitalism's legacy will be its ability to successfully transform and decarbonize the economy. Given that investments are the steering wheel of this process, it seems only fair to claim that capital has a purpose.

Where do we stand?

At the risk of restating the obvious, let us briefly look at the current consensus regarding climate change and the loss of biodiversity (see also the links at the end of the article for further information). Due to human-made climate change, earth’s climate is now changing faster than at any point in the history of modern civilization. The assumption that current and future climate conditions will resemble the recent past is no longer valid. If the world attempts and achieves the Paris Agreement’s targets, transitions will be challenging but manageable according to the scientific consensus. But if we don’t meet these targets, hundreds of thousands of lives are at risk every year – and hundreds of billions of dollars. Without rapid cuts in CO2 and other greenhouse gases, climate change will have an increasingly destructive and irreversible impact on life on earth. The window of opportunity for action is almost closed; we are in the eleventh hour.

The 20 warmest years on record have been in the past 22 years and the top four in the past four years. Climate action must be increased fivefold to limit warming to the 1.5°C goal scientists advise, according to the UN. There is only 11 years for global warming to be kept at a maximum of 1.5°C, beyond which even half a degree will significantly worsen the risks of drought, floods, extreme poverty for hundreds of millions of people. Urgent and unprecedented changes are needed to reach this target. Though one of the most ambitious aspects of the Paris Agreement, meeting the maximum global warming targets is  affordable and feasible.

As scientists have noted, a change of just 0.5°C more can cause widespread damage and destruction. For example., at 1.5°C, only half as many people on the planet will be exposed to water stress than at 2°C. Food scarcity would be less of a problem, and hundreds of millions would be spared climate-related poverty. Insects, which are vital for pollination of crops and plants, are almost twice as likely to lose half their habitat at 2°C compared with 1.5°C.

There is also growing evidence that the loss of permafrost that comes with global warming further accelerates climate change because of the large release of the greenhouse gas methane from these areas, which would subvert, or entirely negate, any meaningful progress in the fight against climate change. Yet, despite all we have studied and know, at the current level of commitments, the world is on course for a disastrous 3°C of warming.

The goal has to be a rapid shift towards a zero-carbon society. As well, we need ecological recovery, like reforestation, to draw carbon dioxide from the atmosphere, a tectonic shift in our transport and power systems to clean, renewable energy, greater adoption of carbon-capture technologies, and agricultural practices and systems. Keeping the global average temperature rise below 1.5°C would bring enormous advantages as compared to a rise of 2°C, but this commitment needs urgent and unprecedented action. Even pro-Paris Agreement nations are involved in actions that run against the spirit of their commitments, e.g., fossil-fuel extractions.

A related problem is the loss of biodiversity. Urbanization and agricultural intensification leave fewer and fewer spaces for nonhuman species to live in. A recent meta-study concludes that insect populations are in fast decline and likely on a path to extinction. The decline in the number of insects and species deeply affects the functioning of the whole ecosystem. A decline of one species by 30% can eventually lead to the extinction of another species. As well, most insects are especially vulnerable because they are highly adapted to specific ecological niches. Tropical insects are especially very sensitive to temperature changes. Their disappearance has pivotal consequences for the rainforest ecosystems.

Given their importance in ecosystems, the decline of insect populations could lead to ecosystem collapse. Even if more evidence is needed, given the disastrous consequences of such a massive, systemic decline, the precautionary principle requires to act decisively and quickly to halt and reverse this trend. Like climate change, the loss of biodiversity is a silent killer – by the time we can actually see what is happening, it might be too late. Humanity has wiped out about 60% of animal populations since 1970. We have to stop these losses – otherwise we could face our own extinction.

100 million people will be pushed into poverty by 2030 because of climate change.

As early as 2012, the World Bank published an alarming report: ‘The projected impacts on water availability, ecosystems, agriculture, and human health could lead to large-scale displacement of populations and have adverse consequences for human security and economic and trade systems.’ Among the calamities anticipated in the report was large-scale dieback in the Amazon, the collapse of coral-reef systems and the subsistence fishing communities that depend on them, and sharp declines in crop yields. No natural systems have grown or grown healthier since the report, some projections became dire reality by now. Today the Bank estimates that without urgent action up to 100 million people will be pushed into poverty by 2030 because of climate change. One of the greatest contributors to global warming, and one of the greatest threats to insect populations and biodiversity, is petro-chemical farming also know as 'intensive agriculture.' Soil sterility and loss, erosion, water contamination, and pollinator dieoffs are just some of the effects of modern agricultural practices. Our large-scale agricultural systems pose a serious threat to our planetary well-being and our own continued existence.

How to move forward?

Today, there is a crisis of trust in science. Many people – including politicians – publicly express doubts about the validity of scientific findings. This is not a reassuring sign when time is running out and significant steps have to be taken to prevent the worst. We know intellectually that we have to act, and we can no longer play the blame game where politicians do not act out of fear of not becoming reelected, corporations and investors point to government regulations (or a lack thereof), and citizens feel betrayed by the financial and political elites. Through deflection and blame, we default into a position of inaction.

 

Humanity is ill-prepared to cope with problems of the scope of climate change.

For several reasons, humanity is ill-prepared to cope with problems of the scope of climate change and biodiversity loss. The scale of the problem, coupled with personal, business, political, and societal perceptions and decision-making models, challenges our ability to save our planet and way of life with effective immediacy. And while economic, psychological and neuroscientific research is uncovering some of the reasons for this fallacy, it is getting hotter by the day.

In the modern, globalized world, corporations, and NPOs have a responsibility to contribute to the solution to these problems, a responsibility that extends far beyond legal and regulatory compliance. In a globalized world, nation states (as the traditional rule setter) are weak, and the idea of multilateralism is not in good shape to politically address the issues that come with climate change. Hence, corporations and investors are the only remaining force powerful enough to act. When it comes to production and investment decisions, there can no longer be any acceptable excuse for myopia and short-termism. It is not even necessary that the corporate world has to act out of a sense of moral obligation (although it would definitely help) but with a perspective that looks beyond the next quarterly figures.

Corporations and investors are the only remaining force powerful enough to act.

This bold claim does not deny the many obstacles that are in the way of sustainable capital investments. Competitive pressure may make it hard to implement measures that are costly, the global scale of the problem creates a huge collective-action problem and encourages free riding, and so on, and so on. But these challenges can no longer be used as excuses for inaction. Instead, these challenges must be seen as an invitation for meaningful action.

From a narrow, profit-oriented perspective, there are even win-win scenarios. Companies that understand the speed at which things are moving will win. Those who deny and delay will eventually be out of business. Trillions of dollars of capital will be shifting from carbon-based to carbon-free production. Understanding this protects the shareholder investments; those who do not redirect their capital will end up with massive stranded assets. Green energy costs are decreasing, and in many cases, wind and solar are now cheaper than coal and gas. Yet, political deadlocks are preventing the advancement of better and more competitively-priced green-energy technologies. A capital investment shift could break up deadlocks and propel renewable energies forward.

So even if one narrows the perspective to shareholder value, the scientific consensus makes the following conclusion inescapable: for the sake of long-term-profit maximization, we must change our business models. Climate change will lead to political instability and loss of natural resources – all corporations depend on both. Further, recent studies show that climate change is seen as the most severe and pressing global threat, creating reputational, political, and financial risks for firms – but also opportunities if business models effectively reorient themselves towards sustainability. Therefore, it is in the best economic interest of corporations and investors to take immediate and decisive action against climate change. Key focus areas for sustainable capital investments are the following: (1) Supply chains: Supply chain emissions are often responsible for the biggest share of the corporate carbon footprint. It is essential to control them. (2) Energy: Electricity, heating and cooling create emissions. It is vital to focus on facilities in the entire value chain including offices, storefronts, factories and third-party warehouses. (3) Relocalization, or the shift of food, goods, and services to local economies, is another strategy that has been identified as way to address the carbon footprint of transport and logicstics. (4) Food: What we eat has a significant impact on greenhouse gas emissions. Agriculture is responsible for roughly one third of global greenhouse gas emissions.

 

There are even win-win situations from a narrow, profit-oriented perspective.

We have a collective responsibility to avert climate chaos. The last couple of years have created an awareness that the effects of climate change and the loss of biodiversity are here and are here to stay. But even if climate change and biodiversity loss would not immediately affect our generation, then certainly our children’s and grandchildren’s generations will be affected. Climate action can offer us a compelling path to transform our world for the better. It offers a path and a duty. The reluctance of political entities to take decisive measures makes this duty even more pressing. Climate stabilization and biodiversity regeneration is still in our hands, but the window for action is shutting.

When it comes to climate change, it is essential that corporations and NPOs work hand in hand with politicians and other social groups. While some may be wary of climate-smart positioning and fear incurring costs to their businesses, such policies will actually open up new opportunities. Therefore, it is prudent to use corporate-governmental partnerships to encourage progressive climate policies.

Climate change has to be a key consideration in all major private investment projects. In order to do so, one has to develop financial innovations that help investors to better assess the climate impact of their investments and that link returns to climate impact. Green and structured bonds (that for example incentivized investors to reduce emissions) have been an important first step, but they are not enough.

Investors need a willingness to systematically push into the direction of decarbonizing the economy. As I have argued since the beginning, the biggest promise of capitalism to society is its ability to unleash innovations to make the lives of the many better. Our generation’s challenge in renewing this promise is to show that it can activize investments and propel forward the next frontier of human innovation and development. All capital is venture capital if one takes the risks that are ahead of us seriously. Of course, a carbon tax would help, but the unresolved redistribution issues and political repercussions make it unlikely that such a tax will support this process early and vigorously enough. Meanwhile, there are many scientists sitting on innovative strategies while they await funding.

It is time to go beyond wishful thinking and act to protect our own and our children’s future. Capital is the eponym of capitalism; therefore, capitalism must play a major role in making the future promising and possible. Capital has a purpose beyond the bottom line.