From COVID to Climate: Our Last Best Chance for a Sustainable Future

With each vaccination against COVID-19, the world moves closer to overcoming the worst public health disaster of the 21st century, an extraordinary accomplishment for science, technology, and human ingenuity. But as Rebecca Henderson of Harvard Business School warned last year, “COVID was the pop quiz; climate is the final exam.” As challenging as the race was to find effective vaccines in record time, the race to reduce greenhouse gas emissions (GHGs) and protect people and planet against the worst ravages of global warming will be much, much harder. And the consequences of failing to avert climate disaster will be far greater and longer-lasting.

That is why, as we approach this year’s Earth Day, we must remind ourselves that bending the curve on GHGs and strengthening the resilience of our planet’s defenses is not mission impossible. The Energy Transitions Commission report from last September concluded that up to $2 trillion per year, or 1-1.5% of global GDP, will be required to achieve net zero emissions by 2050. Moving the entire world economy onto a net-zero GHG emissions trajectory over the next decade is crucial to keeping global warming well under the 2 degree Celsius temperature rise that scientists agree is the critical threshold for avoiding catastrophic ice melts, sea level rises, storm surges, crop failures, biodiversity loss, and mass migration from uninhabitable regions.  As Mark Carney has remarked, “the task is large, the window of opportunity is short, and the risks are existential.”

Yet the net-zero goal is both technically and economically feasible, and a growing number of business leaders and investors are recognizing the huge opportunities that a global restructuring of economies, energy systems, and business models brings with it. Echoing the “build back better” slogan of the European Union, the Biden administration has placed job creation at the center of the climate-specific parts of its $2 trillion infrastructure bill. Renewable energy jobs are now among the fastest-growing sectors of the U.S. economy.

But as with overcoming COVID, this is not a task that governments can achieve on their own. Every sector of the economy will need to be involved, and trillions of dollars in  investment capital will be required over the next decade to transition to cleaner forms of energy, transportation, manufacturing, and agriculture.

Institutional investors have a critical role to play on two fronts. First, in terms of the companies they already own, engaging with management and their boards on transition plans to net zero is a powerful lever. State Street is leading a global Task Force of Asset Owners and Asset Managers within the Sustainable Markets Initiative to consider ways of strengthening the impact of net-zero engagement in addition to other tangible actions.

For investment managers with large index-based businesses like BlackRock, Vanguard, and State Street Global Advisors, divestment is not an option for as long as companies are included in the indexes. Engagement with boards and top management can help accelerate transitions. At the same time we are concerned about divestment. Divestment can run the risk of selling ownership of high-emission companies to buyers less concerned about sustainability or push assets to private markets, potentially reducing both shareholder influence and transparency. Investor efforts such as Climate Action 100+ have made huge strides in engaging with the world’s largest GHG emitters, which account for more than 80 percent of global industrial emissions, on their transition plans, with clear benchmarks for reporting progress. We need to strengthen that engagement.

The other powerful lever institutional investors possess is fresh capital investments into projects aimed at climate mitigation and adaptation as well as new technologies required to reduce emissions in GHG-intensive sectors like cement, aviation, shipping and agriculture.

This is an area where we need to build more effective public/private partnerships to scale investments. Policymakers can help facilitate those partnerships by providing the kinds of credit enhancements that will allow large pension funds or other institutional investors to participate. These enhancements cover areas like first-loss guarantees and insurance against country and currency risks, which are particularly important for projects in developing countries that desperately need greater capital investment. Fortunately, we can learn from the experience of Canadian, Scandinavian, and Dutch pension plans that have successfully worked with their governments to scale significant investments in renewable energy infrastructure and other sustainability-related projects.

Of course, greater transparency and consistency around climate risk disclosure is a precondition for investors to reallocate capital from climate laggards to climate leaders at scale. State Street, like other investors,  has adopted and endorsed the framework created by the Taskforce for Climate-related Financial Disclosures (TCFD), because it takes a holistic view of how companies should treat climate risk as it relates to governance, business strategy, enterprise risk frameworks and reporting. But more work is needed to improve the data, analytics, and risk management tools around climate, especially in new areas like warming scenario analysis, climate VaR and stranded asset sensitivities. As with vaccine development, we expect that concerted action within the investment industry will drive the necessary breakthroughs in climate data and analytics.

Finally,  just as governments cannot solve the climate challenge on their own, investors alone cannot address the racial, social, and economic inequities that a hotter world will exacerbate. As with COVID, the most vulnerable populations are already disproportionately affected by climate change damage, and government policy must respond. One of the most powerful lessons from the pandemic is that none of us is safe if we aren’t all safe; like deadly pathogens, greenhouse gases know no borders. Solving the climate problem really is our generation’s final exam. It is not easy, but it is doable. On this Earth Day, as world leaders gather to put the world on a more sustainable path, let us take inspiration from the resolve, ingenuity, and science that have coalesced to  defeat COVID and commit ourselves to joining the race to net zero and to a more resilient future.  As with pandemics, ignoring the problem is no longer an option.