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Decapitalizing the fossil fuel industry (podcast)

ImpactAlpha, Dec. 21 – The failure of the COP25 global climate conference in Madrid left climate-finance practitioners seeking a path forward in the absence of effective political and policy leadership.  “The climate emergency is real and the financial casualties are piling up,” said Brian Walsh, head of impact for the fintech company Liquidnet. “Those kind of risks toss climate action into the laps of the capital market.”

Are they ready? On ImpactAlpha’s latest Returns on Investment podcast, the roundtable regulars dug deep for year-end optimism in the face of confounding obstacles to progress.

“There has long been an expectation on the part of the capital markets that regulation will happen and that they will respond and trade accordingly,” said Imogen Rose-Smith, an ImpactAlpha contributing editor. “The capital markets will step up when the political landscape exists. Without that, the capital markets are not going to do it on their own.”

Among the contenders to fill the void:

  • Universal owners. The largest pension and sovereign funds did not flock to the recent Saudi Aramco IPO. Part of that was wariness about the Saudi government, Rose-Smith said, but another part was wariness of fossil fuels. “They are thinking in longer time horizon,” she said. “A two- or three- or four degree world is not good for their portfolios.”
  • Europe. The European Union is setting policies for an ambitious European Green Deal passed earlier this month. Central banks are pushing banks to get ready for stress tests along the lines of the recommendations of the Task Force for Climate-Related Financial Disclosures, or TCFD.
  • Protesters. In a counter-intuitive shift, the millions of young climate strikers who have taken to the streets may be more pro-business than recalcitrant governments (listen to the September podcast, “Mispriced climate risks signal investment shocks – and opportunities for action).
  • Insurance companies. Underwriters are scrambling to revise their risk assessments in light of extreme weather, wildfires and even worse worst-case scenarios.
  • Consumers. Banks are sensitive to public sentiment, especially if it is accompanied by customer defections and withdrawals. Goldman Sachs’ recent announcement that it would stop financing for Arctic oil drilling signaled that a broader range of fossil fuel projects are becoming unbankable.

The confounding thing about the political stalemate is that it’s demonstrably anti-business. “It is better for everybody’s portfolio, for their loan portfolio, and all kinds of asset values, for the world to hold the line on catastrophic climate change,” I said near the end of the discussion. “You have to believe that the business world, for its own reasons, is going to say, ‘We can’t head off the cliff.'”

“We may be in the darkest hour before dawn,” I said, grasping for a positive ending. “Things move very slowly until they move very fast.”

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