How Do We Get Climate (and Water) Issues Represented in the Private Sector?
An active debate is underway right now about how to engage businesses on environmental public policy issues such as water stewardship, carbon emissions, and climate adaptation. An AGWA audience knows already that all three of these issues are intertwined, hence the relevance for a policy newsletter. Indeed, the decision space is evolving from self-regulation and marketing communications to public policy quite rapidly, at global and regional levels, with some useful new research appearing.
In publicly traded companies, debates around ESG (environmental, social, and governance) issues have been prominent for a quite a while, with NGO-driven and sectoral standards and even some regulatory frameworks emerging. A lot of that work seems to have had little research into efficacy — what comes from applying these standards and frameworks? Are we getting results that we intended? The implications for how we move forward with climate adaptation and resilience issues are important, given how much most national economies are driven by decentralized private sector decisions rather than the public sector.
Last week, I heard a great podcast interview relevant to these issues with a huge sovereign wealth investment fund from Norway, a Yale University researcher working on ESG issues, and an NGO working actively with companies that have often scored quite badly in many ESG ratings.
Kelly Shue at Yale has written a very interesting paper about perverse outcomes from ESG-driven investment. She makes some important background points: the E tends to overwhelm the S, and the G is barely an afterthought. And for most purposes, environmental scores really come down to carbon emissions — with all climate change issues really subsumed under a climate mitigation approximation. For an AGWA audience, that’s quite frustrating in itself.
Shue’s paper groups the highest rating companies in a “green” category and the lowest companies in a “brown” cluster. Shue continues the trend of making E = climate change = carbon emissions, and her ratings follow that line of thinking. The green companies tend to be services: banking, insurance, consulting, and software. They never emitted much carbon anyway, and they never will. They are not the problem for climate mitigation.
The brown companies, on the other hand, are often in very dirty industries like resource extraction (oil, mining) and high emissions industries (think shipping, fertilizers, and other fossil-fuel dependent industries). She makes a powerful observation: when we divest from low-scoring brown companies, we are not actually making the world a better place. We’re incentivizing the wrong behaviors, actually, making capital resources for brown companies that want to be greener harder to find, or having those countries game the system and improve their scores by simply purchasing, say, a high-scoring low-emissions bank, which elevates the brown companies overall score without changing any emissions patterns. Indeed, to make shifts in their carbon emissions, brown companies almost certainly need more investment — not less. Likewise, investing preferentially in green companies doesn’t really reduce overall emissions. Instead, we’re just lowering their cost of capital artificially, without a carbon benefit. What are we incentivizing? Greenwashing? Services?
The interview with the sovereign wealth fund was notable because this massive trillion USD investor had liquidated its assets of some 400 brown companies that had scored badly in ESG ratings. The NGO working with brown companies, in contrast, found that even small changes in the way that these corporations worked had inordinately large impacts on carbon emissions — even a 1 percent change in a very large brown company can represent the total emissions of dozens or hundreds of emissions from green companies.
My read on this discussion is that divestment in brown companies is not analogous, say, to divesting from South African investments during the apartheid era, or even industries and companies benefiting from slavery in the nineteenth century’s abolitionist movement. Divestment makes practical sense on those cases. We will continue to need energy, natural resources, fertilizers, and transportation. But we need greener versions of all of those traditionally brown outputs.
My intuition is that investing only in green companies feels better than knowing that you are invested in brown companies. I believe what Shue is actually suggesting is that we need activist investment to make brown companies green. And that shift in behavior is what should both motivate “us” — as investors or regulators or citizens represented by regulators — and mobilize the real change all of us are seeking.
For those of us worried about adaptation and resilience, you must be feeling pretty left out. Listening to the podcast, the implication is that our rating and regulatory systems need to be smart, look at multiple variables (I still can’t get over that E= climate change = carbon. Really? In 2024????), and consider tradeoffs between priorities. For adaptation and resilience, my fear is that our current rating systems look a little at climate risk, but rarely in a sophisticated or interesting way (“northern India may have less water / more competition than 20 years ago”), and if we use investments and regulations for punishing companies that are exposed to a lot of climate risk, we are probably telling them to divest from the emerging economies that desperately need additional investment to assure effective, transparent, and useful adaptation. As with Shue’s lesson that brown over green may be the path we should be taking for greener outcomes, the adaptation and resilience lesson here looks like risk assessments should be telling us which regions need more help, not less.
Instead, without mentioning any names, almost every well-known corporate water use assessment tool I know looks at climate risk, and the way to game those tools is to remove yourself from the at-risk region. More generalized climate tools make the same point — and usually about water resources. Do we want such tools to inform public policy? To guide regulatory frameworks? That’s a recipe for making poor countries poorer, not for helping companies become part of the resilience solution by investing in their companies — and mobilizing the resilient power of water. The question for policy is how and who first, not really where. No place is immune from climate risk. We all need to be doing better than making snap decisions about where investment funds go.
John Matthews
Corvallis, Oregon, USA