(Photo by iStock/hanibaram)
Sheltering in place, passing our days monitoring deaths and scientific breakthroughs, we are living an unimaginable distance from “normal.” But while COVID-19 delivers disorienting blows, a much more formidable force is bearing down, and the world is even less prepared to respond to it.
COVID-19 and climate change are case studies in risk management or, rather, risk management failures. Leaders caught flat-footed are calling the pandemic a “black swan.” But black swans are extremely rare events that no one sees coming. The novel coronavirus and climate change are other beasts entirely; they are “grey rhinos.” Grey rhinos are highly probable but neglected threats with enormous impact.
For many years, a worldwide pandemic capable of killing millions and bringing the global economy to its knees has been a probable and foreseen risk. Similarly, the probability of atmospheric warming is 100 percent; global average temperatures are already 1 degree Celsius above pre-industrial levels. And the devastating human and economic impacts of increasing global temperatures are well understood, if difficult to truly comprehend.
But our fate is not yet sealed. There is still time to apply the lessons we’ve learned from failing to adequately prepare for a global pandemic. These lessons can help us stave off the worst impacts of climate change, and they include:
- Science can be more powerful than politics, religion, and greed. As the COVID-19 crisis peaked, political rallies, churches, mosques, temples, and factories closed because scientists said it wasn’t safe to do otherwise. When scientists warn us about climate change, we must take their warnings seriously.
- Abrupt and disorderly economic and societal transitions are most devastating to vulnerable populations, amplifying existing inequities and injustice. In the United States, female, black, and Latinx workers suffered greater levels of COVID-19-related unemployment than white counterparts, and businesses led by these groups did not receive equal access to federal aid. Around the world, extreme heat, drought, and flooding are disproportionately impacting poor and disadvantaged communities.
- Individual behavior changes can make a difference, but decision-making by governments, businesses, and investors matters most. Government mandates limiting individual mobility to slow COVID-19 resulted in drastic carbon emissions reductions, but absent smart stimulus, these declines will be temporary and likely won’t have a material impact on future carbon emissions.
- Governments can mobilize trillions of dollars in a matter of days when lives and livelihoods are on the line. The US Congress passed the $2.2 trillion CARES Act just a few weeks after the virus emerged as a domestic threat in the United States. The CARES Act alone exceeds the price tags of even the most ambitious national climate policy proposals.
I often use the analogy of a rearview mirror to help explain why society’s driving forces are off-course on climate. To understand why, let us consider the behavior of large asset owners—the intergenerational pools of wealth held in pension and sovereign wealth funds, foundation and university endowments, family offices, and insurance companies. Together, these institutions own assets that total roughly $100 trillion, which—through a portfolio of public and private equities, credit, and alternative investments—serve as the primary source of oxygen fueling the real economy.
These institutions have payout obligations well into the future, yet their investment decision-making hinges on backward-looking information. One tool that is proving less useful in the era of climate change is backtesting, a technique that assesses future performance based on how well an investment would have performed under past market conditions. Manager evaluation and compensation are also heavily reliant on yesterday’s news, with formulas typically tied to benchmarks constructed on peer and past performance. Institutional investors are generally a risk-averse bunch, and these practices were designed to protect portfolios from uncompensated risk.
But putting too much faith in backtesting and benchmarks actually increases risk for investors in a changing climate. The approach is akin to navigating a car down the road based on what you see in the rearview mirror. The physical risks of climate change are not in the rearview mirror, and neither are the new technologies, policies, and consumer preferences that will drive the decarbonization transition. As the primary source of oxygen fueling the global economy, institutional investors are calibrating decisions on assumptions of atmospheric stability that no longer exist.
So, what would we see if, instead of looking backward from today’s vantage points, we looked into a rearview mirror from the year 2030 and mapped the road scientists tell us we need to find from there? Hop into my time machine and I’ll show you.
Looking Back From 2030
Welcome to the future! You must be tired from your journey. Sit back, and I’ll remind you how we got to 45 percent below 2020 emissions levels and are on our way to hitting net-zero in the next 20 years.
Having just traveled here from a world besieged by COVID-19, you will recall that amid unprecedented economic collapse, reductions in global emissions peaked at 17 percent and settled at minus 7 percent for the year. That was still short of the 7.5 percent annual drop required to limit warming to the 1.5 degree Celsius goal of the Paris Agreement. Those sobering numbers finally settled the debate about whether stabilizing the climate necessitated slashing the tires of national economies or whether developing green pathways promised a better road ahead. We chose the latter.
The 2020s were characterized by wildly ambitious industrial policies, rapid proliferation of climate data and management tools, and a cultural and political context that rewarded those who got proactive. In the end, securing a prosperous future came down to three things: 1) green growth, 2) data, and 3) leadership. COVID-19 was the turning point. Let me explain.
Support for Green Growth
In just the first two months of the pandemic, the US government provided more support for markets than it offered over the three-year period after the 2008 Financial Crisis. It took a change in administration but, starting in 2021, the United States leveraged this World War II-scale of government spending to accelerate the decarbonization of the national economy. The government linked loans and support to carbon reduction and climate preparedness targets. As a result, US companies became more resilient to the physical impacts of climate change and stronger in the face of foreign competition. Most notably, beyond paying benefits to millions of unemployed Americans—many of whom lost their jobs in the oil, gas, coal, and airline industries, which never rebounded to their pre-2020 levels—the United States revived the Works Progress Administration (WPA). WPA programs paid workers displaced by COVID-19 to build the infrastructure needed for a climate resilient and prosperous future.
“Green growth” policies fueled nearly every industry and every national economy the world over. The roadmap called for shifting the power sector to renewable sources (a trend well underway in the developed world); shifting downstream uses of energy (such as heating, cooling, and transportation) to electricity (rather than oil and gas); and aligning incentives for agriculture, forestry, and other land use to reduce and sequester carbon.
Regulations enabling energy markets to value flexibility services accelerated the shift to clean energy worldwide. Taxing carbon expedited the transition from fossil fuels to clean sources, the cost of which fell even more dramatically in the 2020s. Sensors helped predict renewable resource availability and optimize the use of battery storage, the cost of which fell dramatically thanks to ambitious economy-wide emissions reduction targets. Supported by carbon tax revenues, transition financing helped retrain and relocate displaced workers and decommission existing fossil infrastructure. Government policy and investment was also instrumental in the decarbonization of heavy industry and the construction of direct air capture facilities.
Governments invested in zero-emissions transportation infrastructure and capitalized on behavioral patterns reshaped from the coronavirus to re-design cities. Traditional commuter belts disappeared and were replaced with afforestation projects and autonomous electric transport. Cities got smarter too, investing in digital infrastructure to optimize the movement of people and resources.
Finally, green growth policies in the food and agricultural sector took advantage of inefficiencies in existing subsidies to reduce overall spending, while driving sustainable livelihoods for sustainable farmers. Factory farms went extinct by way of incentives for plant-based meats and regenerative ranching. Farmers benefited from access to subsidized loans to transform their land into carbon sinks and, after overcoming initial difficulties in measurement and verification, were able to earn income from the carbon they permanently sequestered in soils and by planting trees. Local landowners were compensated to keep the Amazon and other critical forests thriving, and natural capital the world over was valued and appropriately compensated for its ecosystem services.
Collection and Use of Climate Data
Core to the success of green industrial policies were advancements in climate-risk data collection and utilization. In 2020, central banks in Europe and Asia began mandating climate stress tests for financial institutions. Though the US Fed was late to the party, the global nature of finance had the effect of drawing US institutions into the exercise long before our government acted. This had a cascade effect, surfacing previously undetected or poorly understood weaknesses in global financial systems, and catalyzing high-caliber climate risk models and climate-related financial disclosures. Information gleaned from these stress tests drove commercial banks to stop lending to carbon-intensive sectors by 2022, and governments around the world stopped subsidizing fossil fuels. (The profound and prolonged decline in oil prices beginning in 2020 helped.)
Advancements in data collection and analytics also accelerated investment into the companies, technologies, and systems driving the transition. The development of robust and sophisticated green taxonomies and sustainable accounting standards helped investors understand what was green and what was greenwashing. In 2020, roughly $12 trillion was purportedly invested in sustainable strategies. As was becoming clear at the time, those claims were only as useful as the self-reported, highly variable, non-standardized, and non-comparable data on which they relied. The green bond market, especially in China, was exposed for being largely an exercise in moving money around, painting it green in the process. A shift from volumetric targets to systems-based analysis redirected investment from products to outcomes.
Using satellite and asset-level data, and building on advances in data visualization developed during the COVID-19 pandemic, scientists counted daily emissions globally and activists launched dashboards to track corporate climate commitments. These tools held governments and businesses accountable and rewarded those making progress.
Courageous Leadership
Most importantly, in the wake of the coronavirus pandemic, all of humanity rose to meet the climate challenge. Courageous and visionary leaders stepped up in every arena.
Asset owners set ambitious decarbonization and climate resilience targets and achieved them through transparency, accountability, and aligned incentives. Titans of finance and industry held governments accountable to green growth policies. Business leaders leaned into the concept of shared value. After spending so much time working from home, executives stopped being parents and grandparents only on the weekends and started bringing their whole selves to work. Just as it was not considered “okay” to put your workers, unprotected, into harm’s way during the pandemic—it became no longer okay to emit carbon into the atmosphere unabated.
And most importantly, individuals—especially in their role as voters—stepped up. The coronavirus taught us that we are all interconnected and that individual actions can either cost or save lives. We, you, and I learned that “normal life” isn’t guaranteed, and that we need to work together to make the world we want to live in.
You may remember that on April 22, 2020, the United States celebrated the 50th anniversary of Earth Day. What had gotten lost over the years is that, on the first Earth Day in 1970, 10 percent of the US population marched to protect our one and only planet. Sheltering in place, in the spring of 2020, all of us collectively confronted the fact that nothing would change, in the immortal words of Dr. Seuss, unless we cared a whole awful lot.
Now, back home in 2020, we have to resist the temptation to rely on the rearview mirror in the face of unprecedented disruption. We have the map to a better future. All we need is to recruit the ambitious policies, high-quality data, and courageous leadership to drive us there.
Support SSIR’s coverage of cross-sector solutions to global challenges.
Help us further the reach of innovative ideas. Donate today.
Read more stories by Alicia Seiger.