Global Warming’s Unlikely Antidote: Why Capital Markets Hold the Key to Addressing Climate Change

Abstract

While intergovernmental policy and mainstream capital markets remain unmoved by the mounting evidence of the severe costs of climate inaction, selected groups of private investors and activists have mobilized to transform the orientation of capital markets. The fossil fuel divestiture, impact investing, and clean energy investing movements have made significant inroads, yet remain marginal relative to the vast amounts of capital controlled by traditional investment intermediaries. Such firms still, by and large, neglect to account for the significant risks inherent in continued investment in companies dependent on fossil-fuels, risks that likely will translate into significant financial losses over the long-term once the “carbon bubble” is addressed. Such market inertia is nothing new, but the causes are complex and often only partially understood. Most calls for policy action related to private markets include the need for a tax on carbon emissions - clearly a critical starting point - as well as various other tax incentives or subsidies. However, a broader set of capital market rigidities also must be addressed – spanning a range of industry-related beliefs, norms, and practices that represent barriers to change.