ANALYSIS Climate change: 3 reasons businesses aren't seeking solutions
Why aren't U.S. businesses doing more to combat climate change? Don Pittis says it's a combination of short-term thinking, vested interests and outright climate change denial. (Sean Gallup/Getty)
It seems a strange disconnect. If climate change is really causing economic havoc, as outlined in a new blue ribbon Congressionally mandated report from the United States. why is business so insouciant?
That's not the way markets are supposed to work. According to the theory, if there is a problem that needs to be solved, markets move to fix those problems. When that theory holds true, it’s one of the wonderful and useful things about market capitalism.
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And there is a problem. According to the report, extreme drought and floods are hitting crop production. Storm damage, wildfires and rising water levels are all imposing real economic costs. From landowners in Florida to maple syrup producers in Vermont, business across the U.S. are feeling the heat.
And the report says those costs are going to continue to climb over the next century.
So if the entire productive capacity of the United States — and by extension Canada — is suffering damage due to climate change, why isn't business onside when it comes to efforts to try and minimize it?
Three potential reasons come to mind.
Short term thinking
One is the perennial business difficulty of what might be called a short investment horizon, or short-term thinking.
It's a well-established principle of business (and economics) that money in your hand today is worth more than money you’re expecting to earn tomorrow. That is the reason interest rates exist. It is why people run up credit card bills.
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But that natural urge to have it all now has been exacerbated by a business culture that likes to take the money and run.
Annual bonuses encourage those on the receiving end to profit now and to heck with the future. And senior executives often get part of their pay in share options, meaning they want to keep shares high while they are around, not in 20 years when they are long gone.
Even non-executive shareholders have radically shortened their investment horizon.
Annual bonuses encourage those on the receiving end to profit now and to heck with the future. And senior executives often get part of their pay in share options, meaning they want to keep shares high while they are around, not in 20 years when they are long gone.
Even non-executive shareholders have radically shortened their investment horizon.
"Fifty years ago, the average stock was held for more than eight years, according to LPL Financial. By 2010, the average stock was owned for five days," writes Morgan Housel, a.k.a. the Motley Fool, in an epitaph for long term thinking.
If business can not longer invest for longer that five days without locking in gains, how can we expect them to think 100 years ahead?
Vested interests
Which brings us to reason number two. For companies that already have a successful business model worked out, battling climate change is a form of economic disruption in itself.
Many existing business strategies are founded on rent-seeking or vested interests, based on the stream of profits from the brilliant innovations, infrastructure and practices they established decades ago. Businesses have invested in factories, pipelines, and the entire fabric and structure of their companies to perform a limited set of tasks that only work in the world as it is now.
'In Canada, the current government's power base in the Western oil fields makes it difficult to encourage disruptive change.'- Don Pittis
No wonder they are willing to spend to protect those investments from change — and for many, taking steps to minimize climate change would be a bigger immediate disruption than the effects of climate change itself.
It is well documented that fossil fuel industries have given financial support to climate change deniers. As Scientific American reported last year, while direct donations to climate denial groups have faded, "the amount of money flowing through third-party, pass-through foundations like DonorsTrust and Donors Capital, whose funding cannot be traced, has risen dramatically."
It is easy to point the finger at Big Coal, but having a financial interest in the status quo extends well beyond a few black hats in the fossil fuel industry. As in any economic disruption, the huge majority of existing companies are set up for the way things are now. Cheap energy, urban sprawl and long range transportation are all built into the business model.
Change benefits fast-moving upstarts, but historically a sudden change in the business environment causes a decimation of the established players. No wonder many don't want to concede that climate change is a fact.
Climate change futures
As for reason number three, there is something self-fulfilling about it, but it may be that business leaders have begun to honestly believe the widespread propaganda of climate change denial. Perhaps they are truly convinced that the vast majority of scientists, save those paid by the Scientific American donors mentioned above, are all wrong.
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That is why I think some clever experts in derivatives who are sympathetic to climate change should set up instruments that allow investors to put their money where their mouths are.
There would be many ways to do it, but one would be to buy options on coastal U.S. (or global) land that the climate change scientists say will be flooded. Investors convinced that climate change and its effects are false or excessively pessimistic could bid up the options on that land confident that it would keep its value. Climate change believers would take the opposite play.
People threatened with losing their land could be the beneficiaries. But in the meantime it would be a market-based indicator of who is right. Such indicators have been very successful for predicting weather events and things like market volatility.
On the other side, options on land predicted to become the new coastline after 25 or 50 years could be played the opposite way, as climate change believers anticipated the profit of owning newly formed beach-front.
To some extent, this a business already being conducted by one of the sectors that does take climate change seriously: the insurance and reinsurance industry. They were some of the first to warn of the danger of climate change. They are an industry that already understands how to run a business with a long term view.
That’s not to say business isn’t beginning to answer the call. Innovators large and small, from Tesla to Canada's Bullfrog Power, are already in the game. But they’re still a minority, and the fact is that if the 300 experts and 60 scientists who wrote this report are right, the entire U.S. economy as it stands today is a shrinking asset.
In Canada, the current government's power base in the Western oil fields makes it difficult to encourage disruptive change. But in the U.S. there are things the government could do to beyond raising more and brighter warning flags.
They can use legislation and moral suasion to discourage the culture of short-termism. They can work to amplify the voices of innovators against the roar of the established players. They must do everything they can to free the disrupters. Because if there is any group that can restart the U.S. economy, unleash the power of capitalism and pull the economy out of the climate change fire, it is not the complacent giants hanging on to what they have. It’s the vigorous companies that can rebuild the future and profit from change.
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