Investors
The financial system of the whole world has investment assets totaling about $45 trillion. Most of it represents holdings in an old economy that still relies on the careless consumption of fossil fuels.
The fact of climate change is putting the accumulated wealth of the entire globe at risk. That's why 50 leading investors representing more than $4 trillion of those assets called on Congress to put tough mandatory limits on carbon emissions. And their numbers are growing.
Wall Street has never confronted a risk factor like this. This is the big kahuna, the mother of all bubbles. Global warming will spare no nation, no market and no industry, and investors are under increasing pressure to pull off a pretty neat trick. Without either missing the next quarter's numbers nor spooking the herd, they need to start moving that $45 trillion into low carbon investments. Tall order, especially if you consider that Exxon is the most profitable company in the history of mankind, but investors really have no choice.
They can deploy their enormous power and wealth to help chart the course to a new energy economy, or risk universal ruin. This is a logical, scientific and financial certainty.
Fiduciary Duty
Investors who oversee pensions, endowments and other monies are technically speaking, "fiduciaries," and they are legally bound by a strict code of conduct which in practice means this: make as much money as possible, as quickly as possible. It's a very narrow definition that opens onto a brutish world of short-sighted behavior.
But there is a kinder gentler brand of fiduciary duty. Have a look at what a company called ST Microelectronics has done. Now-retired CEO Pasquale Pistorio developed the unorthodox view that sustainable corporate practices are in the best interests of shareholders, and he elevated sustainability to be a prime company objective. His vision is now delivering $1 billion to the company bottom line.
ST Micro was one of the first to see the light -- in the early '90s -- but it is no longer alone. There are companies in every sector that are doing well by doing good, and new tools and rankings to allow investors to quantify previously intangible benefits and expose the most glaring risks of high carbon exposure.
Kicking and Screaming
But the bullish herd ain't budging right now without a lot of kickin' and screamin', which explains why two ongoing NGO efforts have proved so crucial to maintaining climate action momentum.
One tool has been a coordinated global warming shareholder campaign. Concerned investors are succeeding in applying pressure to corporations in the oil and gas, electric power and building and retail sectors to be accountable for carbon risk exposure. Climate-related shareholders resolutions reached record numbers in 2007.
Another highly effective tool has been a campaign to force companies to disclose information regarding their carbon footprint and what they plan to do about it. It's of relevance to shareholder value. Called the Carbon Disclosure Project, the effort last year asked the world's 500 biggest companies for the information on behalf of institutional investors with $31.5 trillion in capital under management. Not only does this ongoing effort create a repository of valuable information. It also sends a signal to management that shareholders are seriously concerned about the impact of climate change on company value.
Smart Money is on the Upside
But the smart money is on the upside potential of climate action. Prime example: the boom in ethanol production. Already there are over 100 plants making fuel from corn in the US, and almost an equal capacity under construction. Farm-based liquid fuels now account for 4% of what's used for transportation. Experts project the share is rapidly going to hit 20% or more and that the new industry will create hundreds of thousands of new jobs. That's just one sector of the coming clean tech boom.
What may be even more alluring to the money people though, is that there's a new global currency -- carbon -- that is helping to rewrite all the rules of business as usual. It sells in the form of credits and its unit of measure is the metric ton. This new currency has been created in order to control global warming. Up to now, sending carbon up in smoke was free. The atmosphere was used as a dumping ground. Those days are numbered in the US. In Europe they are already over. Carbon in the EU now has a price tag, and it's motivating emitters to produce less of it, because getting rid of it costs serious money.
Carbon is Money
Carbon credits by the metric ton sell primarily on a market in the European Union called the ETS -- the Emissions Trading Scheme. The global market for carbon credits is already bigger than the international trade in grain. It has attracted every kind of financial whiz under the 
sun because the volume of trade is doubling every year. When it matures, some expect the market in carbon credits will be $3 trillion conservatively estimated. That's roughly the size of current markets for oil, natural gas, electricity and coal combined.
There are two regional markets under development in the US -- one in the Northeast and one in the West. There's a lot of talk in Congress about a national carbon market that will be one outcome of various "cap and trade" measures now under debate. US investors are right now on the outside looking in at this lucrative new marketplace that already includes vast opportunities in China, India and other developing nations for turning a buck on carbon.
Downside Risk: Unchecked Emissions
At the same time, industries with a big carbon footprint are looking like very ugly investments. Nothing exemplfies this fundamental change in investor sentiment than the 2007 TXU story.
Bucking popular sentiment, the big utility company announced plans to build 11 new coal-burning power plants in Texas. It was an expansion that would have added more new coal plant capacity than has been built in the United States in the last ten years. But there was a big dirty black cloud of carbon hanging over the multi-billion dollar opportunity which wasn't going to go away on its own.
The solution? A buyout of TXU. The price tag? $45 billion, the largest ever in American history. The wrinkle? Scrap plans to build eight of the 11 Texas coal plants. Why? Because environmental advocates had a seat at the negotiating table, and were able to influence the terms of the deal.
It was a watershed moment in corporate finance. Never had the treehuggers had such clout on a deal of such magnitude. Climate change has taken its place as a primary material issue in the financial sector, and carbon risk is creating a new calculus of investment -- as a matter of an evolving definition of fiduciary duty.
Related Links:
