COP26 and the Four Pillars of Responsible Capitalism

Climate protest

COP26, the UN Climate Change Conference in Glasgow, concluded on 13 November with an intergovernmental pact and a series of supplementary intergovernmental agreements – most prominently to reduce methane emissions and deforestation. But responsible capitalism must be built around four sectoral pillars – household, business and financial, as well as government – all operating within scientifically-determined planetary boundaries that help maintain resilient natural ecosystems.

So it was good to also see pledges from major corporations to develop paths to ‘net zero’ carbon emissions by 2050, and from financial institutions (like those in the Glasgow Financial Alliance for Net Zero) to provide funding for projects leading to climate change mitigation and to achieve adaptation to its impacts.

Some participating business and financial sector executives expressed the view that they were showing more leadership than governments, perhaps engaging in a bit of corporate social responsibility (CSR) promotion and creating space for lobbying. But it should be noted that many more large and small businesses, as well as private equity-run companies, have yet to make any climate commitments. Moreover, the large business corporates are answerable to their shareholders and other stakeholders, rather than to the electorate in democratic countries. 

Ultimately, the ‘Glasgow Climate Pact’ fell well short of assuring that global heating will be contained below 2 degrees or the preferred 1.5 degrees set out in the 2015 Paris Climate Accord in order to avert crisis conditions, particularly in coastal and arid regions. The clock is ticking, but the pact leaves the door open to further governmental pledges next year and subsequently.

In addition, business behaviour will be increasingly influenced by the ‘stewardship’ of institutional investment managers and banks, who in turn are increasingly urged on by their regulators and shareholders to take into account the climate-related risks their financial assets are exposed to. In support of this, there is governmental pressure to align greenhouse gas (GHG) disclosures with the information needs of stakeholders, including investors. To the extent that it drives changes in their consumption patterns, increased consumer-awareness of climate change will also induce business behaviour to adapt.

Nevertheless, governments still appear to be constrained by prevailing political narratives of what their citizens and electorate are supposedly willing to support. Hence India (the most populous democracy) and China (the most populous country and second largest carbon-emitter), both of which are heavily dependent on coal power stations, could not at this stage commit to more than ‘phasing down’ their use of coal.

Indeed, evidence suggests household consumers in rich and poorer countries alike strongly dislike rising car fuel and energy prices. And yet this is precisely what will follow the removal of fuel (petrol and diesel) and natural gas subsidies and the introduction of some form of carbon pricing. Witness the angry ‘gilets jaunes’ protests in France, which started in November 2018, against a rise in car fuel taxation, and the recent public outrages at the rise in natural gas prices in the UK and petrol prices in the US.

While citizens have become increasingly willing to vote in favour of climate change-abatement policies, producers of products and services that lead to GHG emissions will ultimately pass the costs of reduced subsidies and increased carbon taxes on to consumers. Currently expensive electric and hybrid vehicles fuelled by ‘green’ electricity (produced from wind, solar and hydro energy sources) will help sustain the use of household cars. But their battery technology is proving difficult to enhance, and the mined minerals they rely on (iron and coal for steel, copper and the cobalt, lithium and ‘rare earths’ used in batteries) cause huge environmental damage and slave labour concerns in their extraction. ‘Green’ hydrogen may eventually provide a substitute for natural gas and an alternative to heat pumps for home and office heating, and might also fuel cars. But it’s hard to see this emerging from existing markets without regulatory pressures or structural reform.

If the direct (from governments) and indirect (carbon taxes not levied on the polluters) fuel subsidies cannot be removed due to pressure from consumers and voters, then households were the ‘elephant in the room’ at COP26. They both support the actions taken and increasingly agree with climate change activists and protesters that more needs to be done, whilst at the same time are seemingly unwilling to make the lifestyle changes necessary for global warming to be contained at 1.5 degrees. 

The polluters must pay – and so too will the consumers, who must then respond to price changes by adapting their behaviour if emissions are to be halved by 2035 on the road to ‘net zero’ by 2050. But since the world’s richest 10% are still responsible for more than half of all GHG emissions through consumption today, while the poorest 50% create just 10% and are the most vulnerable to price rises, perhaps the onus should be on wealthier countries’ households to make those lifestyle changes and absorb any increased costs.

By Professor Andy Mullineux
Lloyds Banking Group Centre for Responsible Business, Emeritus Professor of Financial Economics