From Nash to Net-Zero: The Quest for Equilibria
- 1. 18 Trendmonitor 3 . 2019 Fokusthema 5 Die Autoren Dr. Chris Bayer is Principal Investigator at Deve- lopment International e.V. Praveen Gupta is Chartered Insurer, former MD and CEO at Raheja QBE. Dr. Jiahua Xu is Postdoctoral Researcher in Fi- nance at the Ecole polytechnique fédérale de Lau- sanne (EPFL). Jiahua Xu Praveen Gupta Chris Bayer With the rise of calls to divest from compa- nies that drive climate change, to boycott the fossil fuel sector, or to become net zero by 2030, #climatecrisis is trending on so- cial media. This article puts forward that a Nash equilibrium buttressed by unprec- edented international cooperation would be a prerequisite to reach a net-zero carbon equilibrium. We outline findings from new reports and papers that show how invest- ment but also divestment in carbon-based fuel extraction is occurring, analyze the de- gree to which greenhouse gas (GHG) emis- sions are disclosed, and discuss how, even in the absence of such disclosure, the «carbon positions» of companies or investors can be proxied. The elusive equilibrium for carbon In the current «climate» of carbon stig- matization, it is easy to lose sight of the fact that carbon dioxide is an essential food for plants, and that we depend on its greenhouse gas effect to prevent our planet from freezing. Indeed, «without greenhouse gases, Earth would be a fro- zen –18 degrees Celsius»1 . However, when the equilibrium between carbon emissions and carbon sinks is not reached, change, by definition, must oc- cur. Global warming, sadly, has already exacerbated extreme weather events and disrupted ecosystems. Furthermore, this rate of climate change has not occurred since an asteroid hit the Yucatan 65 mil- lion years ago, which became the final nail in the dinasour coffin. If we do not take heed of climate change, we will face the domino effect of runaway global warming, scientists warn. Concerted international cooperation ad- vances on the issue, but has been accom- panied by setbacks. With explicit and implicit defections from the stated goal of keeping global warming below two degrees Celsius above pre-industrial lev- els, we have yet to reach a Nash Equi- librium through instruments such as the Paris Climate Agreement, in which a change of strategy does not benefit the change agent in the context of many players. The recent Amazon fires, for example, represent a notable «defection», which was generally met with international out- rage. In response to Brazil’s «change of strategy», investors have put on hold Brazilian sovereign bond purchases and corporate actors have boycotted Brazilian leather.2 While such responses, as well as a USD 22 million band-aid offered to Brazil by the European Union, are to be applauded, the real question is whether the Amazon’s carbon sink has been prop- erly valued and compensated, avoiding the temptation, in the first place, to slash-and-burn. Banking on oil and oiling the banks Despite the consequences of continued carbonization of the environment which are well understood and undeniable, banks and insurance companies continue to «fuel» coal mining as well as the growth of big oil and hydrocarbons. For many, it is pure economics of cost. Al- though renewables are getting cheaper, oil remains the darling. The recent Fossil Fuel Finance Report Card with the title «Banking on Climate Change» (BankTrack et al., 2019) points out that 33 global banks provided USD 1.9 trillion to fossil fuel companies since the adoption of the Paris Climate Agree- ment at the end of 2015 and also shows that the amount of fossil fuel financing has increased in each of the past two years. In addition, the report found that From Nash to Net-Zero: The Quest for Equilibria
- 2. 19Trendmonitor 3 . 2019Fokusthema 5 USD 600 billion of the USD 1.9 trillion went to 100 companies which are most aggressively expanding fossil fuels, high- lighting business-as-usual practices that fly in the face of the latest scientific warn- ings from the Intergovernmental Panel on Climate Change (IPCC) according to which «limiting global warming to 1.5 degrees Celsius would require rapid, far- reaching and unprecedented changes in all aspects of society»3 . According to Johan Frijns, Director of BankTrack, «we’re faced with ever-wors- ening climate change impacts worldwide, and the latest IPCC report (IPCC, 2018) provides a stark 2030 deadline for the deep cuts in CO2 emissions needed to avoid full climate breakdown»4 . He expresses his dismay about the fact that, apart from addressing minor policy tweaks in the «responsible finance» ini- tiative, banks still continue to invest bil- lions in the fossil fuel industry, and won- ders what it will take to abandon these investments. The same IPCC report (IPCC, 2018) not only outlined the dangers ahead if we conduct business-as-usual, but also stressed the fact that USD 2.4 trillion worth of clean energy investments are needed each year up to 2035 in order to stave off the worst of the effects of cli- mate change. In order to raise this year- ly investment sum, banks as well as en- ergy companies must divert capital from fossil fuel to clean energy. Alison Kirsch, Climate and Energy Lead Researcher at Rainforest Action Network, calls the aforementioned IPCC report a red alert. She believes that, despite the groundbreaking Paris Climate Agreement, a man-made planetary collapse is immi- nent if the banks continue to increasing- ly support dirty energy.5 According to BankTrack et al. (2019) the four biggest global bankers of the fossil fuel energy sector are the US banks JP- Morgan Chase, Wells Fargo, Citi and Bank of America. However, other banks in the rest of the world including Bar- clays from the UK, Mitsubishi UFJ Fi- nancial Group from Japan and Royal Bank of Canada are continuing to heav- ily finance the fossil fuel industry. But, as pointed out in BankTrack et al. (2019), «the massive economic weight of the US oil and gas industry can be eas- ily seen in the fact that the top four bankers of climate change are all head- quartered in the United States» and, fur- ther, the two US banks Morgan Stanley as well as Goldman Sachs are part of the top 12, meaning that «all six of the US banking giants are in the top dirty doz- en fossil banks» and «account for an as- tonishing 37 percent of global fossil fuel financing since the Paris Agreement was adopted». Divestment and rating «signals» While the combination of democracy and capitalism is not outright delivering a green outcome, the interplay of envi- ronmentally conscious citizens and a growing share of fund managers is slow- ly but steadily steering capital deploy- ment towards a cleaner future. From sovereign wealth funds to rating agencies, we are observing divestments and rating downgrades of companies at the heart of GHG pollution. Recent headlines read «A $20 billion fund in Denmark is dumping 10 major oil com- panies»6 , and «Rating agencies ratchet up pressure on insurers over ESG risk»7 . The former article reported that the Danish pension fund was selling its stake in ma- jor oil companies due to the incompat- ibility between their business models and the Paris Climate Agreement. The latter article cited Moody’s new report, which highlighted multiple environmental, so- cial and governance (ESG) problems of insurers and warned that «some compa- nies would struggle to meet their finan- cial obligations without swift action». Measurement of carbon footprint with or without disclosure Yet, even in high-income economies, the disclosure of CO2 emissions remains a «challenge» for many companies. As a recent set of reports reveals, the further down the corporate value-chain one goes, the less companies, in general, are willing or able to account for their GHG footprint (see Table 1). Corporate actors are increasingly ac- countable, by law, for their greenhouse gas accounting and performance.8 For companies that are still opaque on their CO2 emissions, there are ways to proxy their «carbon positions» in the context of a carbon certificate regime. Cogni- zant that insurers oversee about one quarter of all invested assets worldwide, Braun et al. (2019) notably offer in their recent award-winning academic paper an asset pricing method to detect carbon-intensive positions on the bal- ance sheets of insurance companies in- vesting their own capital. The paper suggests monitoring insurance compa- nies’ financial performance in relation to the change of price for carbon cer- tificates, since companies with heavy in- vestments in carbon-intensive industries Tab. 1: Proportions of companies disclosing their GHG emissions by GHG emission scopes for companies in Germany, Sweden and Austria (Source: Bayer et al., 2019a; Bayer et al., 2019b; Bayer et al., 2019c) Number of companies Austria (2018) Scope 1: Direct Scope 2: Electricity Indirect Scope 3: Other Indirect Germany (2017) Sweden (2017) 84 422 245 46% 37% 20% 33% 26% 17% 48% 39% 27% GHG Emissions
- 3. 20 Trendmonitor 3 . 2019 Fokusthema 5 are presumably more likely to suffer from carbon price hikes. Concluding remarks The prospect of a GHG equilibrium ne- cessitates a two-pronged approach: suf- ficient compensation for the service of carbon sinks along with control over emissions (accompanied by sound car- bon accounting and reporting). After all, while climate science is pure chemistry and physics, a Nash Equilibrium must exist before a carbon equilibrium would even be possible. Notes 1 See https://earthobservatory.nasa.gov/features/ CarbonCycle/page5.php. 2 See https://www.reuters.com/article/us-brazil-en vironment-investors-idUSKCN1VK1S0 and htt- ps://edition.cnn.com/2019/08/30/business/vf- corp-brazilian-leather-amazon-scli-intl/index. html. 3 See https://www.ipcc.ch/2018/10/08/summary- for-policymakers-of-ipcc-special-report-on-glo- bal-warming-of-1-5c-approved-by-govern- ments/. 4 See https://cleantechnica.com/2019/03/22/bank s-funneled-1-9-trillion-into-fossil-fuels-since-pa- ris-agreement/. 5 See https://cleantechnica.com/2019/03/22/bank s-funneled-1-9-trillion-into-fossil-fuels-since-pa- ris-agreement/. 6 See https://www.bloomberg.com/news/articles/ 2019-09-03/a-20-billion-fund-in-denmark-is- dumping-10-major-oil-companies. 7 See https://www.ft.com/content/3c9f4b4e-9dd e-11e9-b8ce-8b459ed04726. 8 For example, in the European Union, Directive 2003/87/EC notably provided for the Emissions Trading System (EU ETS), which has been in ef- fect since 2005 and targets high-polluting indus- tries including power generation, iron and steel, paper and cellulose, chemist as well as refineries. References BankTrack, Honor the Earth, Indigenous Environ- mental Network, Oil Change International, Rain- forest Action Network and Sierra Club. (2019). Banking on Climate Change: Fossil Fuel Finance Report Card 2019, Retrieved from: https://www. ran.org/wp-content/uploads/2019/03/Banking_ on_Climate_Change_2019_vFINAL1.pdf. Bayer, C., Vogel, G., Kaltenhäuser, S., Storrs, K., Xu, J., and Ibañez, J.I. (2019a). A New Responsibility for Sustainability: Corporate Non-Financial Re- porting in Germany. Development International e.V. Retrieved from: https://www.ipoint-systems. com/fileadmin/media/downloads/GER.EU. NFRD.2019.05.06.pdf. Bayer, C., Vogel, G., Rudebeck, T., Wiklund, M., Xu, J., Storrs, K., and Ibañez, J.I. (2019b). A New Re- sponsibility for Sustainability: Corporate Non- Financial Reporting in Sweden. Development International e.V. Retrieved from: https://www. ipoint-systems.com/fileadmin/media/down- loads/SWE.EU.NFRD.2019.05.06.pdf. Bayer, C., Xu, J., and Ibañez, J.I. (2019c). A New Res- ponsibility for Sustainability: Corporate Non-Fi- nancial Reporting in Austria. Development In- ternational e.V. Retrieved from: https://www. ipoint-systems.com/fileadmin/media/down- loads/AUSTRIA.EU.NFRD.2019.10.01.pdf. Braun, A., Utz, S., and Xu, J. (2019). Are insurance balance sheets carbon-neutral? Harnessing asset pricing for climate change policy. The Geneva Papers on Risk and Insurance – Issues and Practice, 44, 549–568. Retrieved from: https:// doi.org/10.1057/s41288-019-00142-w. IPCC. (2018). Global Warming of 1.5 ° C: An IPCC Special Report on the impacts of global warming of 1.5 ° C above pre-industrial levels and related global greenhouse gas emission pathways, in the context of strengthening the global response to the threat of climate change, sustainable deve- lopment, and efforts to eradicate poverty. Ret- rieved from: https://www.ipcc.ch/site/assets/up- loads/sites/2/2019/06/SR15_Full_Report_High_ Res.pdf. Healthcare-Transformation-Study For Download of the Study: www.ivw.unisg.ch Healthcare transformation Institute of Insurance Economics (I·VW-HSG) and Credit Suisse Christian Biener / Alexander Braun / Arina Brutyan / Martin Eling / Danjela Guxha / Niklas Häusle / Martin Lehmann / Hato Schmeiser / Lyle Ungar The digital revolution is beginning to make its presence felt and promises to make healthcare more efficient and safer. The «Healthcare transformation» report, published by the Credit Suisse Research Institute, looks at the improvements Artificial Intelligence (AI) and Big Data could bring into people’s lives but also examines potential policy and regulatory risks in the more developed economies. In addition, as national healthcare models are being disrupted by soaring costs, the report discusses a number of solutions which are currently up for debate. There is also a focus on China as an example, providing insight into a country facing an aging population and a rapidly growing health service industry. Color gradient or Image placeholder Research Institute June 2019 Healthcare transformation Thought leadership from Credit Suisse and the world's foremost experts