Political paralysis: Investors must catalyze positive change

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      By John Streur, President and CEO, Calvert Research and Management

      Washington - There is one major issue that the vast majority of global leaders agree upon: Climate change is a real problem and we need to use economic, market-oriented mechanisms to fight it now.

      Even at a time when U.S. politicians are at such disagreement that the federal government has been partially shut down for nearly a month and transnational relations have deteriorated to trade wars and arrests, with the uncertainty surrounding Brexit occupying Europe, we all agree on the need to address climate change. But we also recognize that government is not capable of providing the needed solutions at the speed by which they need to occur, so investors must take action.

      In advance of next week's World Economic Forum annual meeting in Davos, the organization's latest Global Risks Report was clear and direct in its assessment of how leaders worldwide see the threat that climate change poses.

      Every year, the World Economic Forum conducts a survey of about 1,000 business leaders, politicians and academics to identify the biggest global risks in terms of likelihood and impact. It defines global risk as "an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries."

      In its top 10 risks by likelihood from the just released Global Risks Report 2019, five are classified as environmental. In addition, involuntary migration and water crises are placed in the societal category by the World Economic Forum, but are exacerbated by climate-change impacts:

      1. Extreme weather events
      2. Failure of climate-change mitigation and adaptation
      3. Natural disasters
      4. Data fraud or theft
      5. Cyberattacks
      6. Man-made environmental disasters
      7. Large-scale involuntary migration
      8. Biodiversity loss and ecosystem collapse
      9. Water crises
      10. Asset bubbles in a major economy

      This isn't a sudden realization of the impacts that climate change is likely to have. The top two risks in terms of likelihood in the 2018 report were extreme weather events and natural disasters, and they ranked No. 1 and No. 3 in 2017. But it's also noteworthy that the failure to mitigate and adapt to climate change now ranks so highly. The more time we spend failing to act, the more the conversation must turn to those areas rather than prevention. As the report notes, "Of all risks, it is in relation to the environment that the world is most clearly sleepwalking into catastrophe."1

      Economists agree

      It's not just the Davos attendees who have climate-change impacts on their minds. On January 16, 45 top economists representing beliefs across the political spectrum published a letter in The Wall Street Journal and other publications around the world that called for the United States to put a tax on carbon. They advocated for this approach as a simple and straightforward way to help combat climate-change issues that we can no longer afford to ignore. Even major oil companies like Exxon support this proposal because it realizes that if we fail to act now, more severe actions will be required in the foreseeable future.

      The letter suggests returning the proceeds collected from the tax back to taxpayers in the form of a rebate, thus mitigating the out-of-pocket consumer costs and creating an additional incentive to lower carbon use. For example, a family that drastically reduces its own carbon use and pays a few hundred dollars in extra carbon taxes might ultimately make money if the rebate check it receives based on general carbon tax collected is higher.

      Greg Mankiw, a former chair of the Council of Economic Advisers, noted that this wasn't a controversial topic among economists. "The politics is complicated, the international relations is complicated, but the economics is really simple," he told The Washington Post.2

      Calvert's drive toward positive change

      Despite the fact that so many of us, including the business leaders and economists cited above, know the risks that this creates, as a society we have lacked sufficient will to take significant steps toward implementing real solutions. Too often, an emphasis on short-term returns, political hurdles and a reluctance to overturn the status quo can allow inertia to push the problem further down the road.

      This has brought us to a point where climate-change mitigation and adaptation must be discussed alongside prevention, and increased the chances that we will fail to act with sufficient urgency until it is too late. The disconnect between the recognized need to take decisive action and the sluggish response makes it more necessary than ever for all of us to do what we can to drive positive change.

      At Calvert, we do so through our innovative research system that incorporates material ESG inputs into our investment decisions. We also conduct structured engagement with companies where our research indicates that our engagement team may have the greatest impact, and use our proxy votes as shareholders to encourage companies to take positive steps toward managing their preparedness for the effects of climate change, and their relationship with the environment and their communities.

      As responsible investors, we will continue to analyze how a company handles the climate-change risks, like those seen by the World Economic Forum, prominent economists and so many others, when making our investment decisions, and use shareowner activism in an effort to catalyze needed change.

      Bottom line: Please consider what you can do to create action; the debate is over, but we need many more people and organizations to take action to drive positive change.