5 ms·

This was very good. I’ve been working at the intersection of climate and finance for nearly 20 years, and I would add the following points to augment the story

This was very good. I’ve been working at the intersection of climate and finance for nearly 20 years, and I would add the following points to augment the story told in the podcast (article available on Apple Podcast). 1. Banks have enormous power to determine what the future looks like. This is exercised via licence to make loans (and issue money) from nothing more than a ledger entry. That loan or ledger entry often dictates the future as without credit projects don’t happen and business operations aren’t viable. 2. On a neutral reading, asking banks to change their practices is a bit like asking Kodak to make digital cameras. Banks are wired for issue of loans using their existing risk analysis tools. Adopting to a new world in which they must onboard new tools to assess climate risk is like asking Nokia to make a good smartphone. 3. On a less neutral reading, banks have a fiduciary duty to their shareholders over and above the well-being of a wider group of stakeholders. Add in that banks are staffed with employees very focused on material and financial gain, so the legal obligations are reinforced with internal cultural expectations. Banks are filled with people who don’t really want to undermine their very lucrative hustle. 4. Banks claim that they need government support and regulatory change to help them make an adjustment and level the playing field to make climate action viable. But they lobby against precisely those statutory changes that are needed. A climate catch 22.

toast0 3y ago
> On a neutral reading, asking banks to change their practices is a bit like asking Kodak to make digital cameras. Banks are wired for issue of loans using their existing risk analysis tools. Adopting to a new world in which they must onboard new tools to assess climate risk is like asking Nokia to make a good smartphone. I don't understand this whole thing. Kodak pioneered digital cameras. Nokia made several good smartphones.
- Biologist123 3y ago
  Maybe those aren’t the strong examples I believed them to be. My understanding was that both Kodak and Nokia struggled to adapt to the requirements of a new age, which is the point I’m making about banks, that like many businesses, they are not wired for change.
richrichie 3y ago
The problem here are two fold: 1. benefits of climate change are more like public good 2. as elsewhere many firms went crazy with green washing and ESG is kind of becoming a loaded phrase in corporate speak On 1, private action won’t work unless the govt somehow pays the private actor. So, blaming banks is less effective.
- Biologist123 3y ago
  Thank you for the opportunity to exchange views on this. I’m currently trying to write up my professional experience. I’m finding it challenging, but your response and the dialogue helps me sharpen my own understanding and thinking. Most of my career has been spent building mechanisms to pay the private actor as you suggest. It works well at one level. But the problem is that there isn’t enough government money in the world to pay off all private actors needed to get to sustainability. The other thing to recognize is that banks create money far more than governments do, and they create it to finance projects which likely destroy more wealth than they create: just not wealth in a strict financial sense. Is blaming banks ineffective? The blame probably lies with the system which allows banks to determine the future, and to make that determination on the basis of what creates narrow financial value to a small group of insiders to the exclusion of other values such as environmental, good relations between people etc. I don’t have any beef with the bank mandate per se, their social utility is the allocation of resources to what society finds most useful. But that valuable mechanism breaks down if non-financial values are excluded from credit-scoring systems.
  - richrichie 3y ago
    Thanks for the reply. Is there a better mechanism than financial incentives? I am afraid that is the best working mechanism we have. Planned economies generally have not fared well in history, not only from economic value added perspective, but also from the fascist political systems they produce as a by product. They may get some narrow domains correct, but by and large they are net negative.
    - Biologist123 3y ago
credit_guy 3y ago
> Adopting to a new world in which they must onboard new tools to assess climate risk is like But what exactly are you even asking the banks to do? A green company suffers from the same climate risk as a regular company. Yes, a loan to a green company might reduce the global climate risk, but do you see how you've got a prisoner's dilemma here? A bank that gives a green loan below market rate is basically subsidizing the green transition. That's laudable, but that bank has to compete with other banks that don't make such subsidies. It almost feels like stating a truism: subsidies should come from governments, not from for-profit corporations. Maybe you deplore the whole "for-profit" thing, but that's a dangerous direction to go to. It has been tried before, a number of times, and it did not look that rosy in the end. It's best to work with what you've got: people do business to make a profit. They are not hell bent to destroy the world, but they don't have a motive to save it either. Let them do business, and we as a society we'll take care of saving the world via government action, or via charitable NGOs.
- Biologist123 3y ago
  > But what exactly are you even asking the banks to do? I don’t think I’m asking banks to do anything in that comment. What I am trying to do is set out a problem statement, and given your knowledge (and handle), I’d greatly appreciate your input on it: 1. Banks have a powerful ability to determine which projects happen and which don’t through the credit mechanism. Because often times no credit = no project. 2. When projects are evaluated on narrow financial criteria, wealth can be destroyed rather than made. The project will create free cashflow and the loan will be repaid, but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath. 3. To avoid the competition issue, governments could regulate to change market rules, but banks themselves frustrate this by lobbying against change. If we have agreement on a problem statement, then we are in a position to discuss responses. Your response might well be do nothing, but that should be justified to be credible.
  - credit_guy 3y ago
    > but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath The solution is extremely simple: governments can make the assessment if a project is a net benefit for humanity, and either provide loan guarantees or loan subsidies. Then the banks will be happy to do the thing they do best, provide credit using their existing lending framework.

toast0 3y ago

> On a neutral reading, asking banks to change their practices is a bit like asking Kodak to make digital cameras. Banks are wired for issue of loans using their existing risk analysis tools. Adopting to a new world in which they must onboard new tools to assess climate risk is like asking Nokia to make a good smartphone. I don't understand this whole thing. Kodak pioneered digital cameras. Nokia made several good smartphones.

Biologist123 3y ago
Maybe those aren’t the strong examples I believed them to be. My understanding was that both Kodak and Nokia struggled to adapt to the requirements of a new age, which is the point I’m making about banks, that like many businesses, they are not wired for change.

richrichie 3y ago

The problem here are two fold: 1. benefits of climate change are more like public good 2. as elsewhere many firms went crazy with green washing and ESG is kind of becoming a loaded phrase in corporate speak On 1, private action won’t work unless the govt somehow pays the private actor. So, blaming banks is less effective.

Biologist123 3y ago
Thank you for the opportunity to exchange views on this. I’m currently trying to write up my professional experience. I’m finding it challenging, but your response and the dialogue helps me sharpen my own understanding and thinking. Most of my career has been spent building mechanisms to pay the private actor as you suggest. It works well at one level. But the problem is that there isn’t enough government money in the world to pay off all private actors needed to get to sustainability. The other thing to recognize is that banks create money far more than governments do, and they create it to finance projects which likely destroy more wealth than they create: just not wealth in a strict financial sense. Is blaming banks ineffective? The blame probably lies with the system which allows banks to determine the future, and to make that determination on the basis of what creates narrow financial value to a small group of insiders to the exclusion of other values such as environmental, good relations between people etc. I don’t have any beef with the bank mandate per se, their social utility is the allocation of resources to what society finds most useful. But that valuable mechanism breaks down if non-financial values are excluded from credit-scoring systems.
- richrichie 3y ago
  Thanks for the reply. Is there a better mechanism than financial incentives? I am afraid that is the best working mechanism we have. Planned economies generally have not fared well in history, not only from economic value added perspective, but also from the fascist political systems they produce as a by product. They may get some narrow domains correct, but by and large they are net negative.
  - Biologist123 3y ago

credit_guy 3y ago

> Adopting to a new world in which they must onboard new tools to assess climate risk is like But what exactly are you even asking the banks to do? A green company suffers from the same climate risk as a regular company. Yes, a loan to a green company might reduce the global climate risk, but do you see how you've got a prisoner's dilemma here? A bank that gives a green loan below market rate is basically subsidizing the green transition. That's laudable, but that bank has to compete with other banks that don't make such subsidies. It almost feels like stating a truism: subsidies should come from governments, not from for-profit corporations. Maybe you deplore the whole "for-profit" thing, but that's a dangerous direction to go to. It has been tried before, a number of times, and it did not look that rosy in the end. It's best to work with what you've got: people do business to make a profit. They are not hell bent to destroy the world, but they don't have a motive to save it either. Let them do business, and we as a society we'll take care of saving the world via government action, or via charitable NGOs.

Biologist123 3y ago
> But what exactly are you even asking the banks to do? I don’t think I’m asking banks to do anything in that comment. What I am trying to do is set out a problem statement, and given your knowledge (and handle), I’d greatly appreciate your input on it: 1. Banks have a powerful ability to determine which projects happen and which don’t through the credit mechanism. Because often times no credit = no project. 2. When projects are evaluated on narrow financial criteria, wealth can be destroyed rather than made. The project will create free cashflow and the loan will be repaid, but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath. 3. To avoid the competition issue, governments could regulate to change market rules, but banks themselves frustrate this by lobbying against change. If we have agreement on a problem statement, then we are in a position to discuss responses. Your response might well be do nothing, but that should be justified to be credible.
- credit_guy 3y ago
  > but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath The solution is extremely simple: governments can make the assessment if a project is a net benefit for humanity, and either provide loan guarantees or loan subsidies. Then the banks will be happy to do the thing they do best, provide credit using their existing lending framework.