Week 19: I Guess If We Don’t Talk About It, Then It Doesn’t Happen!

Dear all,

Systemic destruction.

You can pause when reading that short but clear statement and let it land in front of you. Systemic destruction sounds calculated and planned. It is not like havoc. It has a certain level of engineering embedded in it. You need resources, power, and people to make it happen. You need concentration and focus. You also need to know where to hit—and hit hard.

The financial industry has a systemic function in our world, regardless of the value we assign to that function. It is global in nature. What happens in Tokyo echoes in New York and spreads in nanoseconds to London, Paris, and Frankfurt. We know what happens when the global financial system doesn’t work. Once you enter the wonderland of global finance, it can be hard to find a way out. It has its own lingo, rules, and norms—albeit regularly challenged and, occasionally, forcefully changed by politicians. Yet its function is clear: risk and reward. Risk has a price, and reward has a value.

Now, climate change per se is not a risk—at least not if there’s no price agreed upon by the market wizards behind the Bloomberg terminals. Climate change is a macro theme. Yes, it may carry a certain stench of a price when looking at particular supply chains, distant regions, or a handful of companies. But in general—yeah, in general—it bears little weight in the Babel towers of finance.

How is that the case? Well, the cost of the rather brutal consequences of climate change is socialized. Companies never really pay the full price of the externalities they cause through their business operations. And that is perfectly accepted—by politicians, as well as by consumers around the world. It’s the way we have built our world.

No one wants to pay the full price, especially when the basic commodities and necessities of our lives would, in some instances, quadruple in cost if we included the true price of what they actually bear.

The financial industry, on its own turf, does not view—or price, for that matter—the growing cost of global climate change unless it affects risk and reward. Yet if risk is socialized—taken care of by taxes, subsidies, and various forms of political wizardry—there is no incentive to change seats on the sinking Titanic. The first-class passengers have always survived in larger numbers than the masses on the decks below.

Despite all of this—the weakness of climate change as a macro theme in the financial industry—the very existence of it as a potential financial risk apparently needs to be eradicated in some parts of our world.