Paul Gilding's Blog

“Owing to past neglect, in the face of the plainest warnings, we have entered upon a period of danger.  The era of procrastination, of half measures, of soothing and baffling expedients of delays, is coming to its close.  In its place we are entering a period of consequences …We cannot avoid this period, we are in it now…”

Winston Churchill, November 12, 1936

COVID 19 is not a ‘black swan’ – a singular, unexpected event. It is the first in a series of what NYT’s Tom Friedman referred to as a ‘herd of stampeding black elephants’ – multiple, predictable and economically catastrophic events.  Events that everyone knows are coming but our political and business leaders have consciously chosen not to deal with.

Choices have consequences….

Having a global pandemic with devastating economic impacts used to be one of these predictable 1 and catastrophic ‘black elephants’. Then it arrived – but we had chosen not to prepare. The others are now stampeding toward us, including climate change 2 , the collapse of the fossil fuel industry 3, social and economic inequality 4 , ocean and eco-system collapse 5, famine 6, mass refugees 7 and others. As well as their direct economic impact, many will also drive social instability, civil unrest, nationalism, debt and credit crises 8, protectionism, geopolitical realignment and military conflict 9 – further magnifying the economic consequences.  

That these are all stampeding toward us is known. What is unknown is whether we – taking the lessons of COVID-19 – will now decide to make different choices. Will our political and business leaders decide to act? We will we demand they do so?

If we choose not to, the consequences are clear. While each event will have varying national, regional and global economic impacts; collectively, they risk merging into a mega crisis and triggering global economic collapse. That is an arguable risk. But there is near certainty they will together unleash devasting economic, security and social consequences.

So have we suffered enough yet? What would it take to drive the level of transformational change we need – not just on climate change but on inequality, ecosystem collapse and all the others impacts now so clearly on the horizon?

In considering this question, we should first recognise there is no real dispute on the risks. Very few question they are real and coming our way. But we then make three errors.

Firstly, we see them as ‘risks’ i.e. events that could occur, whereas most are as close to certain as the future ever gets.
Secondly, we fail to look at the whole system and therefore miss the negative economic synergies. Synergies that mean they accelerate each other while also making each one harder to manage (e.g.  inequality has driven worse health and economic outcomes from the pandemic).
Thirdly, we suffer from some combination of optimism bias and denial – assuming these events are somewhere ‘out in the future’ and ‘we always figure these things out’. The pandemic was like that. Until it wasn’t. And we didn’t. Observe the consequences.

So why do we – particularly business and political leaders who have both the knowledge and the power to act – get this so wrong? Why do so many still see COVID 19 as a singular economic event, in a linear chain of events, that we will deal with and move on from? 

Partly because each event does have differences in consequences and timescales. For example, COVID-19 is historically unique and sudden in its economic impact. Governments deciding to turn off major parts of the economy, in a relative synchronised global way, has no parallel. Many then assume that because we effectively ‘flicked the switch’ to off, we can just ‘flick it back on’. Then, within a few years, we will get back to growth and things will be ‘back to normal’.

This is a linear view of the global economy. It is profoundly wrong – and incredibly dangerous because it means we aren’t ready for what’s coming.

This is the main reason we misdiagnose the problem. When you consider the system as a system, you can see those other economic events still stampeding towards us.  You also see the negative synergies, which both magnify each of the risks and shorten the time to others.

Even though most people don’t see things this way, it is not a radical thought. Indeed, it is a process very well understood from history. As the Bank of America Merrill Lynch argued in a recent economic analysis of the impacts of the pandemic:

“Historic global crises like wars, revolutions, and pandemics often feel like they put history on fast-forward”…”Processes that normally take decades or longer to play out unfold in a couple of weeks.”

“Coronavirus is the political, economic, and psychological event of our lifetimes that will drive disruption and transformation for years to come. It will bring a radical transformation of the kind that occurs only once in a generation.”

How will this all play out practically? In many and diverse ways, but consider these:

The collapse of the fossil fuel industry – good for climate action but bad for geopolitical stability 10 – has long been understood as a systemic financial risk. The pandemic may have just triggered it 11, leading not just to economic losses but major global power shifts.
The pandemic has highlighted inherent structural weaknesses in some of the worlds largest economies, but none more so than the US. Their weak response to the pandemic combined with inequality will likely tip the US into depression 12  – or worse. Social commentator Umair Haque describes the current state of the US as “A nation in which income, savings, life expectancy, happiness, trust are all in free-fall. This is the stuff of epic social collapse”. I think he’s right. The collapse we’re witnessing will likely lead to violent civil unrest and political chaos – but certainly to ugly polarisation and instability, manufactured trade conflicts, nationalism and protectionism.
Just those two examples, happening on top of the renewable energy and electrified transport revolution already underway, will precipitate massive global shifts in political and economic power – not just from the US to China but more broadly – with far reaching implications 13. As argued by the Bank of America report, it could lead to “….some of the largest shifts in power ever seen in modern economic history.” The US will be an empire in decline, with all the risks that entails.

Events of this nature – if not these precise ones – will almost certainly happen. That’s why most of these ‘risks’ are best understood not as ‘risks’, nor black swans, but as stampeding black elephants. We can see them clearly; we know they are very dangerous and there is a large herd of them racing towards us.

The only way to avoid them is to force a collective recognition amongst policy makers and the business community as to what this is really about. We have a system problem and unless we address it in a systems way, we will fail.  

Will we do so?  Or will we launch some token version of a “Green New Deal” programme, add on a slightly stronger social safety net and call it a revolution? Will we use this opportunity – or will we just apply unfocused monetary policy – basically spend lots of money – still deluded that we can restart the economy as it was?

History is brutal teacher on this topic. As we have seen with COVID 19, it’s only when an existential crisis hits – with direct and immediate impact – that we then embark on truly dramatic change.  Will this crisis be enough to trigger a broader understanding of, and appropriate reaction to, the greater systemic crisis?

The evidence so far is probably not. Not until things get worse. A lot worse. It may or may not be a synchronised global depression, and it may not be global collapse, but it will be very bad, and it will last for a long time.

My writing is often referred to as ‘optimistic’. So let me be clear – I’m not having a bad day. My views on all this – and how it will likely unfold – have largely stayed the same for 25 years. I have a powerful belief in human ingenuity and our capacity to change. I study history and note that when we decide to change, there is virtually no limit to how fast or how dramatically we can do so.

But first we have to decide to change.

This is about choice, not about our capacity to deliver. Each and every ‘black elephant’ is fixable – if we act in time. We have the technology, the financial capacity, the intellect, the humanity and a visceral instinct to survive. But if I dwell on that potential here, I risk triggering your optimism bias and the opportunity for denial.

I don’t want you to think ‘We always figure these things out.’  I want you to face reality. We won’t act until we shift to what activist and writer Margaret Klein Salomon calls “Facing the Truth”. When we face the truth about the state we are in, what’s at risk and how bad it could get – we will act. But that moment is not here yet.

It will get much darker before the dawn.

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On top of the countless human tragedies, there will be many long-lasting social and economic impacts of the COVID-19 pandemic. Perhaps none will be more profound though, than the death of free market fundamentalism and the return of the State.

Why now? After all, there have long been moral, social and environmental risks posed by an unfettered market. Risks that present a strong case for action by the State – with inequality and climate change being the two most glaring examples. It didn’t help.

This is different. COVID-19 presents a blindingly powerful economic case for change. It shows that an ideological, quasi-religious approach to regulating markets, sometimes called neo-liberalism and, until the virus, the dominant political approach in the west, is fatally flawed. It creates a weak and unstable economy, which magnifies risks and is unable to manage shocks1. It threatens itself.

Of course, a pandemic would always have had a very large and disruptive economic impact. However, we can already see that those countries with a coherent, competent, respected and well-resourced State – everything market fundamentalists have sought to undermine – are likely to have both lower economic and human cost.

Thus, market fundamentalism is no longer even in the interests of the corporate sector or the financial elites. It creates unmanageable economic risks and ultimately poses an existential risk to capitalism, as argued by Nobel Prize winning economist, Joseph Stiglitz2. Therefore, any corporate or finance leader who continues their knee jerk support for actions to ‘free up markets, ‘reduce taxes’, to ‘get government out of the way’, will now know the consequences.

This is not about being for or against ‘the market’ or the ‘corporate sector’. It is not about ‘curbing corporate power’ or developing ‘an alternative economic system’. Capitalism, correctly defined and well managed, can be a powerful and effective component of an intelligently designed, democratic and fair society.

However, what has clearly failed is seeing markets as a kind of pure ideology. This type of extremist fundamentalism is just like Islamic fundamentalism that encourages terrorism, or Christian fundamentalism that oppose science. Fundamentalism drives a thoughtless, evidence free corruption of the original idea.

Markets at their core can work. When well-regulated, they are an efficient and effective way to organise certain activities. They are a useful part of a system – but are not a system in themselves. Left alone they do not solve all problems nor meet all social needs. That is why the return of the State is key to building a stable economy. As that bastion of capitalism, the Financial Times, argued in a recent editorial:

“Radical reforms — reversing the prevailing policy direction of the last four decades — will need to be put on the table. Governments will have to accept a more active role in the economy. They must see public services as investments rather than liabilities, and look for ways to make labour markets less insecure. Redistribution will again be on the agenda; the privileges of the elderly and wealthy in question. Policies until recently considered eccentric, such as basic income and wealth taxes, will have to be in the mix.”

I am not naïve to the fight back that will come. Proponents of market fundamentalism will desperately try to claw back government spending and fight against the inevitable push for higher taxes and stronger services. This fightback must be opposed. But to be successful such opposition will need to include – perhaps even be led by – many of those same powerful elites that previously advocated, or at least turned a blind eye to, the market as an ideology.

Why would they do so?

Firstly, they will have the consequences of the failure to manage economic risks seared into their memories by COVID-19. But many will also recognise that this is just the first of many risks on the way that are, like the virus, completely predictable based on solid scientific evidence3.  

Rather than an unexpected “black swan” event, the virus is just the first in a herd of stampeding black elephants racing towards us: climate change, ecosystem breakdown, deforestation, water shortages, food crises triggering geo-political conflict, ocean acidification, inequality and many more. These will impact the global economy like a rolling series of COVID-19 viruses, with no vaccines possible, and lasting for decades. The Great Disruption is now clearly underway.

This is the future our economy will need to be managed through. The return of the State and a well-regulated market economy will be the only chance we have to do so.

COVID-19 gives us clear evidence that market fundamentalism is a failed economic strategy. Interpreting markets as an ideology or quasi-religious belief system, results in unmanageable and systemic economic risks. Any corporate or financial system leader who doesn’t now become an advocate for a strong, well-resourced and respected State, decent taxes and a strong social safety net, will share responsibility for the decline of capitalism.

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“The last global crisis didn’t change the world. But this one could”

William Davies

It was always going to come to this. Whether it was a pandemic triggering a shutdown, a climate emergency bursting the carbon bubble, a populist backlash against inequality, wars over water or countless other possible triggers, this moment has long been inevitable.

COVID-19 is just like a match thrown on a tinder dry forest floor on a hot windy day and starting a wildfire. The match isn’t the key – it’s where it lands.

While of course a pandemic would always be an enormous economic and health challenge, the context in which it lands is the key to our ability to manage it. Thus, we now see our economic system’s inherent instabilities clearly exposed. The house of cards is collapsing.

Won’t this all pass? We’ll find a cure, develop a vaccine, boost the economy and then everything will get back to normal. It’ll take a few years, but we’ll get back on track. Right?

Wrong, very wrong.

We are at the beginning of a process with an uncertain end. It could be a major recession, a full-scale depression, or a slide into systemic collapse. Or it could be a turning point – where we recover and build a very different kind of economy, one defined by sustainability and resilience with a focus on improving human well-being. This range of outcomes is uncertain. What is certain is that we are not going back to how things were.

Why?

We should always remember the true meaning of the word ‘unsustainable’. You can never be sure when, or how it will happen, but one thing you can be very sure of is this: when things are unsustainable….they will stop.

When I wrote my book “The Great Disruption” in 2011, I laid out this argument. At that time, I thought the climate crisis was the most predictable trigger point for a crisis that would drive system change. Basic physics showed that increasing emissions would, in the end, force an existential crisis. But like the match, the trigger is not the key. The book’s main focus was the broad global system and its inherent unsustainability – and why a major disruption was inevitable.

In summary the argument I made was this.

An economy and human society built on the concept of infinite compound economic growth was, by itself, obviously ultimately unsustainable. It’s like COVID-19 cases doubling several times a week – in a short time you go from a worrying number, to a collapsed health system and social chaos. On a longer timeframe, it’s the same with infinite economic growth.

On top of that, I argued there were a series of ‘system overload’ points built into our economy – points that when reached would inevitably trigger a system wide crisis.

These included:

the emissions causing climate change and with it, water shortages, conflict, extreme weather and food crises;inequality causing political instability, polarisation and protectionism;global poverty causing geopolitical instability, conflict and refugee crises;the delusional idea that when things get tough you can just ‘print more money’ – making the house of cards taller, and more unstable.

Thus, we had built a system that, as a whole, behaved in a predictable way. There was always uncertainty what the trigger would be, but certainty that the moment would come. When things are unsustainable… they will stop.

Then comes The Great Disruption.

“Economic contagion is now spreading as fast as the disease itself”

Harvard Business Review – March 2020

Here we are in 2020. The house of cards is tumbling down and the inherent weaknesses of the system are being exposed – making the virus spread faster and the economic crash harder.

Inequality means the virus spreads faster because of the lack of access to services1;Our reliance on centralised fossil fuel supplies, especially oil, exacerbates financial system risks and geopolitical instability as the economy declines2;Huge levels of debt, incurred to keep the system afloat, put huge risks into the global financial markets, that the virus’s economic impacts could now tip over the edge3;Neo-liberalism’s4 success in reducing both the resources and the authority of the state, leaves many countries ill equipped to manage such a rapidly moving crisis, thereby magnifying the economic crash.

Meanwhile governments vacillate between impossible choices – crash the economy and risk a global depression or crash the health system and kill millions, risking social chaos.

The dreadful thing about the coronavirus is that it is all happening so quickly. This leaves little capacity to reflect on the system wide lessons and how we can avoid spiralling into an ongoing crisis, or worse.

However, like any crisis and deep instability, we owe it to ourselves to understand, and act on, the lessons being learnt. As William Davies5 argued “To experience a crisis is to inhabit a world that is temporarily up for grabs.”

We can no longer prevent the COVID-19 crisis. We can only manage it aggressively to reduce suffering, loss of life and economic impact. However, we can still learn the lessons being thrust in our faces and drive the change needed to prevent future crises. Climate change is still coming at us hard and fast. We can reduce the inequality which will make future crises worse and harder to manage. We can recognise the benefit of our actions and economy being guided by science and expertise rather than ideology. And we can recognise that market economics is a useful tool, but not an ideology nor a way to run our lives – and therefore strong and competent government is central to human progress.

I now find myself with time – thankfully isolated with my family on our farm in rural Tasmania, Australia. So, I will be putting my mind to reflections on these questions and sharing them with you here – in the Cockatoo (Corona) Chronicles.

The future is still ours to make. We can respond to this pandemic by acting to prevent future crises from overwhelming us. We have tinder dry fuel across the whole global system. If we don’t act to reduce it, a fire like this one could one day sweep all before it.

There will be no vaccine for a global disruption triggered by climate change, inequality or ecosystem degradation. It’s time to pay attention. The Great Disruption is underway.

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Wall Street’s denial of climate dangers is setting us up for a 2008-style financial explosion where “risk spreads in a way that cannot be contained or isolated”.

Graham Steele, Stanford Graduate School of Business, December 2019

You can pretty much hear it now. It’s like being in a forest and hearing the leaves rustling in the tops of trees, just before the storm hits. Then it comes with a roar, everything shakes, and we look around wondering what will fall – and will it fall on us.

This is how I see the global economy and climate change. Everything is ready, everyone knows it’s coming, we’re just waiting for the storm to hit.

When it does, it will be the climate emergency meets financial contagion.1 When the global market flips to FOMO2 – from fear of acting too early, to fear of being left behind as everyone races for the exits.

This moment was always going to come, and it was always going to be messy. Markets rarely move smoothly. But why now? Simply because all the practical economic and financial impediments are gone. The financial logic of acting is now impeccable, meaning the only thing left is for there to be a shift in sentiment – that moment of an intangible, hard to define flip in how the decision makers in the market see the world.  That can happen overnight. And because markets hunt in packs – when they go, they’ll all go.

There are four critical factors that lead me to conclude this shift in sentiment is now imminent – anytime from tomorrow morning to 2025, but not later.

The technology to dramatically lower emissions is available, scalable, superior and investable.Physical climate change is obvious and accelerating.Public engagement and political momentum are rapidly turning.The financial markets are primed – from central banks, to lenders to stock markets.

The scale of change that will result – and the likely timing – can only be understood by the way these factors interact in combination, as a system. This is the way to understand markets and forecast their behaviour.

Key to this, and perhaps most critically, is the way markets behave synergistically with politics and public sentiment. The markets are not abstract machines. They are run by people who feel, think and fear. They see what we see.

To explore all this, I’ll first expand on these four factors and then explore how they will interact and drive a financial contagion across the global market. A contagion that will tip the system into a new state.

The Four Factors Shifting Market Sentiment

1. The technology to aggressively act on climate change is ready – it’s available, scalable, superior and investable. This is a real game changer. It has long been the case that the technology was available, but it was less developed, not widely deployed and more expensive. It was therefore assumed policy would be needed before it would go to scale – policy to address the market failure of not pricing climate change risks. Now, across energy,3 transport4 and food,5 countless climate solutions are not just available, but are broadly superior in performance to incumbent offerings. In most cases, they are also cheaper or at least price competitive6 and will keep getting more so. As a result, they are investable propositions today and capital is flowing into them at scale.7 Taken together this means deployment could easily be ramped up and there would be considerable economic benefit in doing so.8

2. Physical climate change is now obvious and accelerating9 – with two critical impacts. Firstly, it is being viscerally felt by the public10 and that drives public sentiment11 which increases the pressure for a political response.12 If the markets believe a policy response is more likely in the future, they will start to price future market impacts today. Secondly, physical climate impacts bring the economic implications of the physical risks into much sharper focus. This applies to physical infrastructure,13 real estate, 14 agriculture15 and the cost and availability of insurance.16 When climate change ceases to be an abstract future risk and is all around you, it is more likely to impact decisions on lending risk, insurance premiums, hedging strategies and much else. When cities like Sydney are blanketed in smoke from unprecedented bushfires, the humans that make market decisions start thinking.

3. Public sentiment and political momentum are turning and will soon be unstoppable. It might be hard to see in the era of laggard politicians like Trump and Bolsanaro, but they are the last hurrah of a dying philosophy and world view. The political context is shifting, driven by two factors. Firstly, by a new generation of vigorous and uncompromising climate activism that both represents and builds a new political momentum. Secondly by the irrefutable business and economic logic of the need to act, 17 and the huge opportunity in doing so. When business and activists both demand change, politicians resist at their peril.

4. The financial markets are primed to act at scale. They are just waiting for the tide to turn. Then FOMO will click in and contagion will erupt. While markets have so far only acted at the margins in terms of global market impact, those actions show they are paying attention, and are waiting for the moment. Signs include government bonds being sold due to climate risk,18 the recent fizzled IPO of Saudi Aramco,19 high valuations of plant-based food companies and the continued slide in value of the oil majors.21 Central banks and regulators are now wide awake to the systemic risks. The market is engaged and waiting. And remember they hunt in packs.

By considering these factors together and in particular by understanding how synergies between them could drive contagion across the system, we can start to see how a market tipping point could occur – and do so any day.

Let’s consider a few potential examples of the reinforcing interactions.

Climate Contagion and Energy

For capital to decide to leave the fossil fuel industry at scale – perhaps the most significant indicator of climate contagion being underway – two things need to happen.

First there needs to be a viable competitor for capital to go to. With the technology to replace the industry now superior, cheaper and ready to scale – that’s done. Secondly, there needs to be a perceived risk of loss if the capital stays where it is – the risk of being late to the exits.23 The key issue that will drive this loss of value is not the level of demand today, but the level of belief that demand will be there in 10 – 20 years’ time. This is key because the fossil fuel industry today invests hundreds of billions of dollars every year finding and proving new reserves to meet the assumption of strong demand in 10 – 20 years. That future demand assumption is based on a belief that climate change is a ‘future’ risk, that policy is not imminent, that the public isn’t engaged and that the new technologies aren’t ready to scale.

Those assumptions were all true 20 years ago. Now they are all wrong. If the market starts to believe that demand won’t, or even might not be there in 10-20 years,24 then hundreds of billions is suddenly wasted every year. If that sentiment turns, the value is gone.25 The already struggling oil and gas majors will not then transform, they will just fail, as incumbents usually do.26

“…the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors”. 

BNP Paribas September 2019

Climate Contagion and Policy

To date, climate policy has been effectively resisted by the likely losers – largely the fossil fuel industry – using the argument that policy would cause economic loss not just to them, but to society as a whole. But what if the reverse were now true? What if it became accepted that strong climate policy would reduce economic loss and even increase economic gain?27 Then the rest of the business community would become a lobby for climate policy.

What could turn that tide? There are a number of ways the above four factors could reinforce each other to this end.

Physical climate impacts and youth driven activism are together changing public sentiment, driving much stronger public concern and demand for policy.  The intensity of both youth activism and climate impacts are likely to increase.This also weakens the resistance to policy, with incumbent industries losing their social licence and with it their political power. The fossil fuel industry is becoming increasingly toxic to support28 and this can have very real financial impact given the extent to which the industry depends upon subsidies and other policy support. The zero emissions solutions (that policy would help deliver), are now largely superior for consumers and society,29 are lower in cost and are ready to scale. With the solutions bringing significant broad economic benefit, it makes policy easier to put in place.Taken together, this means most of the business community will be economic losers without climate policy and will benefit from it being put in place.

This all makes policy far more likely – especially in the 5 to 10 year timeframe. But again, it is critical to understand the synergies and not to see this as a linear process – with policy leading to later market change. While it is the case that policy drives change in markets – indeed that is usually the reason for it – market change also accelerates policy. It does so by pricing in a belief that it is coming – which reduces the value of assumed future policy’s losers and increases the value of its winners. Then, because policy makers are nervous about policy having negative economic impact, the more they see the market moving ahead of policy, the more likely they are to put in place policy that will accelerate this. So again, sentiment is key.

Climate Contagion in Action

When we focus on “markets”, most people think about the stock market. But markets are more complex than this – they are a broad and diffuse system comprised of a near infinite array of interconnected and interdependent components.

Risks and future assumptions are priced into this system in many ways. So, when assumptions change, the impacts cascade from one component to the next. It can be government bonds being repriced or sold due to climate risk; re-insurers managing risk exposure by capping coverage for retail insurers in certain geographies, forcing increased premiums or the removal of cover to avoid bankruptcy;30 infrastructure becoming de-valued or harder to borrow for, due to climate risk; corporate bonds increasing in cost, tipping shaky industries over the edge. This is how contagion spreads. Filtering through an economy and impacting value in many diffuse ways.

It is easy to imagine how this could unfold for the fossil fuel industry. With future demand looking increasingly shaky, due to clean technology getting cheaper every year and policy to support it more likely, demand forecasts are downgraded and the market value of fossil fuel producers decreases. Corporate debt increases as asset values drop and money has to be borrowed to pay dividends to restless shareholders. With the trend being global, assets cannot be sold to pay-off debt as they are not worth their book value.

Meanwhile, ratings agencies see declining asset value and increasing debt and downgrade company credit ratings making debt more expensive. Major institutional investors see these financial risks but are also sensitive to public sentiment, so reduce their exposure and share prices fall further. The companies’ debt grows closer to its value, its political influence and social licence evaporate, and its own people lose faith in their employer’s future. It’s too late to transform and they enter a death spiral.

But this is not just about fossil fuels. It may start there but will then have knock on impacts across the whole economy, because many sectors and countries are deeply exposed to climate risk.31 The state of Queensland, Australia, provides a perfect real-life case study of the potential for such contagion.  It provides a clear example of how this could spread across economies.

The state’s tourism slogan is “Queensland – Beautiful One Day, Perfect the Next.” 

Queensland’s economy is heavily focused on coal mining (now in global decline),32 agriculture (suffering successive droughts),33 tourism around its natural wonders including the Great Barrier Reef (which may not survive)34 and tropical rainforests (now burning)35 and a warm, beach front lifestyle that is highly attractive to retirees (whose water front property is now threatened by sea level rise and could be slashed in value and become uninsurable).36

A few weeks ago, the Swedish Central Bank announced it had sold all its Queensland Government Bonds37 due to the state’s heavy exposure to climate risk.

Queensland – Beautiful One Day, Too Risky the Next.  

So it begins.

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Wall Street’s denial of climate dangers is setting us up for a 2008-style financial explosion where “risk spreads in a way that cannot be contained or isolated”.

Graham Steele, Stanford Graduate School of Business, December 2019

You can pretty much hear it now. It’s like being in a forest and hearing the leaves rustling in the tops of trees, just before the storm hits. Then it comes with a roar, everything shakes, and we look around wondering what will fall – and will it fall on us.

This is how I see the global economy and climate change. Everything is ready, everyone knows it’s coming, we’re just waiting for the storm to hit.

When it does, it will be the climate emergency meets financial contagion.1 When the global market flips to FOMO2 – from fear of acting too early, to fear of being left behind as everyone races for the exits.

This moment was always going to come, and it was always going to be messy. Markets rarely move smoothly. But why now? Simply because all the practical economic and financial impediments are gone. The financial logic of acting is now impeccable, meaning the only thing left is for there to be a shift in sentiment – that moment of an intangible, hard to define flip in how the decision makers in the market see the world.  That can happen overnight. And because markets hunt in packs – when they go, they’ll all go.

There are four critical factors that lead me to conclude this shift in sentiment is now imminent – anytime from tomorrow morning to 2025, but not later.

Clean technology is available, scalable, superior and investable.Physical climate change is obvious and accelerating.Public engagement and political momentum are rapidly turning.The financial markets are primed – from central banks, to lenders to stock markets.

The scale of change that will result – and the likely timing – can only be understood by the way these factors interact in combination, as a system. This is the way to understand markets and forecast their behaviour.

Key to this, and perhaps most critically, is the way markets behave synergistically with politics and public sentiment. The markets are not abstract machines. They are run by people who feel, think and fear. They see what we see.

To explore all this, I’ll first expand on these four factors and then explore how they will interact and drive a financial contagion across the global market. A contagion that will tip the system into a new state.

The Four Factors Shifting Market Sentiment

1. The technology to fix climate change is ready – it’s available, scalable, superior and investable. This is a real game changer. It has long been the case that the technology was available, but it was less developed, not widely deployed and more expensive. It was therefore assumed policy would be needed before it would go to scale – policy to address the market failure of not pricing climate change risks. Now, across energy,3 transport4 and food,5 countless climate solutions are not just available, but are broadly superior in performance to incumbent offerings. In most cases, they are also cheaper or at least price competitive6 and will keep getting more so. As a result, they are investable propositions today and capital is flowing into them at scale.7 Taken together this means deployment could easily be ramped up and there would be considerable economic benefit in doing so.8

2. Physical climate change is now obvious and accelerating9 – with two critical impacts. Firstly, it is being viscerally felt by the public10 and that drives public sentiment11 which increases the pressure for a political response.12 If the markets believe a policy response is more likely in the future, they will start to price future market impacts today. Secondly, physical climate impacts bring the economic implications of the physical risks into much sharper focus. This applies to physical infrastructure,13 real estate, 14 agriculture15 and the cost and availability of insurance.16 When climate change ceases to be an abstract future risk and is all around you, it is more likely to impact decisions on lending risk, insurance premiums, hedging strategies and much else. When cities like Sydney are blanketed in smoke from unprecedented bushfires, the humans that make market decisions start thinking.

3. Public sentiment and political momentum are turning and will soon be unstoppable. It might be hard to see in the era of laggard politicians like Trump and Bolsanaro, but they are the last hurrah of a dying philosophy and world view. The political context is shifting, driven by two factors. Firstly, by a new generation of vigorous and uncompromising climate activism that both represents and builds a new political momentum. Secondly by the irrefutable business and economic logic of the need to act, 17 and the huge opportunity in doing so. When business and activists both demand change, politicians resist at their peril.

4. The financial markets are primed to act at scale. They are just waiting for the tide to turn. Then FOMO will click in and contagion will erupt. While markets have so far only acted at the margins in terms of global market impact, those actions show they are paying attention, and are waiting for the moment. Signs include government bonds being sold due to climate risk,18 the recent fizzled IPO of Saudi Aramco,19 high valuations of plant-based food companies and the continued slide in value of the oil majors.21 Central banks and regulators are now wide awake to the systemic risks. The market is engaged and waiting. And remember they hunt in packs.

By considering these factors together and in particular by understanding how synergies between them could drive contagion across the system, we can start to see how a market tipping point could occur – and do so any day.

Let’s consider a few potential examples of the reinforcing interactions.

Climate Contagion and Energy

For capital to decide to leave the fossil fuel industry at scale – perhaps the most significant indicator of climate contagion being underway – two things need to happen.

First there needs to be a viable competitor for capital to go to. With the technology to replace the industry now superior, cheaper and ready to scale – that’s done. Secondly, there needs to be a perceived risk of loss if the capital stays where it is – the risk of being late to the exits.23 The key issue that will drive this loss of value is not the level of demand today, but the level of belief that demand will be there in 10 – 20 years’ time. This is key because the fossil fuel industry today invests hundreds of billions of dollars every year finding and proving new reserves to meet the assumption of strong demand in 10 – 20 years. That future demand assumption is based on a belief that climate change is a ‘future’ risk, that policy is not imminent, that the public isn’t engaged and that the new technologies aren’t ready to scale.

Those assumptions were all true 20 years ago. Now they are all wrong. If the market starts to believe that demand won’t, or even might not be there in 10-20 years,24 then hundreds of billions is suddenly wasted every year. If that sentiment turns, the value is gone.25 The already struggling oil and gas majors will not then transform, they will just fail, as incumbents usually do.26

“…the economics of oil for gasoline and diesel vehicles versus wind- and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policymakers and the oil majors”. 

BNP Paribas September 2019

Climate Contagion and Policy

To date, climate policy has been effectively resisted by the likely losers – largely the fossil fuel industry – using the argument that policy would cause economic loss not just to them, but to society as a whole. But what if the reverse were now true? What if it became accepted that strong climate policy would reduce economic loss and even increase economic gain?27 Then the rest of the business community would become a lobby for climate policy.

What could turn that tide? There are a number of ways the above four factors could reinforce each other to this end.

Physical climate impacts and youth driven activism are together changing public sentiment, driving much stronger public concern and demand for policy.  The intensity of both youth activism and climate impacts are likely to increase.This also weakens the resistance to policy, with incumbent industries losing their social licence and with it their political power. The fossil fuel industry is becoming increasingly toxic to support28 and this can have very real financial impact given the extent to which the industry depends upon subsidies and other policy support. The solutions (that policy would help deliver), are now largely superior for consumers and society,29 are lower in cost and are ready to scale. With the solutions bringing significant broad economic benefit, it makes policy easier to put in place.Taken together, this means most of the business community will be economic losers without climate policy and will benefit from it being put in place.

This all makes policy far more likely – especially in the 5 to 10 year timeframe. But again, it is critical to understand the synergies and not to see this as a linear process – with policy leading to later market change. While it is the case that policy drives change in markets – indeed that is usually the reason for it – market change also accelerates policy. It does so by pricing in a belief that it is coming – which reduces the value of assumed future policy’s losers and increases the value of its winners. Then, because policy makers are nervous about policy having negative economic impact, the more they see the market moving ahead of policy, the more likely they are to put in place policy that will accelerate this. So again, sentiment is key.

Climate Contagion in Action

When we focus on “markets”, most people think about the stock market. But markets are more complex than this – they are a broad and diffuse system comprised of a near infinite array of interconnected and interdependent components.

Risks and future assumptions are priced into this system in many ways. So, when assumptions change, the impacts cascade from one component to the next. It can be government bonds being repriced or sold due to climate risk; re-insurers managing risk exposure by capping coverage for retail insurers in certain geographies, forcing increased premiums or the removal of cover to avoid bankruptcy;30 infrastructure becoming de-valued or harder to borrow for, due to climate risk; corporate bonds increasing in cost, tipping shaky industries over the edge. This is how contagion spreads. Filtering through an economy and impacting value in many diffuse ways.

It is easy to imagine how this could unfold for the fossil fuel industry. With future demand looking increasingly shaky, due to clean technology getting cheaper every year and policy to support it more likely, forecasts are downgraded and the market value for producers decreases.  Corporate debt increases as asset values drop and money has to be borrowed to pay dividends to restless shareholders. With the trend being global, assets cannot be sold to pay-off debt as they are not worth their book value. Meanwhile, ratings agencies see declining asset value and increasing debt and downgrade company credit ratings making debt more expensive. Major institutional investors see these financial risks but are also sensitive to public sentiment, so reduce their exposure and share prices fall further. The companies’ debt grows closer to its value, its political influence and social licence evaporate, and its own people lose faith in their employer’s future. It’s too late to transform and they enter a death spiral.

But this is not just about fossil fuels. It may start there but will then have knock on impacts across the whole economy, because many sectors and countries are deeply exposed to climate risk.31 The state of Queensland, Australia, provides a perfect real-life case study of the potential for such contagion.  It provides a clear example of how this could spread across economies.

The state’s tourism slogan is “Queensland – Beautiful One Day, Perfect the Next.” 

Queensland’s economy is heavily focused on coal mining (now in global decline),32 agriculture (suffering successive droughts),33 tourism around its natural wonders including the Great Barrier Reef (which may not survive)34 and tropical rainforests (now burning)35 and a warm, beach front lifestyle that is highly attractive to retirees (whose water front property is now threatened by sea level rise and could be slashed in value and become uninsurable).36

A few weeks ago, the Swedish Central Bank announced it had sold all its Queensland Government Bonds37 due to the state’s heavy exposure to climate risk.

Queensland – Beautiful One Day, Too Risky the Next.  

So it begins.

The climate strikes over the coming weeks will focus a great deal of attention on government and the urgent need for policy action. Rightly so. But it’s also a good time to reflect on the bigger context, as this is not anything like protests of the past.  There has in fact, never been a point like this in all of human history.

I called this column ‘choosing extinction’ because that is the path we are on today. There is considerable debate whether that extinction applies to us humans, or ‘just’ to millions of other species. But either way a mass extinction event is on the way, unless we choose to stop it.

What we now know, is that we are facing a time sensitive, existential risk. Failing to respond adequately, could commit humanity to widespread misery for hundreds and possibly thousands of years. It could literally change the course of evolution and human history.

We are well advised on the risks and they are clear and material. Not certain, but nor unlikely. The evidence is very clear and it tells us:

The scale and level of risk — it threatens civilisation; The scale of change required — the transformation of the global economy; and The speed with which this transformation must be delivered — largely within a decade. 

What this means is we have been warned of an imminent danger. Not just a danger to our prosperity or our level of progress but a danger to the very existence of organised civilisation. We know how to fix this and we know we can afford to do so. 

Now it’s time to decide. 

To decide whether humanity will continue on its long social, cultural and economic path of exploring and fulfilling our potential. Whether to find out what we are capable of. 

To decide how many of the world’s 8.7 million species we will allow to live and continue on their evolutionary path.

And to decide how many we will choose to destroy, presumably never to come back.  Perhaps including our own.

We know all this. Yet we sit idly by, as the evidence mounts and the risks get greater, paralysed in various ways by ignorance, despair, delusion and fear. There should be no surprise in this, it is the path we have always taken in response to existential risk, even at smaller scale like WWII, which continues to be the closest analogy. 

The big difference in this case however, is that the existential risk applies to our whole planetary civilisation. With this, there is no historical parallel.  Not since the dinosaurs. But unlike the dinosaurs, we are consciously aware of the risks, we fully understand them, and we can choose to address them. 

We know exactly what we need to do. We cannot be certain of success if we act, but we can be pretty certain of catastrophe if we don’t.

Some argue it is hopeless, that there is no chance of success. In war this attitude would be considered treason – aiding and abetting the enemy. Such people have nothing to contribute on this topic, except to serve the interests of today’s ‘enemy’ – those who resist and delay change. They should cease all public comment and keep to themselves.

Some argue we may not succeed, that we may have left it too late. They are correct, we may have. But there is no evidence – nor can there be ahead of time – that we have done so. There is, therefore, no reason for this possibility to influence our decisions or actions today. There will be a future – our kids will live in it. We get to choose what it will be like.

What we have to do now is simple. We have to decide – do we choose extinction? Or do we choose to fight it? To rebel against it. To stand in its way.

To do all we can possibly do, to get humanity on a different path.

That is our choice. And each and every one of us now gets to decide. That’s why we’re in the streets. That’s why this matters…..like never before.

 

It has always been clear that fixing climate change would require a massive industrial and technological transformation, with widespread social and economic consequences. The recent the UN Intergovernmental Panel on Climate Change (IPCC) Special Report on 1.5 degrees however deeply challenges dominant assumptions about the speed and scale involved.

This has profound implications for many industries and policy makers, but perhaps most dramatically for the future of the multi-trillion-dollar fossil fuel industry, particularly the oil and gas majors (the coal industry now being in terminal decline regardless).

For the last few years, I have been examining what to expect in such major economic transformations – from both large incumbents and disruptive new players.

The evidence suggests that when business models are overturned, the dominant tendency of large incumbent companies is to fail. That led me to question the assumption that these giant oil and gas companies would transition to become the giant energy companies of the future.

Central to any such analysis is the science, as this will ultimately drive how society acts and in particular at what speed. The IPCC recently told us that to achieve a safe climate we must reduce CO2 emissions by nearly half by 2030 (vs 2010) and to net zero by 2050 (1). The science is very straightforward. We either achieve that outcome or face the existential risk of runaway climate change and economic collapse. Doing the latter would be madness. So despite today’s lack of political attention, it is reasonable to assume we will act – dramatically and soon – in the face of such an urgent existential risk.

For the oil and gas industry that has very clear implications. The market for their product (for use as energy) could halve within 10 years and then decline to zero thereafter. If you find this hard to imagine, you must assume we will knowingly choose collapse instead. I would argue humanity may be slow, but we are not stupid.

It is therefore important to think realistically about how such transitions occur and how society and the market will manage this one. Separately – and it is a quite separate issue – we also need to ask if there is a realistic likelihood of today’s oil and gas companies transitioning as corporate entities. Do they have a future? Or will they just fail – as incumbents most often do when faced with such dramatic market change?

We must first acknowledge that the business challenge facing oil and gas majors is mind boggling in speed, complexity and scale. As I argued in some detail in this article this is not only a change in technology. It is total business system change – different technologies, price and cost cycles, valuations, supply chains and business cultures. It is effectively a transition from a centralised long-life resource business to a distributed consumer technology business. It simply couldn’t be more different.

So the transformation is inherently very difficult anyway, even without the issue of speed.

Also, let me be crystal clear on something I think most people get wrong – and as I did before this research.   The question is not could they change, or should they change. Nor is it would it be better for society if they change. Those questions really don’t matter. This is a market question not a social or moral one.

Only one question actually matters: “On the balance of probabilities, given the way markets work and based on real evidence, what is the likelihood they will change.”

Timing is a really critical issue. If they act too late, they will fail. As one of Britain’s most influential energy experts Professor Paul Stephens said, the choice for oil and gas companies is stark. It is between an urgent and radical change in business model – with a strategy of managed decline but ultimate survival on a much smaller scale – or, “what remains of their existence will be nasty, brutish and short.”

In my work, I have considered five key factors, drawing conclusions on each and then overall. (This blog post is a summary of my full analysis which can be found here.)

The speed of transition now required – 12 years to have cut CO2 emissions by around 50% with continued rapid decline thereafter;

Conclusion: Nothing short of dramatic and rapid transformation by the International Oil Companies (IOCs) will see them survive, given how markets value them.

The economicviability of Carbon Capture and Storage (CCS) technology for energy production vs the dramatically falling costs for renewables and storage;

Conclusion: CCS may well be useful for society, but it will do little to support the use of oil (not relevant to how it’s used) and gas (not price competitive) for energy.  It will at best be a marginal issue for IOCs.

The viability of a transition strategy – does it actually make business sense for IOCs to become energy companies (thus would the market support IOCs doing so)?

Conclusion: In many ways, becoming energy companies would be the mostdifficult transition strategy for oil and gas companies. Even more so when the required speed is taken into account. There are different, more logical transition strategies, but they all imply smaller, leaner companies.

The evidence of the real business behaviour of large listed IOCs over the 30 years since the existential threat to the industry’s future became clear.

Conclusion: The industry has already lost the race to become energy companies. They are now up against “built for purpose” companies that are large, well-financed and have the right culture. These new companies are way ahead and the oil and gas majors will not catch up.

The behaviour of financial markets with respect to incumbents and disruptors during major economic transitions.

Conclusion:  The attitude of the financial markets to incumbents vs disruptors makes profound transitions by incumbents very hard. Consider the gap between how markets value GM vs Tesla despite stock pricing fundamentals. And that is not a profound business model change.

Given this context, I have concluded that dominant assumptions regarding the transition of the oil and gas companies are wrong. The evidence suggests it is far more likely they will fail. The recent IPCC report makes this even more likely because of the speed of change. The market will soon come to the same conclusion and price in this risk accordingly. Considering the way markets work and capital flows – and observing the history of other incumbents that have failed – this will then trigger a market spiral of irreversible decline.

 

This blog post is a summary. The paper with my full analysis can be found here.  

 

(1)  IPCC 1.5 degree report http://www.ipcc.ch/report/sr15/  Note these reductions are from 2010 levels, with the task actually greater given 2018 emissions are higher. And this is for a low level of certainty of achieving the 1.5 degree goal (about 50% likelihood).

 

The only rational response to the scientific evidence on climate change, is to declare a global emergency – to mobilise all of society to do whatever it takes to fix it. As the UN Secretary General Guterres recently stated: “We face a direct existential threat”.

Failure is really not an option when “failure” means we could “annihilate intelligent life or permanently and drastically curtail its potential”  This is now a war for civilisation’s survival. [1]

Meanwhile we blunder on…. Deeply committed to making verbal commitments, while delivering pathetically inadequate actual responses. Responses that treat the clear and urgent advice of the world’s top scientists – that we face the risk of global collapse – as merely passing thoughts to be casually contemplated.

Well, time’s up. To quote Winston Churchill: “Owing to past neglect, in the face of the plainest warnings, we have entered upon a period of danger.  The era of procrastination, of half measures, of soothing and baffling expedients of delays, is coming to its close.  In its place we are entering a period of consequences …We cannot avoid this period, we are in it now…”

Enter the Extinction Rebellion.

This is group of people who have simply had enough. They have looked at the science and concluded that the world has gone mad, that we now face the risk of extinction. And they’ve decided not to stand by in the face of that – but instead to rebel against the madness that has overtaken us. To try to shock us all into action, to face up to reality.

Extreme? Over-reaction? Maybe. But maybe not.

Of course, we can’t know for sure. The crucial mistake we tend to make in complicated issues like climate, is to fail on very basic risk assessment and management. We don’t knowsociety definitelyfaces collapse, so we assume (or hope) it won’t and act accordingly. This is madness. If your doctor told you, “on balance I think your child will be dead in five years – I can’t be sure but the best medical science suggests a 90% likelihood. However, if you take these simple steps – steps that will be quite inconvenient and disruptive but totally doable – the likelihood of their death will fall to 5%.” What would you do? Wait for certainty? Which could only come when your child was on their death bed? Madness.

That’s the point of the Extinction Rebellion. To make us all stop and think – to ask the simple question: Am I really paying attention? To what I know, to what we all now know?

The big question is whether this will be any different from the past 30 years of climate activism. It may of course not be. We have shown an incredible ability to stay in denial about what is now asked of us. But it may also be very different. Why? I suggest five reasons.

Civil Disobedience at (potentially) large scale.

To date most climate activism has been advocacy for policy, with a relatively small focus on direct action protests. When the latter has occurred, it has focused on specific activities e.g. Keystone and other pipelines, new coal mines. Important and often powerful, but the debate then tends to then go those particular developments, with the global climate issue as the context. Extinction Rebellion (XR) proposes something quite different. They plan civil disobedience blockades at scale – and if they get sufficient support, to shut down cities. To stop the world and make us think. It’s kind of Occupy Wall St meets the Arab Spring and Tahir Square, but armed with the world’s top science and clear, practical and actionable solutions.

Civil Disobedience has a strong and powerful history in political and social change, including the civil rights, suffragette and peace movements and in bringing down many autocratic governments. In today’s political context, it may become a powerful, hopeful and emotionally engaging way for young people to respond to the despair and frustration they feel.  XR may be flooded with people joining them. As Greta Thunberg – the Swedish 15 year old who started the School Strike For Climate said: “We’re facing an immediate unprecedented crisis that has never been treated as a crisis and our leaders are all acting like children. We need to wake up and change everything.”

The science is now crystal clear. This is an emergency.

Civil disobedience is of course not new on climate change. At Greenpeace International in 1993 I helped organised a blockade of a key city intersection demanding the Dutch Government take action on climate change. It had little impact. Why might this be different?

This is not 1993. We have 25 years more evidence of the problem. We are also now living in the reality of a changed climate, with the process just beginning. To avoid catastrophic risk, the most recent IPCC report [2] said we have around a decade to have cut CO2 emissions by about 50%. To be clear : not a decade to start doing it, but a decade to have it done. Churchill’s “era of procrastination” is well and truly over.

The solutions are ready.

We also have 25 years of progress in both developing and delivering solutions. In 2008, when I wrote with Professor Jorgen Randers, the One Degree War Plan, showing how we could slash emissions by 50% in five years, commencing in 2018, it was seen by many as economic fantasy.  Fast forward just 10 years and we see renewables blitzing fossil fuels in the market. The most recent annual report from Lazard on the levelized cost of energy concluded: “We have reached an inflection point where, in some cases, it is more cost effective to build and operate new alternative energy projects than to maintain existing conventional generation plants”. Consider that – it is often already cheaper (and getting cheaper every year) to build and operate newrenewable power plants than to just operateold (i.e. fully depreciated and paid for) fossil fuel and nuclear power plants. This is without strong policy on climate change – so imagine how fast we could move if we had it!

The Extinction Rebellion is not alone.

This all comes on top of a growing awakening  that climate change is a real emergency. Groups like The Climate Mobilization (TCM) formed by people who also faced despair but decided that telling the truth and taking action was the right response. TCM has taken the climate emergency message across the USA getting cities and towns to formally declare an emergency. They also acted in the recent US elections, which saw unprecedented engagement by young people with strong action on climate change one of their key demands. One result is that new members of Congress, like Alexandria Ocasio-Cortez, are now fully engaged in the emergency mobilizing approach.

Meanwhile, continuing to build on the intellectual basis for all this, think tanks like Breakthrough – National Centre for Climate Restoration have put forward the clear scientific case for an emergency and, I think critically, defined what an emergency mobilisation is. They explain this is not just a verbal intent to accelerate urgency and action, but a practical organising basis with clear goals, most closely referenced by the industrial transformation and economic mobilisation we saw in WWII.

Considering this growing momentum, XR might just be the tipping point.

Nothing else we are doing is working.

My final reason this could be different is the very uncomfortable fact we in the climate movement must face. We are failing. We have built huge and widespread global support for action across policy makers, business and the public. Never has there been such engagement on the climate issue. But success cannot be defined as support for potential action. Success is slashing emissions. And on that we are failing. There are countless good reasons and justifications for this – and it’s not like millions of us aren’t trying as hard as we can. But we are still failing. And time is up.

Of course, it’s possible that Extinction Rebellion will also fail. That a few protests will gather media attention then fade away. Perhaps their deep commitment to non-violence will be disrupted by outsiders or agent provocateurs. Perhaps they will be written off as the crazy fringe, with wacky ideas about the future of democracy. All possible.

But they may also succeed. They may make enough of us ask some questions: Am I part of the problem? Am I sitting back clearly recognising the scale of the crisis and the risk of collapse, maybe even extinction, but paralysed by either fear and despair? Or just not knowing what the hell else to do? Should I join them on the streets?  Is it time?

Extinction Rebellion may be the crazy fringe. Or they may be the only sane people in the room.

 

Quote from Page 13 “What Lies Beneath”. Dunlop and Spratt. Published by Breakthrough – National Centre for Climate Restoration. This report provides an excellent overview of existential threat, the climate science and why we tend to the understatement of risk on climate. https://www.breakthroughonline.org.au/publications


2. IPCC 1.5 degree report http://www.ipcc.ch/report/sr15/  Note these reductions are from 2010 levels, with the task actually greater given 2018 emissions are higher. And this is for a low level of certainty of achieving the 1.5 degree goal ( 40% – 60% likelihood ).

The core assumption and focus of people who work to drive sustainability through markets – as corporate leaders, investors, NGOs or thought leaders – is that we need to convince existing companies and their shareholders that sustainability is first good for their business, and secondly, they can successfully transition to a sustainable business model.

But what if both of these are wrong? As someone who has spent over 25 years in that world, I’m starting to think they both might be. If so, it calls into question the very basis of the work literally millions of us are engaged in. So, it is at least worth a discussion!

The first point is the foundational question – that sustainability is broadly good for business. Not business as a concept, but business as specific institutions.

Having been a corporate sustainability “insider” for two decades I can see how the idea emerged. It came from a time when action on sustainability was primarily about improving efficiency and cutting pollution while treating your people and communities well. These were good things to do, and they really were good for all businesses in the 1990s.  They lowered costs, reduced risks and gave companies a sense of purpose.

But the world has changed. Today sustainability is an existential threat to the global economy and that means the scale and speed of change required is profoundly different.

We are now up against time bounded needs that can only be addressed through radical innovation in technology and business models – inevitably resulting in disruptive change across the market. Anything less will see issues like climate change, pollution, inequality and resource constraint pose system wide threats to global economic and social stability.

Given this, sustainability is only “good for business” for today’s major companies ifthey can transform – either dramatically in how their business operates or in some cases (e.g. oil majors) transforming into different companies entirely.

This raises my second question. Can incumbents transform? The question can’t be answered in theory or conceptual potential, but in practice – in the reality of how markets work, and how businesses are run. For this we have a great deal of evidence of previous and ongoing transformations and disruptions.

As I introduced in my last column, the essence of the answer lies in recognising that markets are defined by a process of “creative destruction” – old and slow companies are taken over and replaced by new and fast ones. Not always destroyed but made so small they slip from sight.

We see this throughout economic history as the key driver of change within the market system and, critically in the sustainability context, the fastest. It doesn’t just apply when the driver of change is inherently disruptive e.g. digital technology or renewable energy. It then happens faster and more dramatically, but history tells us it happens anyway. In fact, it defines how markets normally operate. The only difference today is that it is getting faster.

Consider the latest research by growth strategy advisors Innosight (co-founded by innovation guru Clayton Christensen from Harvard Business School). The numbers are startling, arguing that “the 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016 and is forecast to shrink to just 12 years by 2027.” That means about half the companies on the S&P 500 will fall off it in just 10 years! This shows “creative destruction” is endemic to the market. Of course, it is not a universal rule, but it is the dominant market tendency and shows how rare true transformation is.

This calls into serious doubt the foundational assumptions made by people and organisations who have spent many decades driving corporate sustainability – including myself! If most major companies will die or at least shrink to irrelevance and be replaced, why do we try to change them?  And what does this mean for sustainability focused investors and policy makers?

The key questions to understand are why incumbents fail – and can this be addressed – and what can be done to accelerate the success of the disruptors? I will be focusing my work on this issue over the coming year at the University of Cambridge Institute for Sustainability Leadership, via this new research programme I am supporting.

This research will explore my hypothesis on what the current evidence suggests:

Incumbent businesses, no matter how good their intentions, rarely deliver disruptive change. When they do – often by buying disruptors – they are driven more by the threat from disruptive players than their own insights or strategies. Fear of loss is the driver for incumbents, not opportunity. There is a live example today with Tesla and the auto industry.
Disruptive players usually win because they are not held back by the assets, culture and risk aversion of incumbents. There are exceptions (and whythey are is very important), but they do not define how the system behaves.
Capital follows opportunity and growth, but rarely prices risk accurately. Thus, markets crash, carbon bubbles pop and boom/bust cycles are inevitable in disruption. But over time, markets get it right. The dot com boom correctly sensed the possibilities and the dot com crash didn’t prevent tech companies from dominating today’s stock markets.
Markets are ruthless and unsentimental. They have no ideology except self-interest and will happily for example, destroy the oil industry and do so quickly when they act.

This all suggests that, given the scale and speed of change needed on sustainability, many and perhaps most of today’s major old companies, simply won’t get there. Not because they couldn’t in theory, but because they won’t in practice. They have some combination of products, assets, culture and values that means transitioning is simply too difficult, too expensive in the short term or just isn’t going to happen in time. They will instead be replaced by new companies – a process profoundly beneficial to the economy.

If this is right, it calls into question the very foundation of the global movement for corporate sustainability. We need to have that discussion.

.

Many look around at today’s crises – climate change spinning out of control, inequality driving political instability and our oceans filling with plastic – and despair at the prospects for serious change. Most then try to apportion blame or at least seek to understand why. Business blames consumers. NGOs blame business. Everyone blames politicians.

Almost everyone who is engaged and thoughtful on this, even inside companies, at some level blame capitalism, markets and big business. This is well justified given, after all, it has been the delivery vehicle for all these crises.

But where does that leave us? As a campaigner who has spent 40+ years on these issues, I’m not satisfied with just a problem diagnosis, I need a way forward, a credible path to success. When talking about risks to the future of civilisation, accepting failure is not really a strategic option.

I don’t disagree that capitalism has been the problem. I emphasise capitalism rather than Western free markets – just take a look at China where capitalism took hold and delivered an epidemic of pollution that nearly overwhelmed the country – and still may.

But problem accepted, we have to find a way forward and I would argue that some form of the market system, if guided or constrained by policy, is our best and probably only hope of moving fast enough.

I do not argue this from a love of markets or an inherent belief in the philosophies espoused by many of that system’s advocates. I approach this as a person who lives and breathes the fear of global collapse and I can’t see another viable way forward.

What I do see, is that by engaging the current system’s strengths and capacities, a rapid and revolutionary transformation couldbe delivered quickly and globally. I see a way to replace most of today’s failing business models and companies with new ones that will deliver what we urgently need – a circular economy, reducing inequality and preventing climate change tipping us over the edge. It won’t solve all our problems or their causes, but it will buy us time to address them.

Markets have many failings, but they also have attributes that make them ideally suited to this task. Most profound of these is what the Austrian economist Joseph Schumpeter called “creative destruction” which he described as the process of incessantly destroying the old while incessantly creating the new.

This is what markets are good at and that should strike fear into the heart of many of today’s corporate leaders. Ironically, it means the market is coming for them and while they can delay, there’s not much they can do to stop their own destruction. And in the case of the Koch brothers, Exxon and many others, it couldn’t happen to a more deserving bunch.

The reason I wanted to write this article, is to present the possibility of this – but also to argue that those of us who have dedicated our lives to addressing sustainability and to preventing collapse can accelerate this process, if we choose to do so.

I am certainly notarguing that “markets will fix this” in some techno-optimist delusion that self-correcting market forces and technology will, by themselves, recognise the problem and turn the system around. What I amadvocating is the potential for transformational change -if we engage and help accelerate the process. Doing so would require us to understand how creative destruction works and therefore how to leverage it.

The essential and first point of this understanding comes from Schumpeter and also the evidence of economic history. While Schumpeter developed his theories in the 1920s, and the evidence was there before that, it’s really in the 100 years since and especially the past 30, that we’ve observed this market tendency on steroids.

I will expand on this evidence in my next column but let me make the core argument here simply. With a few notable exceptions, incumbent businesses consistently fail to respond to system threats to their companies and their business models. They can see the threats, analyse them, resist them, talk about them and when resistance has failed, develop strategies to respond. But they generally fail to deliver these strategies and so they die and are replaced.

Seeing the threat and knowing how they should respond is not enough. Remember that Kodak invented the digital camera, then watched as it destroyed their company.

I have spent 25 years inside the corporate sector – mostly incumbents – advising their top leadership on how to respond to sustainability, trying to convince them of the transformation coming and how to react. So I make the above comments not as a theoretical construct or wishful thinking, but as a practitioner deep inside the system who has seen this happen, again and again, inside the Board room and executive suite. There are important exceptions – and we can learn from these – but they are rare.

What does that mean we – those driving change inside companies, NGOs and government – therefore have to do? For a start, we do not sit back and “let the market work its magic”. If we do that, we will almost certainly face economic collapse, due to the time bound nature of the threats we face.

What we have to do is accelerate the process, by recognising the profound opportunity to differentiate inside the market and the corporate world. To favour winners over losers. To encourage disruptors – both those inside incumbents and as new players. To not waste time and energy (or capital) trying to shift companies that most likely won’t make it. To design policy that supports disruption and then to help the disruptors to advocate for it.

The key is to recognise that “the corporate sector” or “capitalism” doesn’t exist as an aligned force anymore. It is a disparate collection of people and forces that can be influenced and steered.

In summary, to paraphrase Churchill’s writing on democracy, the market and capitalism is the worst form of economic system, except for all the others we have tried. If we plan to avert systemic collapse, we have to find a way to leverage it for change. We have no time for anything else. Fortunately, it has at its core a systemic tendency, creative destruction, that suits our purpose perfectly. We now have to learn to use it.