Mary: Let me move to you Kristen. Were economists also out there lobbying or arguing for some sort of regulatory change? Do economists lobby?

Kristen: Economists, in general, tend to be very apolitical. But economists, especially those involved in the E3 network, have become increasingly vocal in warning that the economic damages from climate change will be significant, and that immediate and significant investments in things like reductions in energy efficiency and renewables will make good economic sense, especially when you compare those actions to the potential costs of inaction. There’s something that Julie just said that I really want to underscore. This ruling really demonstrates that the SEC, and the private sector more generally perhaps, is a lot further ahead than our own government at this point in really coming to terms with both the risks and opportunities present in the climate crisis. From an economics perspective, getting businesses to recognize and systematically account for the implications of climate change is important. But what economists more generally are lobbying for is a more broad-based and consistent policy framework that could help provide the right incentives to these businesses to make those changes.

Mary: Is there consensus about what impact the SEC ruling will actually have on day-to-day corporate business practices and operations? Is it just going to mean longer annual reports? What’s going to happen?

Kristen: It’s hard to say what impact this specific ruling will have. But I think it’s safe to say that there’s no doubt that climate change, and the realities of grappling with climate change, are going to change business as usual in America. Planning for climate change, by definition, means planning for the long term. It means having different attitudes and practices with regards to risk and the environment. One thing we’ll see coming out of this is that firms will no longer be able to relegate the environment to an afterthought. Sustainability, it’s clear, is no longer about marketing green products to your high-end consumer, or making sure that your workplace is more resource-efficient, or being civic-minded; it’s about being smart and strategic over the long-term. What we’re starting to see with this SEC decision is the elevating of long-term environmental concerns to the same realm as things like labor and capital to decision-making. This shift has been a long time in the making because long-term environmental concerns have been relegated to the back burner for quite some time.

Mary: Julie, how do think this SEC action is going to affect investment decisions at Pax’s World and other, maybe, more or less “enlightened” firms? And do you want to speculate quickly about what impact you think it might have on the corporate community and the economy in general.

Julie: One of the things that the financial market is not at all short on is ego. There are a lot of people in finance who are basically born on third base and go through life thinking they hit a triple. And if they don’t know something, it is, by definition, not important. And what they know is what companies report to them. If you give them information on a lot of companies, they will find a way to do really interesting things with it. What this will do is increase the trend of raised awareness toward climate change. Once that awareness is raised, investors start to act on that information. They say, ‘if you’re in this sector and aren’t aware of climate change, we don’t think you’re a terribly well-managed company.’ So you’re a little less willing to pay more for their earnings. The great secret about financial markets is that, in some sense they [create] a self-fulfilling prophesy. If we all, as investors, think that companies that are environmentally well-managed are going to perform better, we’ll pay more for them and they will trade at a premium. They will be worth more because of their environmental management. It’ll take a while. But giving people this information, giving them another way to distinguish well-managed companies from the hoi polloi is going to lead to that outcome. 

Mary: So it could unleash a cascade of sustainability.

Julie: Yes.

Mary: Kristen, when it comes to the SEC ruling and then, longer term, from climate change itself, some businesses are going to be winners and some are going to be losers, right? The impact, of course, will vary based on the type and the size of the business in question. But given that, can you predict who the winners and losers will be, both short- and long-term?

Kristen: There are two kinds of climate-related risks that this SEC ruling is basically taking into account. On the one hand there’s the risks that stem from the physical impacts of climate change. And on the other hand, there are the risks that are embodied in the impacts of regulating carbon and how that [regulation] is going to affect a firm’s operating costs and its competitiveness.

The industries that are most vulnerable to the physical impacts of climate change, we’ve talked about some of them already, include industries like agriculture, forestry and paper products, tourism, real state, offshore energy development, and, of course, insurance. But companies that use fossil fuels intensely in their production, like the electric utilities that invest in high-emission power plants, or companies that produce carbon-intensive products, like car companies that continue to produce gas-guzzling SUVs rather than more efficient hybrids or diesel engines are also examples of companies that are going to find themselves at a competitive disadvantage in the future because of regulations on carbon and the resulting decrease in demand for carbon-intensive technologies and products.

At the same time, companies that demonstrate that they can meet this new demand for low-emissions technology are gong to be at a competitive advantage. And these are the companies I think we’ll see emerge as winners in the new green economy. One of the most beneficial things that might come out of this ruling is that it’s going to help people begin to envision exactly which companies will or will not succeed in a carbon-constrained world over the next 25-to-50 years. We talk to people about how business-as-usual has to change, about how the economic system has to be transformed in order to really meet the climate challenge. You run up against the limits of people’s imaginations and their ability to think long-term about what that would look like? ‘What kind of car am I going to be driving?’ ‘Where am I going to live?’ ‘What kind of industries are my kids going to be working in?’ This is the first step in systematically beginning to identify that these are the industries that are poised to advance and these are the industries that are going to struggle in a carbon-constrained world.