(Lily Rhoads, CC BY 2.0)
CE Financial Observer: Recently, the internet is full of alarming articles that we have already cleared the earth of 50 per cent of its natural forests. People say that big business is to blame. Yet, this is accompanied by planting new forests. There are studies showing that during the past 35 years the area of forests on earth has increased. So why this catastrophic view?
Roger Gifford: People do not realize how much has changed since the 1970s or 1980s in terms of environmental protection. They do not read reports, as media do not inform about them. Thus, the media are to blame for creating this atmosphere that the end of the world is coming by emphasizing that all is changing only for the worse. Such “news” sells better.
Documentary films also sell better if they present how the environment is deteriorating. And, I admit, they make an impression, like the “Plastic Ocean” on Netflix. People get easily convinced.
This is a great documentary! As more and more regions on the earth get richer, the more and more waste is created as well, and something needs to be done about it — especially that today there are technologies making it possible. The extraordinary popularity of this subject among ordinary people proves that they want to improve the situation and they probably would like to contribute to it themselves. They could, for example, invest their retirement savings in companies and products that do as little harm to the environment as possible. The idea of “green finance” is to make it possible for them by showing them the right assets and creating an offer based on them. For example, Poland is a pioneer in the issue of green bonds. The proceeds from the sale of these bonds are to be allocated to climate actions and projects. “Green finance” means creating an environment in which people and institutions from around the world can buy these bonds.
What about the private sector? Part of retirement savings are invested in shares. Is it really the best idea to invest in companies that value the environment more than profit?
Of course, because the one does not exclude the other.
Milton Friedman used to say that profit, not the environment, is the only corporate social responsibility. There are regulations to ensure that the environment is clean, aren’t there?
Friedman was partly wrong about this. It is clear that a company is run in order to increase revenues and cut costs, and thus generate greater profitability. This is the main purpose of its operations, but this does not mean that it can be achieved by any means. People are also, in principle, good, which means that, for example, absolute greed is not their dominant feature. Most of us want to do good, be good persons and citizens — these are the goals of both ordinary people and shareholders of large companies. In other words, most people understand that profit can and should be generated in harmony with the environment and, moreover, that it is profitable for everyone in the long run.
Yes – and that is why we are still largely relying on “dirty” coal energy in Europe.
It is not the citizens’ fault that a government chooses a certain energy strategy. If you consume energy obtained from burning coal, this does not mean that you are bad. It would be absurd to think so. Getting back to Friedman’s reasoning, it should be pointed out that companies do care about their reputation. Today, if you are a company involved in scandals, you have a low corporate culture and you are polluting the environment, then even by making a profit, it is more difficult for you to get a satisfactory stock exchange valuation. What’s more, if your product is controversial in itself, for example, if you produce cigarettes, many investment funds will not be willing to have you in their portfolio. The funds have their own codes of ethics that they comply with. It’s not because their managers are particularly ethical, but because, as I have already said, it pays off in the long run.
And yet many of the funds have in their portfolio huge mining or fuel companies that are not especially concerned about the environment.
Investing in such large companies cannot be avoided. They pay too high dividends for a reasonable investor to ignore them. However, such companies should be constantly monitored and pressured to present plans for green transformation of their businesses — to estimate where they will be in 20, 30 years in terms of environmental protection.
Isn’t this too long-term perspective for companies accused of being short-sighted?
No. Let’s take Coca-Cola for example, which shortly after the premiere of the “Plastic Ocean” announced a new policy, according to which traditional plastic bottles will be replaced with bottles from renewable materials. Do you think they did it out of particular concern for Mother Earth? No. They did it because they care about their own reputation and stock quotations. To sum up, people are sensitive to environmental issues, and caring about reputation means that this is reflected in business, with words followed by deeds.
Is there really no compromise between profitability and environmentally-friendly business? Can you have both?
Once it was thought that it was possible, but there were other myths in business as well. When I started working in the City of London in the 1970s, the prevailing philosophy was to get as much as possible out of employees. Corporate hierarchy was extremely rigid and employees were required to comply with various rules, keep strict discipline, and continually present detailed reports. They were constantly threatened with dismissal because companies followed the advice of Jack Welch, CEO of General Electric, that you should dismiss 10 per cent of staff every year.
Yes. Welch claimed that if you don’t do it, you are bad at running your business. And managers did follow his advice. As you can guess, what was supposed to drive employees actually made them worse and less productive, because they were stressed and unhappy. Today, we now know that a relaxed and happy employee is more productive and the City has adopted a completely different approach than four decades ago. As you can see, the reason is not an altruistic care and concern for employees, but a purely economic calculation: to be successful, you don’t have to be ruthless as a manager. A similar calculation is done today when it comes to the environment.
What was the government’s role, if any, in making companies aware that environmental issues are also important from their own economic point of view?
Governments, and I am talking about such countries as the United Kingdom, Germany and Spain, have shown the direction of development of the energy sector by subsidizing technologies related to renewable energy, mainly wind and solar energy. They decided to increase their share in the total energy balance and they did it. Just have a look [Mr. Gifford turns on his smartphone – author’s note] at the fantastic website which displays the current energy consumption in the UK by its source. It is a bit chilly in the UK and there is little sun, it is lunch time and energy demand reaches 25 GW/h, of which about 5 per cent is nuclear energy, about 10 per cent renewable sources, but there are days when wind and solar energy meet about 50 per cent of the current electricity demand.
And energy from coal?
Almost zero per cent. This is what we have achieved. Not fully clean gas-derived energy still takes a considerable share in the overall energy balance, but this is a different story. And now the best part: guess what the amount of government subsidies paid to generate wind energy today is?
I do not know.
Zero GBP. This technology developed while relying on subsidies, but now with the effect of economies of scale, when it has proved to be cheaper and more effective, subsidies are no longer needed. The top-down measures which actually consisted of building infrastructure for this sector, were a driving force, yet temporary in nature. Now you can rely on private companies and private capital and create green finance around them. You probably don’t invest or save in green assets, do you?
I don’t think so — I don’t know the exact investment portfolio of my pension fund.
Exactly. But why don’t you know it? You are, like most of us, a decent, responsible man. The answer is simple: because you’ve had no such opportunity. Bankers and financiers were focused on other types of securities, and didn’t create platforms to invest in green finance. They often didn’t know themselves which ones were green. They didn’t require companies to provide proper reporting or account for long-term environmental strategies. However, this is changing — companies are also measured by ESG indicators, i.e. non-financial measures, taking into account the environment, social responsibility and corporate governance [E for environment, S for social responsibility, G for corporate governance – editor’s note]. Work on making these measures more reliable is already in the financial “mainstream”. All the largest consulting agencies are engaged in it, and if S&P or Moody’s get engaged in something like that, then, believe me, there is money there.
You say that governments have played a major role in environmental measures. But are you sure that the green revolution would not have taken place without them? In the US over the past decade there has been a revolution in the extraction of natural gas. I’m thinking of the shale extraction technology. Private companies were responsible for the shale revolution, without much government support.
Yes, shale gas extraction is a great example of how much the market itself is doing in terms of ensuring a clean environment. I am also impressed by the progress that was made in science when this technology was developed in private laboratories. Nevertheless, globally, governments play a vital role in supporting the development of clean energy sources. For example, governments have helped to develop many clean technologies that have been known for centuries, something that has already been tested and only needed improvement. Let’s take, for example, hydroelectric power stations, which took their inspiration from ordinary mills. But governments also support completely new ideas that can be ground-breaking. For example, I am following with curiosity the Japanese developments in the field of hydrogen fuel. Huge money is being invested in this technology. It is even one of the government’s priorities to reduce the cost of hydrogen fuel production and start the widespread use of it. If this happens, car emissions will be reduced to zero. I believe we will soon see the first truly commercial use of this fuel.
In the West, it is said that economic growth and care about the environment go hand in hand. At the same time, for example, Asian countries do not want to take radical steps in these areas as they are concerned about economic growth. Is the economy in Europe different than, for example, in China or India?
I am convinced that there is no contradiction between economic growth and green technologies and reduced pollution. I would also like to point out that the two countries you mentioned do a lot in these matters, reducing their reliance on coal. Of course, they have to do it thoughtfully, keeping the right balance, so that their energy-intensive industry can function normally. Yet, there is a significant difference between reducing pollution in Asia or Africa, or Latin America, and reducing pollution in developed Western countries. The West has already invested in technology, created the necessary infrastructure, has done more because it simply had more time. Therefore, making further progress in the field of the environment is relatively cheaper for these countries. In the remaining regions, infrastructure and technology need huge investment. So they have to bear higher costs of caring about the environment to bridge the infrastructure gap and reach western levels. It should also be noted that in Europe, especially the UK or France, a lot of energy comes from nuclear power plants, but new NPPs are no longer being built. They are already there. These costs have been incurred and now there are benefits to reap. Different regions are at different stages, but everyone is determined to struggle to save the environment. This is evidenced by the Paris climate agreement, signed by 196 countries from around the world.
The problem is that this was a political declaration, and many countries may end up withdrawing from it; and to fight climate change we have to be a team. Otherwise it will not bring the desired effects.
Each country will implement the agreement at its own pace and we can’t help it. For example, in Poland you don’t give up using coal, because you can’t do it immediately. Yet, this does not mean that you have be punished with sanctions or urged in any way. We have to be reasonable. It is enough for Poland to propose a feasible plan for increasing the share of renewable sources in the total energy balance and to implement it.
By the way, how do you assess the CO2 emissions trading policy that has been in place for almost 15 years in the European Union?
Unfortunately, this policy is not very effective and needs reform. The CO2 emissions market requires the support of the tax system and increased emission prices. They are currently too low to make enough difference as regards the expected reduction of emissions. However, there are no pan-European reform proposals yet. Some countries, like France, are doing something on their own by imposing special taxes on traditional fuels or gas. This is also a kind of measure. As the government has removed subsidies, it must have some impact on the market, and it can take the form of tax incentives. However, it also has side effects if this is not done correctly. After all, the yellow vest protests in France are the result of, among others, increased fuel prices driven by taxes.
I have always wondered why mankind, wanting to reduce pollution, has decided to invest in solar or wind energy rather than developing nuclear one. How can you explain that?
It’s because of the Fukushima nuclear disaster and waste.
If we invested the funds which are now spent on the development of renewable energy in nuclear energy, NPPs would be even safer and methods and technologies for the disposal of radioactive waste more reliable.
It is possible, but the costs of building more nuclear blocks reach tens of billions of the USD. The world can’t afford to rely on nuclear energy alone. Yet, I am personally in favor of increasing the share of nuclear energy in the total energy balance. A few per cent more will do no harm. As a financier, however, I look at the market from the point of view of costs and risks — money must be invested in the technologies where we see favorable proportions of these two factors. The benefits of green finance are, in my opinion, that they address climate and environmental issues from such a rational market perspective.
Roger Gifford is a British banker and financier, chemist by profession, former mayor of the City of London financial district in the years 2012-2013.