Profit is the best means to slow climate change
Cutting emissions and moving to greener energy is smart business
There is a new secret weapon in the war to save the planet from climate change: greed.
And it just might work. From the windy fields of the Permian Basin to the gleaming corporate headquarters of Houston, the world is awash in oil and gas. The supply is huge, but the price is small. The demand is falling as the global economy cools. So, what energy producers need is the one thing they’re having a hard time getting: money.
That’s because now the world’s biggest investors, bankers in their own gleaming towers in New York, Boston and London, have new terms. And with West Texas crude at a measly $47 per barrel, they have the upper hand. So, they are conditioning investment on, among many other things, cutting carbon emissions. Investors as big as Black Rock and State Street have warned companies: No progress on climate change, no money.
With this, the fake argument over man-made climate change is over. Largely unnoticed by the political world, the financial world is conditioning capital on more than the rate of return, but doing better for the environment and society itself. This is a powerfully coercive new force for good; and no, this is not an endorsement of just letting the market work things out. This tectonic shift in money is a rare and promising gem, as activism and policy bend capital itself not just to self-interest anymore, but to enlightened self-interest.
Yes, climate change, in the end, is an existential problem, particularly to places like Houston. But climate change is a product of an accounting gimmick: the idea that carbon is free, with no cost after it goes to market. Of course, that’s just not true. The cost of carbon has just been deftly passed on to other people who breathe air in traffic jams, get flooded out by hurricanes, pay ever-higher insurance premiums for waterlogged homes and rising taxes for crumbling highways.
Profit comes from shrewdly passing along the cost to others; it’s nice work if you can get it. The major oil companies, for example, make about $3 trillion yearly in revenues. The top 40 of these in the United States then turn a profit of about $28 billion, according to the federal Energy Information Agency. Yet in 2090, 22 other industries in the United States will bear an annual cost of $248 billion for the price of climate change paid through rising heat-related illnesses and deaths, at-risk infrastructure and greater insurance risk.
“Do you know the one thing that gives me pleasure?” John D. Rockefeller, the original oil robber baron, once said. “Watching my dividends come in.”
Of course, hardly anything is more Texan than oil. The gusher that erupted at Spindletop, near Beaumont, on Jan. 10, 1901, shot 100,000 barrels of oil a day 150 feet in the air for nine days, ushering in the modern oil industry in America. Texas oil barons like Roy Cullen, H.L. Hunt, Clint Murchison and Sid Richardson rushed in to become the new Rockefellers. Within 20 years of that discovery, the population of Houston had tripled, forever transforming a middling trading post into the global capital of oil and gas.
And the name of the game was profit. “For me, there is no strategy that is divorced from profitability,” wrote Daniel Yergin in his masterful history of oil, The Prize, published in 1993. Yet he also wrote: “Every system has within it the seeds of its own destruction.”
As if to embody both of Yergin’s thoughts, the emphasis on profit has now driven the industry to a new place: to gain the confidence of investors, it must lower its carbon emissions. In just the last few months, major institutional investors have drawn the line. They can get better returns on their capital elsewhere and so if the traditional energy sector wants their money, it has to cut carbon emissions and do a better job helping the larger society. This is not philanthropy. It is self-interest.
“Climate change has become a defining factor in companies’ long-term prospects,” Larry Fink, the chairman of Blackrock, the largest asset manager in the world with $7.4 trillion, wrote CEOs early this year. “Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity — a risk that markets to date have been slower to reflect.”
“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Fink continued, declaring flatly that “climate change is investment risk.” It threatened all kinds of other investments, even the simplest, like the 30-year mortgage, that undergird the modern economy. But many compa
nies lack the human capital to tackle this new challenge while meeting their quarterly earnings goals.
Enter, of course, the consultants.
Jack Belcher, a native Texan, Longhorn and former Navy Seabee, has worked in, for and around the energy industry for over 25 years. Now, he shuttles a carload of colleagues from his firm, Cornerstone, to client meetings in Houston, to help energy companies large and small meet the demands of investors like Blackstone, which has been joined by State Street, the Dutch Central Bank and others. What companies like Cornerstone provide is expertise in helping energy companies identify ways, including reducing their carbon footprint, to meet the rising demands of investors.
“There was interest before but it absolutely accelerated over the last two months,” Belcher, a Cornerstone principal said. Fink’s warning shot “was a pivotal moment. There were shockwaves after that.”
Sure, the major oil companies have liked to talk about turning green; after all, they have the massive resources and project management experience to alter the landscape, literally. But companies have not matched their talk with action. Royal DutchShell, the Anglo-Dutch giant, may not even spend the full $6 billion on green projects to which it had committed in 2020, according to The Guardian.
Further down the food chain, smaller companies are racing to please investors. Companies like Cornerstone parachute in, figure out what the carbon reduction goals are, find the data, demonstrate how far or close a company is from its goal, what kind of risks they pose investors, prioritize those and report in the data, both quantitative and qualitative. The whole exercise is instilling Environmental and Social Governance, a management philosophy that dates back to 2005, into energy companies, big and small, public and private.
One Cornerstone client in Texas, for example, had to run down gas leaks from its pipelines it didn’t even know about. “The client had these methane emissions and they didn’t know about them,” said Alanna Fishman, a vice president at Cornerstone. “We’re trying to identify the unknown unknown.”
There are a lot of those, by the way: unknown unknowns. For one, the new emphasis on environmental and social governance on the traditional energy industry is so new it’s far too early to meaningfully measure results. How much can it contribute to cutting carbon emissions 20 percent, as called for in the Paris accord? Honestly, nobody knows.
“There’s a lot of talking the talk, but a lot of walking the walk has not been done,” said Katharine Hayhoe, one of the world’s leading climate scientists, who also teaches at Texas Tech University in Lubbock.
Performance will differ from company to company, after all, and investor to investor. To boot, there is no standard rating of how well or poorly energy companies perform in cutting carbon emissions, now numbering 60 billion tons annually rising into the atmosphere. But money does talk.
The massive rush away from using coal — a fuel burned by humans since 4,000 B.C.E. — today isn’t because of a “war on coal.” That’s hogwash. King Coal has been kept on life support in the United States by $650 billion in annual subsidies, according to the International Monetary
Fund.
But it is being killed off by the plummeting price of natural gas, now just under two bucks per 1,000 cubic feet, and a direct result of the fracking revolution. Cutting emissions and making a transition to greener energy sources — over time, not tomorrow — is just smart business.
“It’s simply more cost-effective,” Hayhoe told me. But, we still won’t really know how well the energy industry — and other industries do — until we change the accounting trick, and attach an appropriate price to carbon. That will alter financial results, balance sheet and be the clearest way for investors to provide money — intelligently.
And no place on Earth has a larger stake in the outcome of this moment than Texas — and Houston. Simply put, the debate over man-made climate change is over. And the inherent self-interest of capitalism might just have met with the need of the greater interest.
“The capital providers voted with their feet,” Bobby Tudor, the new chairman of the Greater Houston Partnership said recently. At the same time, the deluge of oil and natural gas has resulted in “prices that make industry profitability generally poor.
“And to put icing on the cake,” he continued, “a consensus has emerged among scientists, business leaders, and the general public that climate change is a real problem that requires urgent attention from all of us, and that we therefore will be using less hydrocarbon-based energy sources.”
The hydrocarbon industry is likely to consolidate into fewer, bigger and, most importantly super-efficient, companies just to be profitable. Green energy will not replace hydrocarbons tomorrow — but the writing is on the wall. And Houston’s energy giants may be the firms of tomorrow, making Houston the energy capital of the future. But the stakes are huge: 7 million lives and livelihoods hang in the balance.
This is a good time, too, to stress a deeply capitalist principle: absolutely ruthless efficiency for the sake of profitability and saving the planet. The most slavish political lackeys of the fossil fuels industry, like Republican Rep. Dan Crenshaw of Houston, are touting socialism — a tax credit for capturing carbon, say, underground.
But that’s just using your money for their private capital. A better idea: More capitalism. Attaching a price to carbon will provide nearly perfect transparency. Maybe government can subsidize industry based upon performance in carbon reduction; but the price of carbon should be revealed, rise naturally and appear on the balance sheets. How, otherwise, can investors know what they’re really investing in? Beware, investors. There is a lot of industry greenwashing to come now that the future of capital is clear.
“The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works. Greed cuts through, clarifies and captures the essence of the evolutionary spirit,” Michael Douglas’s character, Gordon Gekko, said in Oliver Stone’s 1987 film Wall Street. Not only would greed save the target of his takeover, he went on to say, “but that other malfunctioning corporation known as the United States of America.”
Well, we’ll see. The stakes are even higher now. Greed has to help save the world.