For the past three decades, Mark Campanale has been at the forefront of efforts to harness the capital markets to the cause of sustainability. The Londoner is a sought out advisor to investors seeking to reduce their exposure to climate risk. He is a cofounder of the Social Stock Exchange, and is founder and executive chairman of the Carbon Tracker Initiative, through which he advanced the influential “unburnable carbon” capital markets thesis. In 2018, Mark founded Planet Tracker, with the goal of aligning capital markets with natural ecological limits to growth. Both initiatives have been and continue to be instrumental in changing the way financial markets think about environmental and climate risk. When Driving Change caught up with him recently, we began by asking him about how the Covid-19 pandemic has changed how the finance sector thinks about climate change.
Mark Campanale (MC): COVID changed a lot. What it’s done is forced a huge contraction in the global economy. And that contraction has worked its way into energy demand. If we think of climate change as perhaps the big existential problem of our age, and certainly for the coming century, [Covid has] meant that people are looking at where energy is generated and the burning of fossil fuels which contribute to climate change. People have realized we can switch to clean energy: it’s cheaper, it’s more efficient, it’s cleaner. All those fossil fuel companies that used to dominate the S&P 500 like Exxon, their valuation has collapsed. Investors are fleeing the sector. And of course, the darling of the past year has been Tesla, the miracle of new technology.
People are thinking: Well, actually, this changes everything; how we communicate, how we transport, what energy we generate, how offices function, etc. [The pandemic] has brought forward the peak in demand for fossil fuels. It has really tipped us over into the end days of the fossil fuel economy, giving us the freedom and hope to deal with climate change.
Driving Change (DC): That’s a big claim. You really feel this is an inflection point. Would you say it’s brought forward the peak for energy demand?
MC: I think energy demand is growing, particularly in the developing world. That will remain the case. But in the developed world, I think demand, particularly for fossil fuels, has peaked. The internal combustion engine car has almost certainly peaked. It looks like demand for oil has peaked. Demand for coal, globally, has almost certainly peaked, particularly in the western economies.
DC: What about these reports that coal plants have been reopening, and new ones built in places like China?
MC: Yeah, that’s true. But you need to look at their efficiency and how much of the time they spend on stream. A lot of these new coal fired power stations are only operating at 30-40% capacity. Part of the demise story is that they’re not achieving the revenues that a lot of the modelers forecast they would. Even in China, you’ve got dispatchable power from renewables getting onto the grid before fossil fuels. In many parts of the world, what counts is who’s getting onto the grid first, and renewables are getting on first.
Some economists ask me: “Well, Mark, we’ve seen this before, we’ve seen something similar in 2008, when the economy contracted after the financial crisis only for energy demand, particularly fossil energy demand, to bounce back.
So what’s different today? It’s very simple. What’s different is, renewables are cheaper. It’s cheaper across most parts of the world, if not all of the world, to generate power from wind, solar and battery storage compared to new build coal or new build gas. But soon, it is going to be cheaper to build new renewables than to continue to operate old coal plants. That switch I think will be the death knell for the traditional energy system.
Soon, it is going to be cheaper to build new renewables than to continue to operate old coal plants. That switch I think will be the death knell for the traditional energy system.
DC: So you really see this as an inflection point?
MC: Demand for energy will grow back, particularly in the developing economies, but that demand is not going to be met from fossil fuels, it is going to be met with renewables. We’ve got far more renewable energy capacity being built today than traditional fossil fuels. The very simple reason for that is that the cost of production for renewables has dropped below that of fossil fuels.
It’s a technology switch. Across the world, it’s cheaper to build wind and solar plus battery storage than it is to build new coal-fired power, and typically, often new gas power as well. And even in economies like China’s, when it comes to dispatchable power, renewable energy is getting onto the grid first. Renewable suppliers increasingly have first right to get their power onto the grid, ahead of fossil fuels. That’s making traditional fossil fuel capacity expensive to build, expensive to run. It’s just accelerating the demise of the old technologies.
DC: You mentioned policymaking. Are you seeing in some of these stimulus packages that this time around policymakers are leaning towards the new technologies over the old technologies? Or is there still a default mentality of pouring money into whatever creates jobs and keeps the economy growing?
MC: Good question. I’m going to give you an answer that’s broken into two halves, a good and a bad. The good news is there are many green stimulus packages, including at the European Union level. The French and the Germans have been driving it. Even the UK, which is preparing to Brexit, has a Green stimulus. If you look at the Biden election program, it does include a Green stimulus, and envisages a Green recovery.
There are simply more jobs to be created in retrofitting clean energy and energy conservation than there are from fossil fuels.
The bad news is in the purchase agreements used by central banks to stimulate the economy. They’ve been buying fossil fuel company bonds and high carbon company bonds at the same rate, or faster, than Green energy bonds. That throws a whole lot of cheap capital to fossil fuel incumbents. What that has done, including in the UK and the US, is turn the stimulus into a bailout of an industry that was teetering on the edge.
I’m disappointed by central bankers, who had a lot of choices. They should have known better, but didn’t really think it through. As a consequence, we’ve got businesses that were on their last legs being bailed out by the taxpayer. No thank you.
DC: So as you look forward, firstly to the next year and then beyond, what are you hoping that policymakers who care about fighting climate change will do?
MC: We need everything from certainty around carbon pricing to certainty around green power and power purchase agreements. One bet that I’m thinking about is slightly technical, but needs to be talked about it. At Carbon Tracker, our analysis shows there’s around $30 trillion of fixed assets in the fossil fuel economy: pipelines, oil rigs, coal fired power stations, and coal mines. These are going to have to be written down, written off, aggressively depreciated over the next ten, fifteen years. Oil wells and the rest of the fossil fuel economy is going to become redundant. Currently companies are not putting aside the capital to deal with this.
I want policymakers to make sure that the accounting profession actually does the write-downs, and does the stress tests. It’s a bit like going into the 07-08 financial crisis with those triple A mortgage-backed securities and insisting that they are still triple A. It is the same problem with fossil fuel assets; regulators and governments need to do something about it.
We also need to see more clearly the endgame for fossil fuels. The world is continuing to invest in fossil fuels when we should be winding down the industry. The International Energy Agency reckons around $1 trillion is invested in fossil fuels annually. That has to stop.
To do that we need to focus not so much on energy demand reduction – turning off the lights, switching to electric cars and so on (all good, of course), but on constraining the supply of fossil fuels. That’s why I and others have called for a Fossil Fuel Nonproliferation Treaty (fossilfueltreaty.org). Governments, policymakers, civil society and companies need to prevent all those projects that stand to take us above one and a half degrees [increase in average temperatures]. We’re gonna have to constrain supply, we’re gonna have to cancel licenses, cancel production. You may have seen the announcement from British Petroleum, one of the world’s biggest fossil fuel companies, that they are going to cut production by 40%. It was the first time I’d ever heard a CEO talk about this when Bernard Looney referred to the declining carbon budget limiting how much fossil fuels we can burn. IThe company wrote off $17 billion of fossil fuel reserves. But it needs to be more than BP; everybody should be doing it. That’s what I want to see policymakers focus on in the year ahead.
DC: That is a big, big idea, the Fossil Fuel Non-proliferation Treaty. Is it something that could be announced and signed next year? Is it something that governments get? Also, is it still down to the government to lead, or can the private sector now be in the vanguard of this shift?
It goes to the heart of this question: what’s the point of a retirement plan if there’s no planet worth retiring into?
MC: The treaty idea has been driven by scientists, academics and civil society. You may ask, how good is that? Well, actually, the nuclear treaties of the 1970s were driven by civil society. NGOs and civil society were the first to go off and start counting missiles and then sat around the table and had them draw up the agreement to cut those huge missile reserves that the Americans, Chinese and Russians had. We have to do the same with fossil fuel.
I do think it’s possible that it can happen. I spoke to somebody in the UK Government just last week, and they said, well, look, all policy has been focused on emissions reduction from the demand-side. Nobody’s thinking about supply, because the politics are really tough. But they added that this may not be such a bad thing, as there is space for fresh thinking and for governments to embrace new ideas. So I’m hopeful that this will get onto the agenda.
As to private sector leadership, over the last two years individual private investors and investment institutions have mobilized regardless of government. There’s Climate Action 100, a coalition of the world’s largest investors, taking on the world’s top 200 polluters. It has a combined $46 trillion under management. It’s the biggest coalition that has ever been created of investors who are sitting down with management and challenging them to change.
Now, the government didn’t tell them to do that. It was driven from the bottom-up, driven by individual policyholders of pension schemes, driven by trustees, driven by fiduciaries. It goes to the heart of this question: what’s the point of a retirement plan if there’s no planet worth retiring into?
DC: How serious is this shift? Is it largely rhetorical, or is there something fundamental going on here? After the Paris Agreement, there were lots of business leaders and investors saying, yes, we’ve got to do this. But they also said that we mustn’t scare the fossil fuel industry, and that there needed to be a “just transition” with compensation to fossil fuel companies that lose from the shift to renewable fuels.
MC: I think the level of ambition and expectation is now there. What people have told me about Paris is that in previous years of climate negotiations, you had power blocks – the business power block, lobbying, government not doing anything that’s damaging for jobs. Then you had the scientists and the NGOs saying, please do something. What changed in Paris was investors turning up en masse, saying to the governments that a strong climate agreement is in the interest of investors.
They were coming as a counterforce to the narrative from the business community. People often make the mistake thinking that finance and business are the same thing. In fact the business community is often in conflict with the interests of the shareholders. Investors are starting to find their voice. There have been many shareholder resolutions on climate, and investor groups that were previously slow to act, like BlackRock, are fundamentally changing. BlackRock now is in favor of a progressive climate deal.
That’s really the switch that we’ve seen. Finance saying, “Now, we’re going to stand for our own position and our own status as interlocutors in the climate negotiations by setting out the kind of climate agreement we want.” Finance is now increasingly on the side of the angels.
Is it going to be enough? Fast enough? Well, one of the things we’ve worked on at Carbon Tracker, along with the UN Principles for Responsible Investment and others, is a concept we’re calling the “inevitable policy response”.
People often think that governments are slow to act, and nothing is going to change. What we are saying to investors – and investors are agreeing – is that actually, there’s growing evidence of climate chaos: ice caps increasingly show signs of melting, forests are burning, 100 degree temperatures in the Arctic, London is a hundred degrees for three, four days in a row – unheard of. We’re saying it’s inevitable that governments will act, they won’t sit aside, because the public will call on them to act. We should expect governments to act and it’s that inevitable policy response that companies have to fear and investors have to ask for. People are not going to sit around and do nothing. That’s for certain.
DC: So if policy response is inevitable, what is the policy that you would advise a policymaker to make their top priority over the next 12 months?
MC: Switch the narrative from trying to constrain demand, – which I feel is a bit like boiling the ocean, telling a billion people to turn their lights off – to constraining supply. We know where the supply is coming from, who’s producing the fossil fuels. We know who it is. We know which projects are going to take us to above one and a half degrees. We know who ‘s developing them and who owns them. Policymakers should be focused on getting an agreement that reflects the science. A Fossil Fuel Non-proliferation Treaty is the policy I really want people thinking about today.