Can banks go green in more ways than one? A recent report by Deutshe Bank Asset Management shows that large global firms are continuing to explore ways to make a profit from mitigating the harmful effects of climate change.
This is welcome news, as the world’s business leaders are beginning to view global warming as an economic issue, rather than a political talking point or moral ideology. Never mind that growing concern for signs of global warming have been expressed (and summarily dismissed) by scientific community for some time.
In accepting it as an issue, economists have begun to realize that capitalism and market forces have failed in protecting the health of the planet. As commercial fish populations begin to die, traffic congestion keeps workers from making it to work on time, and polluted urban air causes developing children to miss school, it’s clear that market failures are costing real dollars in lost output.
Early efforts have taken aim at understanding the byproducts of market systems, such as pollution or waste, that until now have been largely ignored in calculating business profits or economic growth. Economists call these externalities, a product of an economic event that generates a cost not paid by the parties in the transaction.
As corporations join the growing choir, the urgency to develop a field of economics or business strategy that incorporates these market failures – and makes them definable – has taken root. Playing out within a field called environmental economics, a sub-category of classical economics that got its start in the 1960s or 1970s, research is examining the very root of the economic model.
It’s essentially reexamining what it means to make a decision in a world with scarce resources, and take everything into account. Whereas the first industrial revolution ignored pollution and other waste products in calculating the costs and benefits of a certain business line or product, environmental economists say costs to the ecosystem must now be factored in.
For this accounting method, there are a number of different models. One approach would assign a real monetary value to natural resources. Put a price tag on unpolluted air, clean water, and old growth forests and maybe then it will be easier to see what destroying them might mean to the bottom line. This idea was famously explained in the 1999 book, “Natural Capitalism,†written by Paul Hawken, Amory Lovins and L. Hunter Lovins.
Another approach would involve reexamining and reassigning waste products, so that they would become raw materials for the next process in the cascade. The cost to the environment is less if we can use the global warming gases like methane as fuel, while also benefiting from reducing the costs of harvesting raw materials. This also reshapes the traditional economic model and plays right into the talk of efficiency and sustainability that we’ve been hearing so much about lately.
Still more ambitious models imagine the world as one system and the global economy as just one part of a larger closed system. This bigger system includes both the economy, as well as the limited resources of the environment: a paradigm shift for those accustomed to the classical model of economics.
Increasingly, companies and economists are being supported by government regulation in making these changes.
In the last 30 years, laws – like the Clean Air Act of 1963 and the Clean Water Act of 1972 – have attempted to address the issue. The EPA formed the National Center for Environmental Economics in 2000 with the stated objective of “articulat[ing] the benefits and costs of environmental policies and regulations.â€
However, in many cases, government regulations look to change behavior within the traditional system of economics, while many supporters of environmental economics believe that real change will only come with an associated paradigm shift. Either way, it’s apparent that the government will have to play a critical role going forward.
Businesses will also have to jump on the bandwagon, and now that the field has started to take shape and gain ground, typically reluctant companies have started to buy in. A few years ago, Goldman Sachs started the Center for Environmental Markets, with the goal of:
“[U]ndertak[ing] independent research with partners in the academic and NGO community to explore/develop public policy options for establishing effective markets around climate change, biodiversity conservation and ecosystem services. Our public policy views will be informed by this research.â€
To be sure, it’s just one aspect of Goldman’s stated objectives toward greater understanding of how to profit from the environment. But it shows that established players now consider the field to be legitimate and the prospects to be good for basing business and economic decisions on previously undervalued resources.
Look for more market players across the globe to act out of apparent environmental consciousness as a way of remaining competetive and solvent. New and imaginative solutions are sure to take shape as more and more economists struggle to comprehend and benefit from these new models without shaking up the game too much. To say the least, it’s going to be an interesting time for everyone involved. Stay tuned!
