Environmental Risks and Financial Stability

We have had a few days to sit with the reality of Obama’s momentous victory on Tuesday night. It is hard to know what to expect now. I have a sense of what I’d like to see. Obviously the economy and the financial market are going to be the main focus for the new administration, but I expect that the Obama team understands that financial stability and sustainability are not distinct problems.

Recently, Al Gore brought the connections between transparency in the marketplace and environmental protection into view. Standing with New York Attorney General Andrew Cuomo, Gore praised a settlement between the State and a national energy company that requires the disclosure of relevant information to investors about climate change risks associated with their coal fired power plants. The agreement requires the energy company to include information on present and future climate change legislation, the possibility of future litigation, and the physical impacts of climate change in its annual filings to the SEC. An increased awareness of the environmental impact of corporate activity and the need to remedy current and future damage means that corporations will increasingly find themselves in litigation and regulatory proceedings over their carbon emissions. This is going to have serious consequences for investors and consumers. Gore brilliantly equated the failure to honestly acknowledge the legal, financial, and environmental liability of carbon emissions to the failure to honestly acknowledge the financial risks of sub prime mortgage securities. Both reveal a corporate tendency to disregard catastrophic long-term risks for short-term financial gains.

Obama made some promising noise on Friday when he suggested that Detroit’s economic salvation was connected to the production of more fuel-efficient vehicles. Hopefully in the coming weeks he will expand on this and present a stimulus plan that integrates sustainability into our economic survival. But it must be more than a mere recognition of consumer demand for hybrid cars and alternative energy. As Vice President Gore suggested, corporations must fully internalize the costs associated with carbon emissions. Until that occurs the products, services, and securities on the market will not reflect their real value, and we will continue to be victims of an economy built on a false assessment of risk.