Climate change is driving capitalism’s need to change to survive

The world can no longer afford stock markets having a free ride while governments do the heavy lifting of financing essential needs
Circumstances emerging around the world make it likely that capitalism will evolve into something closer to China’s brand of state capitalism

Anthony Rowley

Published: 3:30am, 3 Jan 2022

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Karl Marx believed that capitalism was destined to collapse once the proletariat class overthrew the bourgeoisie, but capitalism has proved remarkably resilient. The system faces fundamental challenges now, however, if it is to survive potentially massive demand for new investments.

The particular brand of shareholder capitalism that has existed in recent decades in the world’s biggest market economies has outlived its usefulness. It seems likely to go out “not with a bang but a whimper”, to borrow from the poet T.S. Eliot, via a spectacular stock market collapse.

Market economies look increasingly like dogs chasing their own tails. They have binged on short-term investment, especially in the tech sectors, creating stretched asset valuations and stock bubbles while neglecting the need for huge investment in long-term socioeconomic areas.

This means governments are struggling to fill a huge financing gap in fighting climate change, battling to overcome infrastructure deficiencies and trying to meet pandemic-related and other spending needs. They have borrowed heavily to do this but are close to the limit of what they can do.

Stock markets have in effect received a free ride while governments do the heavy lifting. But it is becoming increasingly obvious that there must be more burden-sharing between public and private finance if market capitalism is to survive. The next stage of evolution is overdue.

There are already indications of how this will come about. The most tangible sign came from Mark Carney, former Bank of England governor and now UN special envoy for climate action, during the global climate summit in Glasgow. Speaking as chair of the Glasgow Financial Alliance for Net Zero, Carney said some 450 firms and financial institutions in 45 countries had committed to delivering more than US$130 trillion of financing for a transition to net zero carbon dioxide emissions.

Pension funds appear to have made this commitment on behalf of millions of pensioners, insurance companies on behalf of policyholders, mutual funds on behalf of investors and companies on behalf of their shareholders. It must be upheld if the pledge is to prove worth the paper on which it is written.

Here we have a clear indication of how institutional capitalism is being pressured to recognise its social obligations. It also shows how private financial institutions and companies are being drawn into working more closely with governments and official bodies like the United Nations.

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The Carney-led initiative also represents a welcome and overdue departure from capital market diversions and fads such as environment, social and governance (ESG) investing. Trillions of dollars have already flowed into what might be called a “moral suasion” type of investing.

Well-intentioned though it was when it first emerged in 2004, ESG is more a kind of social contract gesture than a needed shift by market capitalism toward meeting hard financial targets. Much the same goes for the UN Sustainable Development Goals.

A whole financial industry has meanwhile sprang up around ESG and other forms of “sustainable” investment. While its benefits are proclaimed by financial practitioners who earn nice commissions on such products, there is scant evidence this is an effective way to channel savings.

But to return to the wider theme of capitalism’s evolution – through stages such as merchant capitalism, industrial capitalism and then private institutional or shareholder capitalism – it seems reasonable to predict that the next stage of evolution could be to “semi-state” capitalism.

To repeat a point made before in this column, state capitalism in China has served to finance development of some of the world’s best domestic transport and other infrastructure, as well as infrastructure projects overseas. Meanwhile, market capitalism has fallen short on both counts.

It is ironic now that circumstances including the exigencies of climate change as well as infrastructure, health and other spending needs are conspiring to push market economies towards a form of directed saving and investment that approaches nearer to being state capitalism.

This transition will hardly be a painless one. It follows that if many of the world’s largest financial institutions have committed upwards of US$130 trillion to climate change mitigation alone, as Carney says, that implies a huge potential shift of investment out of other areas.

If we are lucky, this shift will be a smooth one that allows overvalued stocks in tech and other inflated areas to shade down gradually while money shifts into relatively neglected longer-term areas of investment. But that is not the way markets normally work.

More likely, unfortunately, is that the bubble on Wall Street and elsewhere created by excess monetary largesse on the part of central banks will burst. If it does not happen as a result of inflation and rising interest rates, then it will be because of the redeployment of money by alliance members into long-term investments.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs