Episode 6

How Wealth Protects us From Climate Change

Transcript

Speaker1: Well, welcome to the Q Talks podcast from Loyola University's Quinlan School of Business. This season, we'll be exploring issues surrounding the impact of wealth inequality, its ramifications for business, and any ethical arguments or other anomalies that are a result of the inequality that currently permeates American society. Join us as we unpack important issues present in our country and our world. 

Rick Sindt: Welcome to Q-talks. I'm Rick Sindt. And today we are joined by associate professor in finance, Swasti Gupta Mukherjee. Swasti, I'd like today to talk about the link between climate change and wealth inequality. And I know this is something you're very passionate about. So can you give us sort of the big picture global view as you see it today? 

Swasti Gupta Mukherjee: So the interesting thing about climate change in my view, and as you know, I have really focused on this topic increasingly and it's very easy to give a global view about climate change, because right now, in terms of crises, there really isn't anything more global than this. Climate change is now having very real and very tangible effects on the way of life in this world. And for a long time, people felt that a lot of the research on climate change, a lot of the facts and figures that were being thrown out by the especially the scientific community was hypothetical. That is certainly no longer the case. And one of the major things that we are seeing all across the world, which is why it's a global risk factor, is that we are seeing extreme weather events getting more frequent and larger in magnitude. So all kinds of natural disasters have been linked to climate change. Not necessarily always, it is the case that climate change is causing the natural disaster, but what has reached large scientific consensus is that climate change is exacerbating the magnitude and the effects of these natural disasters that in the past maybe the world was able to deal with better. Also another thing that we are observing increasingly, especially in the last three or four decades, is that these kind of weather events are effectively affecting previously less affected regions of the world. So there were large parts of the world's geography which were not really that vulnerable to a lot of natural disasters but we are seeing those things change, and I'm sure we'll talk more about specifics around that. But just in terms of the link to wealth inequality, I think one of the things that we really need to internalize and understand across every area of research, whether it's business, sciences, humanities, whatever it is, as well as the business world, is that climate change is actually making inequities worse. And we are talking about many different kinds of inequities. And when we talk about inequities, we are talking about within countries as well as across countries. So what do we mean by that? So one of the primary examples being agriculture. So climate change events are affecting agriculture everywhere, food insecurity, water shortage, all of these things that tie into agricultural production, commodity prices, commodity shortage, all of those things are getting worse because of climate change, because of warmer temperatures. So the crops and livestock, they find it harder to survive. All of these things also feed into education, which increases wealth inequalities. Because the worse an economy is doing, the less likely it is for people in those economies to be able to educate their children. Right? And lesser education is clearly tied to lesser opportunities, lesser future wealth and so on. Then it is exacerbating the refugee crisis in some parts of the world, like the Middle East and Africa. There's an intersection between climate change events and violence and wars. So it's exacerbating this refugee crisis with the intersectionality between violence and the natural disasters. Then we have a public health crisis. We are living in the middle of a public health crisis in the COVID crisis right now. But a lot of medical organizations in the world and the American Medical Association, views climate change as a public health crisis as well, because warmer temperature leads to things like smog, etc., which is affecting people's respiratory health and various other factors. So we are really talking about the confluence of many different things that are increasing the inequities in society. And just to kind of summarize in terms of some numbers, I think there was a study that came out of Stanford where the gap between economic output among the richest countries and the poorest countries due to global warming has increased 25%. So that's quite large. And also another data came out of United Nations where it said that by the year 2030, which is really not too far away, climate change could force an additional 100 million people out of their homes, so the geographical displacement. So we are talking about really large numbers in terms of the magnitude as well and it's no longer hypothetical. Right? So just to summarize, in the words of Pope Francis, he has said that the global failure to act on climate change is a brutal act of injustice towards the poor. So everybody is making the link between poverty, wealth inequality and climate change now, starting from scientists to the pope to even Hollywood activists. 

Rick Sindt: Thanks. That's a very nice overview. I'm wondering if in your research, are there any individual stories that have stuck with you or that come to mind as very nice illustrations of what your concerns are? 

Swasti Gupta Mukherjee: I think increasingly the fact that we are even seeing a lot of domestic events because we are largely restricted to the lens of the US, right? So we pay more attention to the news here. Last year we saw huge scale damages with the wildfires in California. This year, right now, and we are increasingly seeing the effects of this, is the natural disaster that we are seeing in Texas, the freeze that has caused large scale power failures. And we are increasingly here hearing specific stories about families, about losing loved ones. And I think those are the things, unfortunately, of course, somebody is paying a very, very heavy price for this. But those are the stories that the optimistic side of me hopes that can really mobilize people to take action, because now they are actually associating it with faces and names, right? It's not something very distant and kind of intangible. 

Rick Sindt: I think what just happened in Texas is a very interesting event because I think it took a lot of things that happen with climate change that normally happen on a kind of extended timeline and made it happen rather rapidly, right? So there was a change in the weather it impacted infrastructure and now people are immediately seeing the costs as they are receiving electric bills that are 16,000, $20,000 for two weeks worth of electricity. So I want to spend a little more time talking about the costs that we are going to see and have already started seeing, because certainly, like I said, not everything moves as quickly as this Texas disaster, so as climate change continues to change our world, what do you see happening in the housing markets and insurance industries with mortgages, and how is that going to impact inequality? 

Swasti Gupta Mukherjee: So that is the biggest unfortunate--I mean, climate change in general is, of course, very unfortunate the way it's affecting the whole world--but the fact is it's pretty much without doubt at this point that the fact is it is making inequities worse. Every kind of inequity we can think of, whether it's housing markets, food insecurity, public health, all the factors that I mentioned. Now, the reason behind that is the fact that multiple types of vulnerable populations actually live in the areas that are worst hit by climate change-related events. So if we talk about, for example, some of the coastal populations in many different countries, a lot of those coastal populations tend to be more dependent on agriculture. Average socio income level is lower. They have less political power as well. And those are also the areas that are worst hit by climate change. Right now, if we think just in terms of the finance of these areas or how financial markets are reacting, in fact, a lot of the risk of these areas is not really priced into the assets of these areas. For example, housing prices or the insurance premium in a lot of these areas that are at higher risk of climate change related events, the risk is not priced in. Now think about when the risk does start to get priced in more directly. It's actually worse for these populations because it will leave many of them unable to even get home insurance, for example, because it will become so expensive. And for those people who are able to live in those areas, it is definitely going to affect property prices as well because property values are going to go down. And for many of these people who actually even are able to afford to own their own homes, that is a large part of their net worth, right? Their total wealth. So those values going down means their overall value is going down anyway, right? So there are many kinds. Of different cumulative factors here that are going to make the inequities worse in these regions. And those regions that are most affected also coincide with having the most vulnerable populations in many ways. 

Rick Sindt: Thinking about what you just said reminded me of a very nice infographic that was recently released by ProPublica that tracked how the climate in the United States is going to probably change between now and 2070 if current trends continue. And so in brief as you watched it and saw things, you saw our farmland move north, you saw the south dry out and become more arid. And surprisingly, their humidity rose in areas like the southwest and became almost uninhabitable because of the wet bulb temperatures. And so I was watching that and thinking about population migration and how that is. Very slowly going to move us. And I'm trying to draw a connection between how there's going to be a time where some of us perhaps are privileged enough that we get to move for comfort, we get to move to a more comfortable climate. And then there are going to be those of us who are perhaps like left behind or forced or are unable to move right because of our wealth decreasing, because our property values went down, because our insurance went up, and we'll find ourselves in untenable situations. And so I wonder if you could maybe share your thoughts a little bit on the intersection between these like changes in the natural world and changes in our socioeconomic world and how they intertwine. 

Swasti Gupta Mukherjee: I mean, that's that's a great question. And in fact, we if we think about some of the specific events and natural disasters we have seen in the last few years, what you're describing is kind of a more global and more slow moving picture, which was expressed in the form of an infographic. But if we take one event, for example, I've mentioned California and Texas, but also Puerto Rico, right? The hurricanes are getting worse. And largely the scientific consensus is that the hurricanes are becoming more severe because of the effects of climate change. So what have we seen or what have we learned from Puerto Rico, for example, which happened several years ago, right? What we have seen is that the poorer parts of Puerto Rico are the parts that are still waiting for recovery, right? There are parts of Puerto Rico where full functionality has not yet been done, and those tend to be the least developed parts of Puerto Rico. And then I read in the news and various articles that the richer parts of Puerto Rico are the richer families and people from Puerto Rico. They were they had the resources to move, right? So they were able to migrate to--maybe even some of them had different houses on the mainland, right? Or they migrated to safer parts. So that is a luxury that not all populations can afford the ability to migrate or move without the loss of serious value and assets and even livelihood, right? We are seeing similar things in Texas as well that, in fact--and this is this was very, very disturbing--that utility companies in many areas got to decide which parts they were going to keep the power on in and which parts they were going to have the blackouts in. So we can't have this kind of decision making, which is related to life and death in the hands of private actors or other human beings, right? Everybody has the right to life. And as a result, clearly, there was a disproportionate effect of these blackouts in the parts of Texas which had poorer populations, right. One of the most, I think, heartbreaking stories I read in the news was about an 11 year old boy who his family is claiming that he died of hypothermia in a mobile home, which was they were depending on the power to keep their children warm. But he died. Right. So these kind of events are clearly largely affecting people who don't have a plan B, everybody cannot afford to have a plan B. And that's what we are increasingly seeing a lot in a lot of these geographies and after a lot of these events. 

Rick Sindt: So we've talked a lot about how the wealthier you are the more privileged you are, the more means you have, the less impacted by climate change your life will be. And I think there's a unfortunate catch-22 in that because those people are also the ones that perhaps have more of the means and the power to address what is ahead of us and to act in ways that would mitigate climate change. So while it will probably be difficult to motivate action because of these factors, I'm wondering if you could share with us how do you think businesses should act in light of what's currently happening and what you predict to occur? Like, how do you view their responsibilities and obligations in this moment? 

Swasti Gupta Mukherjee: So I think one of the most primary responsibilities--so we need a starting point, right? I think the starting point very simply for any business should be do no harm, right? So they cannot actively be causing harm to the society around them, or the environment around them, or the living conditions around them and be a viable business model, right? So we first need to address the issue of harm itself, right? Then once we are done with, let's say, focusing on and making sure that the businesses are doing no harm, then we have to start taking care of some of the perverse incentives that do exist. For example, the most current thing that we are seeing in the news right now related to Texas, I think I saw some data which said that electricity prices in large parts of Texas have gone up 300 times. So the amount of the total electricity bill that people have paid in the last couple of weeks was around the same as the last three years combined. And a few of the electricity and the utility companies are having a windfall because of that. But then there's great amount of damage to a whole lot of other people. So this perverse incentive system where the damage to some people or the shortage of basic living conditions, things that contribute to living conditions such as heat and electricity and water, we cannot have a system where that damage is benefiting certain people, right? So we have to fix the incentives in the way that the business world is functioning and make sure that no one can profit off of the loss of life of other people, for example. And then, of course, we have to look at the positive side of it, that is reward businesses which are doing good, right? Which are, of course, to be a viable business they have to have a profitable model, but they also need are perhaps providing solutions to some kinds of problems in society, right? Or the environment. And we are seeing that actual financial growth can be combined with things that are good for the society and environment. For example, one of the best performing sectors in the economy across multiple markets lately has been electric vehicles. And the main motivation behind electric vehicles is the fact that they are much more green than basically the old, old school technology, right? So they are financially viable, they are a huge growing industry, they have made a lot of money for investors and insiders and people who are at the cutting edge of that innovative technology, but at the end of the day, they are also doing something better for overall society, right, for the longer term sustainability of society as well. So those are the kind of models that we should be focusing increasingly on. That is, first of all, rule out harm, remove bad incentives, and then focus on positive incentives to generate profit as well as do good. 

Rick Sindt: To dig a little deeper into that, I'd like to talk about an article you recently had published in the Stanford Social Innovation Review. ESG is a very commonly spoken about topic in business in general today, I think in all sectors of it. And in this article, you make an argument that the need to act on climate change is so pressing that we should not lump it in with other social good initiatives. So basically like separating the E out into its own thing from the ESG. And I would like to ask you to take a few moments to elaborate on your position and why you think this is. 

Swasti Gupta Mukherjee: So the main reason that motivated me to write that article or to think in that way is the fact that while I definitely consider multiple of the ESG factors, which is the environmental, social and governance factors that are increasingly being discussed in financial markets and. Business in general. Of course, many of them are important to varying degrees. We can debate about that. But the thing that worries me is it is still not as mainstream in terms of understanding various factors related to ESG and the risk factors associated, especially with the climate change part. It's still not mainstream enough for my liking because it's still viewed as kind of like a niche product, ESG related exchange traded funds or other kinds of ESG focused vehicles, they're largely seen as kind of a special feature, financial product in the market. But climate change, the more we think about it, the more we understand data coming out of the science side of it is it's quite different. It's a different animal than the other social and governance factors. And the main argument that I make in the article is if we think about two aspects of climate change that make it a different creature altogether, one is that it is scientific fact. So compared to a lot of the other factors, it is much more clearly understood in terms of the science. We are working off of a common set of facts that largely global scientists agree on, and we are able to figure out what are the real effects of those scientific facts. For example, AT&T has spent billions of dollars in doing damage repairs related to climate change events on its assets. Those kinds of real, tangible effects don't always exist when some of the other factors that are lumped into ESG together. So I do believe that things for which we have scientific data should be treated somewhat differently than other things which are more ambiguous, more related to hypothetical models and which we are still debating in terms of how big of a risk it is. And the other thing that is quite distinct about climate change is compared to several of the other factors in environmental, social and governance related aspects, is it's a macro risk factor, meaning it is affecting everything, it's affecting all businesses, it's affecting all stakeholders, to varying degrees, of course. For example, we talked about vulnerable populations and less vulnerable populations. So clearly some populations, some stakeholders are more affected. Some stakeholders are less affected. However, directly or indirectly, it's affecting all businesses. So given that it's so macro in terms of its effects, it doesn't know any blue states or red states, it doesn't know any national borders either, right, it affects everything. So in that regard, it has to be treated as a macro risk as well, which I don't feel it's not being sufficiently treated as a macro risk that absolutely has to be addressed, partly because the ESG debate kind of has become a little bit more fuzzy and kind of distracting from some of the core things that we do know about climate change. And I think some of the surveys that have been done, it showed that a majority of shareholders, they don't exactly know what ESG really means. So while they're interested in ESG, they don't know what comes into the ESG umbrella or what is under the umbrella. So with climate change in specifically, we can't afford to waste any more time in terms of understanding and addressing because it's a compounding risk. That's another difference between climate change and some of the other factors. The fact that we are not addressing it means it's growing. Whereas with some of the other factors, if we don't address it, it stays the same, right? It stays at the same level of risk. But climate change is compounding and growing as a risk factor based on the fact that we're not addressing it sufficiently enough. 

Rick Sindt: Gotcha. If you think it'd be interesting, I was thinking about how cryptocurrency is something that is really only accessible to wealthy individuals at this point. It's a way that some of them are making a lot of money, but also Bitcoin has the same carbon footprint as New Zealand. So would you like to go down that rabbit hole at all? 

Swasti Gupta Mukherjee: I can give a general some general viewpoints about it. So cryptocurrencies, I think are definitely a very interesting innovation. But like a lot of different technological innovations, there is positive side, but I also do believe that there is a negative side. It's not costless. So while of course in terms of the carbon footprint, all of this stuff, anything that is cashless is good, right? So it doesn't even necessarily have to be cryptocurrency. It can be other cashless forms of payment, right? However, the negative side of it is it is also a market that can be easily manipulated. It's not regulated at all. So while there is a debate around it, because some people view it from the angle of it being a fairly democratized market or kind of taking power away from the banks where banks are kind of they have become the villains of the too big to fail type of organizations. But then on the other side is when you don't have any kind of regulation, it also leaves open the possibility of a few bad actors being able to game the market or manipulate the market without actual consequences and exploit some of the people who are not as sophisticated players or not as powerful players. So definitely there is a good side to it, but I also do believe that there is a bad side to it, which at some point needs to be addressed as it becomes a bigger and bigger part of the total currency market. 

Rick Sindt: So as you as we reflect on what we've talked about today and you have all this knowledge beyond this, I'm wondering if there are things that you hope for to happen in the future, whether that be some of the business actions we've spoken about, or if there are things you hope governments do. Like if you were to project into the future, what is it that you hope most will happen? 

Swasti Gupta Mukherjee: So for governments, I think governments have a very, very important role to play. And interestingly, climate change is an aspect or a type of risk where I do feel Europe has made more progress than the US. A large part of it being that in the US the issue had become very, very political. I feel like now we are moving towards a sort of apolitical way of viewing climate change because we are increasingly seeing Wall Street, for example, just stated as a fact that we have to manage climate risk. We are seeing companies that are apolitical, stating it as a fact that we have to do risk management around climate change. So that is certainly needed. That's a starting point, that we have to get to the facts, right, and then objectively view the facts and decide what are the different stakeholders in society, what role they need to play. So for policymakers, I think much like anything else, even with climate change, they would have to play a very critical role in defining incentives and in defining penalties or costs, write incentives for being good actors and penalties for being bad actors. So, for example, the current administration, Joe Biden's administration, has a pretty ambitious agenda around climate change. They want to encourage, for example, green technologies and so on. We'll, of course, see how the legislation plays out. But at the end of the day, what they're trying to do is they're trying to incentivize types of businesses which are good in terms of mitigating climate change, right? So first of all, do no harm, like I said earlier. Then trying to incentivize profitable business models that are finding a solution. Much like electric vehicles or solar energy and so on, which we are seeing increasingly that they are significant players. A particular company that is kind of ahead of its time, even in the US, is, for example, NextEra Energy. Even though it used to be a traditional utility, it has increasingly invested more in renewables and it is well-positioned to kind of build on that in future years. So it has taken on the incentives that the government has provided and turned it into a profitable model that hopefully it can build on in the future and other companies can build on as well. Now, the cost side of it, that is, how do policy makers actually impose costs on bad actors? So that is also quite tricky because eventually companies would have to internalize the cost of doing damage to the society or to the environment. If they don't internalize the cost and they can just push over the cost to somebody else, then it's a problem. It's an incentive problem. So various ideas have been floated. One of the recent Nobel laureates is a person who is very kind of have strong views about carbon tax, for example. So those kinds of things which are internalizing the cost of having a very large carbon footprint or doing other activities that are causing damage to society, those kind of incentives have to be created. So good things for good business models and then penalties and internal internalization of cost for the ones which are damaging the society. So that as far as policy makers are concerned and for businesses, I think there are of course various models that they can develop new technologies, etc. that are already happening. We talked about green energy. We talked about electric vehicles. We have talked about more cashless apps and transactions. All of those are examples of technological innovations that are largely good for the environment. Another thing that needs to happen, and increasingly we are seeing discussions around that, is to tie executive compensation to sustainability goals, not to short term financial profits, which has become the model in the last few decades. But interestingly, I think I saw a survey where more than two thirds of investors, even in current markets, want executive pay in some shape or form tied to ESG initiatives. 

Swasti Gupta Mukherjee: And we are aware that in general, millennials and younger generations, they do care more about sustainability related goals. So if they are the future shareholders and larger and larger stakeholders in these companies, it's not impossible to imagine that the companies, even to satisfy their stakeholders and shareholders, have to address these issues more directly and potentially incorporate it as part of compensation. Another piece of data around that is, I think it was more than 55% of shareholder proposals that were put on the table in 2020 were ESG related, right? So that's a significant majority and we are probably going to see that trend increasing as well. So combination of shareholder proposals, negotiation, there are more activist investors these days who are pushing these companies towards more ESG and sustainability initiatives. And then, of course, also perhaps tying executive compensation to some longer term goals and sustainability related goals, because I don't believe that executives are against against sustainability. I think it's an incentive issue. If they're incentivized to do it, they will do it. And I think we are seeing more debate around that. But I do wish it could move faster. 

Rick Sindt: In closing, I want to ask your professor of finance. Is there anything you would recommend that we as individuals can do to help reinforce those right kinds of reinforcements and incentives that we've been talking about, whether it's how I invest my 401K or how I shop or whatever, like, how would you recommend we use our money to make the incentive structures that we've been talking about today? 

Swasti Gupta Mukherjee: That's a great question. And I firmly believe that any kind of participants in financial markets or business and society, they can play their role. Of course, the degree of influence of that role may vary, but everybody has a role to play here. And since you mentioned 401Ks, we are actually increasingly seeing universities consciously improve the number of ESG related funds or sustainability oriented funds that are offered as part of 401k. So those are certainly fairly low cost in terms of our attention. Low cost things that we can do, just kind of try to focus on more sustainable businesses, even as stakeholders, even in terms of our 401Ks, and of course, those of us who are investors, even outside of 401Ks, we can focus on high growth, more technological advancement that is also leading to some good for society and the environment as well. So those are certainly things that every level of financial stakeholder can participate in and take action boards. 

Rick Sindt: Swasti, this was a very nice conversation. Thank you so much for joining us today. 

Swasti Gupta Mukherjee: Thank you, Rick. It was a pleasure to speak to you about a topic that I care a lot about, and hopefully the conversations will continue between us as well as in society as a whole. 

Rick Sindt: Yes, I hope so. Thank you. 

Speaker1: This has been an episode of the Q Talks podcast where we seek to marry the wisdom of the Quinlan community with the issues of today. Special thanks to our guests as well as Dean Kevin Stevens for his generous support of this podcast. Matt Shiley, our student producer for editing this episode, as well as Loyola School of Communication and UW for their continued collaboration. Before you leave, take a minute to support us by sharing with friends or rating and reviewing our episodes to help expand our reach. Thanks for listening. I hope you join us next time.