Should We Be Worried About A Green Wall Street?

The simple answer is yes, because of the common interests of shareholders and executives.

With biodiversity in peril from overexploitation and the continued destruction of natural environments for agriculture and housing, there is now an explosion of talk about putting a (monetary) value on nature and letting financial markets be the arbiters of protection vs. exploitation. This is, of course, a terrible idea, but there is a concerted push by the finance sector, their think-tank proxies and politicians beholden to both to make it happen.

In order to understand why, we need to take a brief detour into the current state of corporate equity ownership and shareholder interests. After the great experiment in highly diversified ownership of corporations that followed the Second World War, holding structures shifted back to concentrated ownership starting in the 1970s and accelerated in the 1980s to create a corporate governance regime of ‘shareholder primacy’.

This coincided with the neoliberal reforms of the 1980s and 1990s which included the deregulation of financial services.

As a result, private and public pension funds and mutual funds became major holders of corporate equities, displacing households, as shown in the US example.

These shareholders were interested in share price growth and profit growth of individual companies (in which they had a sizeable ownership stake), but they needed management to play along with their desire to put profit and stock price above other considerations like investment in R&D, wage growth or maintenance of productive capital.

They achieved this aim by linking executive remuneration to profit and stock price performance with the primary vehicle being executive stock options (and their favourable tax treatment compared to executive salaries). By making both executive salaries and stock options hugely attractive to the managers most driven by greed and status, they set a process in motion that resulted in ‘shareholder primacy’ or the belief that the only valid measure of company performance is its stock price.

With managers incentivised to reduce any expenses that did not directly result in profit growth, outsourcing to low-wage economies became the major trend of the 80s, 90s and 00s. Because low-wage countries tend to have lower levels of environmental and social standards related to corporate activity as well, this cost cutting exercise has led to a myopic view of a corporation’s purpose and a myopic view of what executive management cares about. The inevitable result is an almost casual disregard for anything other than financial metrics.

Why does this matter in relation to sustainability? Because it goes hand in hand with the lack of transparency and accountability. It makes it far too easy to not care and not to want to know.

So, should we be concerned that governments have started talking about biodiversity credits, biodiversity offsets, accounting for nature or a Green Wall Street? Absolutely, because the underlying drivers of share price growth and profit growth at all costs are unchanged.

All of these words being invented right now are simply proxies for commoditising nature, that is putting a price on ‘ecosystem services’ so they can be financialised and traded on markets. Because this is only possible through extreme simplification (reducing the value of a river to its water flow or useable fish content), it will have many perverse consequences. But because corporations and financial markets are conditioned to ignore those perverse consequences and focus on making bigger profits only, the systems will not be corrected.

A good example of this process in action is the biofuels mandate in the US (known as RFS – renewable fuel standard). The initial idea from the early 1990s of replacing oil-based fuels with ethanol from corn starch was motivated by ‘increasing sustainability’. Through decades of industry lobbying this has morphed into a monstrous scheme of policy settings, tax credits and grants that has achieved sustainability of profits for corn agriculture (with guaranteed markets, buyers and increased prices), but otherwise is disastrous from an environmental perspective as it has led to a dramatic increase in acreage for corn and soybean cultivation, increased water and fertilizer use and overall caused higher carbon dioxide emissions than using oil.

Do any of the executives and traders care about those impacts? No, of course not. Profits have increased and become predictable in an industry normally associated with constant price fluctuations and unpredictability. What’s not to like? That overall the policy is harmful to the environment is not ‘their fault’. They just lobbied for what’s good for them.

The USA is not alone in this, just take a look at Northern Ireland’s Renewable Heat Incentive scandal, also known as the Cash for Ash Scandal.

If this lack of care and accountability is indeed how executives routinely behave in practice, we should be able to observe a link between the level of breaches of EHS (Environmental Health & Safety) regulations and the actual financial performance of a firm compared to its aspirational level of performance. Any such deviation in performance would bring stress to executives charged with delivering financial results and should entice them to ‘cut corners’ in EHS regulations to bring actual performance into line with aspirational targets.

Fortunately, this has been studied by academics using UK manufacturing companies as an example and this link was indeed present in the data. Both companies that underperform against targets and companies that outperform their stated (or historical) financial performance are more likely to breach EHS regulations. Whilst it is intuitive that underperformance leads to reducing compliance measures and monitoring, observing increasing breaches due to overperformance maybe less self-evident. The answer is most likely hybris – the ‘better’ you are (perceived as) the more you think you can get away with. Both the BP Deepwater Horizon disaster and the VW emission cheating scandal would fall into that category.

It should be immediately obvious that this behaviour is not going to change by means of ‘self-regulation’ or by joining voluntary ‘certification’ schemes or by inventing new markets for ‘ecosystem services’. If executives feel accountable to shareholders only, then financial performance against historical performance and aspirational targets will determine their actions.  

As long as shareholder interests are allowed to dictate executive behaviour, we are not going to see any meaningful transition to sustainable practices; it will remain nothing more than a marketing driven trend. There needs to be a healthy scepticism of President Macon’s Biodiversity Credits (after all his G7 Fashion Pact hasn’t achieved much), Prime Minister Albanese’s Biodiversity Offset and anything termed a Nature-Positive solution. These are again simply attempts to financialise nature. They will inevitably be designed to enrich shareholders, executives and financial intermediaries, not to protect biodiversity. If they are to make money, they have to increase exploitation of nature, not reduce it.

While business is talking about mandatory reporting at the CBD CoP15, as has been clearly pointed out by Nele Marien, FoEI’s international programme coordinator on forests and biodiversity, who said “For most companies, their main aim is to make profit. Their mandate is not to save biodiversity” continuing, “The main type of reporting they want to make mandatory is the risk to business. But the point of the convention [on biological diversity] is to save biodiversity, not to save business”. Hence when business and finance get all excited about ‘nature positive’, ‘green wall street’ and ‘biodiversity credits’, they are getting excited about making more money.

Those who care about the ongoing destruction of ecosystems and biodiversity need to approach these announcements on nature-related finances, accounting and disclosures with our eyes wide open and not through rose-coloured glasses. It is really as simple as that.