Like the cicadas that plague the Atlantic seaboard of the United States every 17 years, inflation has awoken from its most recent hibernation. The hike from about 2 percent in a typical year in the United States to 5.3 percent in the third quarter of this year marked roughly a decade since the last time economists took to op-ed pages and talking head circuits to warn of an uncontrollable rise in prices.
Many familiar causes lie behind this recent bout of inflation. And many familiar motives exist among those raising the alarm, from genuine economic analysis to ideological campaigns to stop further stimulus spending. But this time, beyond the COVID-19 pandemic, there’s another new wrinkle in the old tale: green policy initiatives and the broad Environmental, Social, and Governance (ESG) movement for socially responsible investing.
For proponents, the use of ESG criteria amounts to an attempt to harness market forces in service of sustainability and other values. By rating companies’ performance on the three key indicators, the thinking goes, the movement mobilizes investor pressure for better practices and greater transparency regarding the impact of operations on the environment, race and gender issues, and human and worker rights, as well as promoting good corporate governance.
ESG has been embraced by investors, government regulators, and corporations with increasing frequency, and an ESG ratings industry that applies complex algorithms and methodologies to a company’s performance has grown up around the movement. Firms like Trucost (owned by financial ratings firm S&P Dow Jones Indices), MSCI (owned by Morgan Stanley), Refinitiv (owned by the London Stock Exchange Group), and Sustainalytics (owned by the financial analysis firm Morningstar) conduct detailed surveys of corporate operations, scouring everything from the carbon footprint of a company’s real estate portfolio and the gender and racial makeup of its staff and executive suite to its supply chain and third-party labor practices.
Such work has, indeed, produced some standout cases, in which corporate brand and share prices have both benefited from good ratings. BlackRock, the world’s largest asset manager, has been a vocal and pioneering advocate of designing investment funds that steer clear of carbon-intensive companies. Patagonia, the global sports apparel giant, has led the charge in removing from its supply chain cotton that originates in Uzbekistan, or China’s western province of Xinjiang, where forced and child labor is endemic.
Skeptics of ESG, meanwhile, have argued that focusing corporate leadership and investor sentiment on such “non-material” indicators will raise the cost of everything a company does, which in turn will be passed on to consumers in the form of higher prices for heating a home, buying a down vest, or filling a weekly grocery basket. They also dislike the inconsistent methodologies applied to corporate performance. It’s devilishly hard to be empirical about questions like whether water is being wasted somewhere deep in your supply chain or if your company’s compensation scheme advances the causes of women, racial minorities, or income equity. On a more fundamental level, meanwhile, supply-side purists resent any attempt to stay the invisible hand of the market.
By and large, such critiques haven’t captured much public attention. But the reemergence of inflation has provided opponents of ESG and other green initiatives with a weapon. If the cost of living will shoot up for the great mass of humanity, whose “buy-in” is critical to secure the sacrifices and innovations needed to move the planet toward a net zero-carbon economy, then inflation is a godsend for those who see such pursuits as futile or even quixotic.
Whom to believe? Pro-ESG types do have some history on their side. In retrospect, the last round of panicky rhetoric about hyperinflation—after the 2008–2009 financial crisis—was itself inflated. The economy was damaged, but it continued to do what it does best: make rich people richer. “Inflation bugs,” as the harbingers of doom were known, had a host of motives: softening new banking regulations, increasing or decreasing stimulus spending on infrastructure or other pet projects, preventing “socialism.” In the end, the inflation hawks (or “chicken hawks,” as the economist Nouriel Roubini described them to me in 2012), ranging from Nobel laureate economists like John Taylor of Stanford to presidential candidate Mitt Romney right down to the Tea Party movement, all wound up looking silly. Inflation dropped below 3 percent in 2011. The financial community has largely dismissed it as a non-issue in the decade since.
However, while last round’s “Cassandras have been proven wrong,” Columbia University economist Adam Tooze told me in September, “it’s not as though . . . the rest of us have a very strong theory about why.” Given the massive increase in the money supply driven by bond-buying sprees in the Federal Reserve and other central banks since the 2009 crisis, Tooze finds the fact that interest rates are still historically low “frankly mystifying.” This is evidence, he believes, that this time we are “really in a moment of rupture.”
When classical economists and economic historians—both Keynesians like Tooze and Milton Friedman acolytes like Taylor—are both confused, it is worth noting. And therein lies the real lesson for ESG. Dismissing outright the likelihood of disruption or inflation as the world transitions away from carbon is just not credible. What’s worse, it stores up problems for critics to pick apart later. Far better, then, to concede inflation up front as part of the cost accrued in the last several decades when the West fueled growth by borrowing from the future.
The Panic This Time
Among those who foresee a coming inflationary rupture is Lawrence Summers, a former Clinton Treasury secretary, who wrote a much-discussed piece in the Washington Post claiming that the consumer price index had risen by 7.5 percent in the first quarter of 2021. (Other economists, including James Galbraith, have put the figure closer to 3–4 percent.)
But as with love and charity, inflation is its own reward. Summers’s warning kicked off a new round of jitters and predictable calls by right-leaning politicians in Europe and North America for central banks to hike interest rates and for governments to halt stimulus spending. The opposition focused in particular on spending meant to address various ESG tenets: subsidies for climate change mitigation, childcare programs, and tax incentives for the renewable energy industry. For example, R. Glenn Hubbard, a Columbia economics professor and advisor to several Republican administrations, dismissed Biden’s key legislation on infrastructure investment as “social spending.”
Right on cue, Michael Burry, a much-followed investor who became rich by shorting the markets just ahead of the 2008 crash, tweeted about this point last spring. Burry argued that the Biden administration’s attempts to include in infrastructure spending some projects that go well beyond bridges, ports, and highways show that America is on the road to becoming Weimar Germany, the interwar republic notorious for inflation so virulent that people went to market with wheelbarrows full of currency. Burry wrote that “Germany [the US] started by not paying adequately for its war [on COVID and the Global Financial Crisis fallout] out of the sacrifices of its people—taxes—but covered its deficits with war loans [Treasuries] and issues of new paper Reichsmarks [dollars]. #doomedtorepeat!”
In early June, former US president Donald Trump chimed in, emerging from his own hibernation to warn on Fox Business News of “massive inflation” and gas prices that would soon be pushing $8 a gallon. Stuart Varney, his interviewer, later asserted that the new Biden administration’s determination to rein in the petroleum industry will boost—you guessed it—inflation.
And so, in some circles, this round of inflation panic has come to have one villain: environmentalism. From the Biden administration’s green subsidies for electric vehicles, wind farms, and solar power to proposals before the Securities and Exchange Commission (SEC) to require US corporations to report on their ESG performance, opponents are piling on and warning of the long-term disaster that beckons as the costs of making good on these pledges are passed on to consumers.
Even a Stopped Clock . . .
To be sure, slamming anticarbon policies on Fox is a lot like chumming for fish off the back of a trawler: you don’t much care what you’re dumping in the ocean as long as the fish show up. Mercenary though he may be, however, Varney is onto something. A growing body of evidence does suggest there will be a price—a “greenflation” as some on Wall Street have labeled it—to making the sweeping transformations that climate and ESG activists desire.
Will Nash, an influential blogger and tech entrepreneur, sees a couple of main drivers for inflation. For example, decreased capital investment in oil and gas, spurred by lower investor appetite, will raise energy prices during a transition to renewable sources. Wages may also rise, in part to meet social commitments and tackle income inequality, a major goal of ESG’s social component. Finally, competition for green raw materials like cobalt, nickel, and lithium—all components of the latest generation of batteries and of everything from aircraft to plumbing fixtures to electric vehicles—could push their prices skyward.
And while no serious proponent of green policies claims the process will be either easy or free, there has been a tendency to dismiss the possibility of inflation as incidental. For example, Ann Pettifor, the much-quoted author of 2019’s The Case for the Green New Deal, argues that all this green progress will “pay for itself.” Bernie Sanders, Alexandria Ocasio-Cortez, and other left-wing pols make similar assertions. And then there are those like Dave Levitan, author of Not a Scientist: How Politicians Mistake, Misrepresent, and Utterly Mangle Science, who points out that the Green New Deal may be expensive, but, as the title of his New Republic article says, it “costs less than doing nothing.” True, but who is arguing that we do nothing?
In the long run, one could make the case that any expense is worth the cost of avoiding human extinction. But such attitudes store up great trouble for later by providing easy “gotchas” for opponents of a comprehensive approach to climate policy. The minute there is any inflation, after all, Republican lawmakers could redouble efforts to dismiss climate change remediation as a liberal hoax, led by brokers and financial players who still see profits to be wrung from industries like conventional oil, coal mining, and fracking.
Hedge funds, after all, are already jumping on this particular bandwagon. While asset managers like BlackRock or State Street and global banks like Goldman Sachs, J.P. Morgan, or Citicorp cannot ignore the momentum for ESG among investors (and, increasingly, regulators), hedge funds remain somewhat immune. Their focus on raising money from large, independent investors has created an opening for anti-ESG investment opportunities, especially in the oil and gas industry.
“It’s such a great and easy idea,” Crispin Odey, founder of London-based hedge fund Odey Asset Management,told the Financial Times. “They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table,” he said. The article noted that Odey’s European fund “is up more than 100 percent so far this year.”
Besides denial, there’s also the problem of rose-colored glasses. Countless studies claim to provide empirical evidence that the costs of addressing climate ills will be temporary and negligible.
Take the ESG-friendly trend of local and state jurisdictions’ beginning to require climate-related disclosures from large commercial buildings, now the law in New York City, Berkeley, Austin, and other cities—and being debated by the SEC. In Europe, the Sustainable Finance Disclosure Regulation has regulators policing the claims that fund managers make about the sustainability of their investments, an approach that quickly trickles down in the form of more expensive credit and even divestment.
All perhaps fine. But who will take the hit? Will investors absorb the compliance costs in the form of lower margins? Or will owners just pass the trouble on to renters—already facing increasing difficulties finding affordable housing?
Good green job creation—a tenet of the social and environmental components of ESG—is another area where the dart board might as well substitute for science. For instance, a 2017 study by Boston University economist Heidi Garrett-Peltier arrived at a formula for calculating the net gain in shifting from “brown” carbon-based energy jobs to “green” renewable industry employment. Her model found a net increase of five jobs for every $1 million in investment (or subsidies) shifted from oil, gas, and coal to wind, solar, and geothermal.
Sounds great. But the rub is that the net gain she posited will be in “‘synthetic’ industries—namely clean energy industries that do not currently exist” in her model. The calculation may end up being correct, but it invites the kind of scrutiny that can derail serious progress.
There are also significant problems of definition. A December 2019 report by the Century Foundation argued for broadening the definition of green jobs beyond the standard established by the Bureau of Labor Statistics (BLS) in 2010. But even with a broader definition, we may ask, does a park ranger count? Probably (it does in both the Century Foundation and BLS definitions). An ESG fund manager? A bit less certain. What about the driver of a bus running on natural gas? Or a nuclear plant operator? Adding or removing a broad category like passenger vehicle jobs (which includes bus and taxi drivers), of which the BLS reported over 872,000 in the United States alone in 2020, can entirely invalidate the conclusions of any given assessment. Even narrowed to bus drivers writ large (162,850 in 2020, according to the BLS), the uncertain impact that their individual vehicles may have breeds imprecision.
In September, Brookings released a paper with a team of analysts’ assessment of green jobs creation. The paper addressed the uncertainty surrounding green jobs forecasts by examining what the American Recovery and Reinvestment Act (ARRA), also known as the 2009 Obama stimulus, accomplished in employment with its green subsidies and other environmental initiatives. “Overall, we find that the effect of green ARRA on total employment emerges only in the long-run,” the paper reported. “[T]he effect on total employment is often imprecisely estimated” because of this timing of the program’s impact. The team found reasons to be hopeful about the jobs created by the act’s green subsidies because it assumed future government policy would use tax incentives and other policy devices to buffer negative distributional effects.
It may well be that optimists’ wildest dreams are fulfilled, and the ESG boom represents all upsides and none down. But more realistically, even those who like formulations like the Green New Deal should understand that the road ahead will be very bumpy, a lot of workers in carbon-intensive industries will be bounced off the back of the truck along the way, and the price of almost everything that has been produced, delivered, or enabled by the carbon economy is likely to rise. And here lie real dangers.
Don’t Dumb It Down
Of course, some experts do warn that both inflation and labor displacement during the energy transition may be worse than expected. Take renewable jobs.
Here, dueling green jobs analyses abound. Consider an October 2020 Forbes article noting the “slightly different conclusions” of two studies comparing renewable energy and fossil fuel jobs. In a North America’s Building Trades Unions survey, skilled workers in energy-related construction reported that oil and gas construction jobs had better wages and benefits, longer duration, and more job security and project consistency than those in clean energy. By contrast, a coalition of clean energy groups, using wage data from the BLS and the 2020 U.S. Energy and Employment Report, found that green jobs had better benefits than other private sector jobs and paid as well or slightly better than fossil fuel jobs.
These green jobs could turn out to be well paid, of course, but that assumes renewable energy winds up costing a good deal more than current trends suggest. It’s simple math: high prices allow for high-paying jobs. And if the government wants to buffer the public against those high prices, it will mean higher taxes. There’s really no other way to square the circle.
In terms of inflation, green price hikes are already being “priced in,” as investors say, by many market professionals. The Man Group, for instance, a London-based brokerage, sees this inflation as such a certainty that it has stood up an investment vehicle to make money by hedging the performance of companies affected by these green price fluctuations. A recent note to investors from TwentyFour Asset Management, another denizen of the City of London, confirms the sentiment: “The pressure exerted on corporates to make significant reductions to their environmental footprints is unlikely to abate, and the number of companies committing to net zero-carbon pledges is rapidly increasing. While generating a positive outcome, such a policy is guaranteed to engender higher costs.”
This is not an argument against pursuing such policies, merely one for being honest about the downsides. If this were a typical political initiative—a proposal to lower taxes, for instance, or to provide a new benefit to a specific industry—downplaying the difficulties wouldn’t matter as much. In democracies, at least, by the time the true impact can be measured, the politician behind it has moved on.
But even a casual look at an initiative like ESG, which seeks to reveal and tame the behavior of large corporations for the rest of time, should suggest this is no transitory issue. ESG disclosure not only aims to spotlight environmental impact (carbon footprint, water, and waste), but also social (labor rights, racial and gender pay equity, worker safety) and governance (transparency, executive pay, board and staff diversity, and more).
This is all going to cost money, and history suggests neither shareholders nor the owners of commercial real estate nor the C-suite of senior executives will suffer. Academic studies routinely demonstrate that companies that perform well on ESG metrics tend to outperform their lagging peers. But that is better news for company owners than customers. To take just one example, imagine the cost of refusing, for instance, to source garments from Southeast Asia because a firm discovers abusive labor and environmental practices hidden in its supply chains. Shifting production from, say, Bangladesh or Myanmar to Mexico or Brazil will entail major increases in the price of each commodity and a lot of economic dislocation in those places. Multiply that effect by millions, and perhaps tens of millions of instances, and the effect on prices will be inevitable—even as the C-suite grows richer.
It may be tempting to elide that reality in service of the ultimate goal, whether climate resilience or income equity. No medals are awarded for being blunt about these things. Recent history throws up the case of Hillary Clinton, who spoke of putting coal mines and the miners who work them out of business. It went down very badly for her. But those leading the fight to mitigate and reverse climate change must nonetheless be comfortable with the downsides of what they propose, because failing to do so could bring even worse trouble.
So, the basics:
ESG-driven investment could be a start to plans that will require trillions and trillions of dollars, which will in turn require tax hikes to fund enormous increases in government research and development, international climate mitigation and resettlement, and new regulatory enforcement mechanisms.
There also will be mass displacement of some types of workers, particularly those in carbon-intensive industries—and they are unlikely to find comparable work in renewables, at least without moving to a different location and undergoing extensive training. That will make ghost towns out of some petro-reliant communities and could lead to failed states in some parts of sub-Saharan Africa and the Middle East that cannot transition away from their reliance on oil and gas.
And there will be inflation, which, at the moment, has come to be one of the most politically salient and serious short-term threats to the success of global climate efforts.
Acknowledging all of this with empathy and an active plan to remediate the worst pain has to be a big part of these efforts. McKinsey & Company found in a 2020 survey that 60 to 70 percent of participating US consumers said they were willing to pay more for consumer goods that were sustainably packaged. People may also tolerate increases in prices during the transition period away from carbon-based fuels. But they will lose patience if today’s happy talk proves too easy to ridicule when the going gets tough.
The ESG movement will remain subject to criticism, and the lack of standard, agreed-upon ways to rank and rate company behavior will provide ample ammunition to its enemies. It may be that regulators, spurred by activist jurisdictions like the European Union and California, will eventually standardize how such judgments are reached.
In the meantime, though, those who genuinely hope that the world’s nations will meet their climate commitments need to insist on a clear-eyed message about the costs of getting to net zero, including the higher prices that are inevitable during the transition period. The truth, they say, will set you free. Let’s make sure we start telling it fully soon.