Thursday, September 22, 2005

Environmentalism and Capitalism

The two shall meet

Whenever "isms" are involved people might be found to drop the positive in favor of the normative in presenting their arguements. This happens alot in the capitalism and environmentalism dialectic. Environmentalists say that capitalists don't care about the environment and only want to make a profit. Capitalists say the environmentalists are watermelons; green on the outside but red (socialist) on the inside.

To be clear, what we (the international economy) have is not free-market capitalism, we have a bastardized version I like to call State-Capitalism. This is where large corporations work to gain privileges with government to game the market in their favor. This means that these companies use the government's single ability to force (or prevent by force) behavior to circumvent the more honorable behavior that a free-market (competing on a level playing field) would require. This in turn fuels the "ism" debate on each side.

Environmentalists disfavor this system because indeed companies do not have to be as clean as they otherwise would be if required to be the most efficient (use the waste from their production as part of energy input into their production). And corporations disfavor the environmentalists because they try to gain favor with the government just as they have done themselves.

Economic studies have shown that economic growth buys a cleaner environment. Increased wealth means more money to buy things that humans place a value on, and this includes cleaner water, better air, more parks, etc.

The largest source of funds invested in corporations are 'institutional investors', these are usually pension funds, with the California state pension fund being the largest source of capital in the world. Capitalism is, after all, defined as the process where the factors of production in a society are owned by 'capital' and not owned or controlled by the government.

These institutional investors are usually risk averse and oftentimes socially-conscious. They invest in companies for the long-term and often set societal trends in the voting power they have with their shares of stock. This voting power can help set the public policies of the companies in which they invest. Like most positive social change, however, new directions do not occur overnight.

Corporations, both small and large, are indeed after profits: this is how they exist, to offer monetary return to their shareholders, otherwise investors would put their money in other places. These profits provide society with the economic growth required to raise the standards of living of the poor and to buy other goods, such as environmental quality. With institutional investors owning a larger and larger percentage of corporations, the public policy dynamic changes where the axiom "doing well by doing good" is becoming increasingly relevant.

The Carbon Disclosure Project (CDP) is part of the aforementioned public policy dynamic between institutional investors and corporations and allows businesses to voluntarily describe their environmental efforts. This is "free" investor / consumer information. Corporations with total capitalization of around $20 trillion dollars (almost twice that of the New York Stock Exchange alone) participate in the CDP project.

The point here is that what would seem as knee-jerk opposites - Capitalism and Environmentalsim - are not as far apart as would seem at first blush. And the other point is that one should not expect the government to provide the answers for a cleaner environment. This happens despite the government, who is after all the worst environmental offender.

As an investor or a consumer it is up to each one of us to use our time and money where we think best, all isms aside. After all we may be closer than we know.