The private sector is making progress for climate change

Sometimes incentive and coercion are a breath apart. Climate envoy John Kerry is using his clout to influence private banks to adopt more positions friendly to the environment. Coercive or not, it will be bad for both sides if such private sector actions are viewed as influenced by the government, especially through unofficial channels. Such actions by public officials risk hurting the most promising development on climate change, which is the newfound relationship between civil society and the business community that had ironically taken off under the previous administration.

Donald Trump was wrong about climate science but right about letting the private sector take the lead. The environmental, social, and corporate governance objectives hit a tipping point, while numerous new corporate emissions commitments took the country by storm, led by many financial institutions in a fundamental reshape tied to climate change. Corporate insiders even considered BlackRock, one of the notable leaders on climate financing, as late to the game. The policy implication is profound as rapid decarbonization happens even without government coercion.

Actions like those taken by Kerry risk fueling dismissive claims that the corporate sustainability movement is mere virtue signaling, or worse, a backroom deal to get ahead of government regulation. In reality, business leaders seek lower carbon levels for a variety of reasons, from technology firms attracting climate conscious talent to institutional investors seeing a greening of their client base. The market realizes it is in its own interest to address climate change. For many on the left, it may not be fast enough. That is where regulation or potential coercion rears its head.

We have seen a preview of this type of regulation. The Securities and Exchange Commission is ready to set out its climate risk disclosure rules, just one of dozens of initiatives in the climate agenda of President Biden. It provides little hope that the administration has learned the most vital lesson from its predecessor, which is that regulation alone carries limited potential for lower emissions but still has potential to rattle investors and harm the economy. We should not overestimate the utility of regulation in global decarbonization, nor should we underestimate the role of the free market in promoting positive investment and climate progress.

The administration would be wise to challenge the green orthodoxy, study the catalyst of global supply chain decarbonization, and let the market get to work. The appetite is there in the private sector, but confusion reigns supreme among investors and their clients. The problem is accessible and verifiable information. It is this lack of data which is the missing piece to catalyze voluntary climate decisions. This could prove the climate holy grail with the potential to unlock the green capital flows that transcend boundaries at the speed of business rather than government.

On the other hand, there is serious risk with a strong armed approach to mixing climate and finance. Kerry is leveraging his position in government to seek changes in business behavior, which could have a chilling effect on investment. Firms and investors that do not have critical government relationships or fit neatly into the preferred business paradigm could be discouraged from even participating in the market altogether.

In the realm of climate policy, new technology to reduce carbon levels needs private investment and capital deployment. In other words, climate progress needs healthy markets that can respond to a consumer demand for clean energy and industry. Kerry has taken actions that are reminiscent of the parable of the golden goose, as he could undo the benefits of the market for climate progress in exchange for a political victory.

Improving available information is a role for the government that could form a tenet of durable climate policy. However, it must be done carefully. As the administration pushes the Securities and Exchange Commission to tighten the screws on climate disclosure, it may bring more transparency or merely new corporate liabilities. Financial regulators have to remain cognizant and match disclosure rules with the value of information.

One issue remains. Does the administration want to unleash the power of the private sector? Or does it want to change it by forcing companies with draconian regulation? If the administration cares about the climate, it has to think about the business community as a friend instead of a foe.

Devin Hartman is the director of energy policy at R Street Institute. Philip Rossetti is a resident senior fellow in energy policy with R Street Institute.