Inextricably linked to climate change and inequality based on gender, race/ethnicity and age are gender, ability, age, and ability. Globalization has had an impact on both climate change as well as social inequality.
Over the About 40 years ago, the latest phase of globalisation has acted generally to increase inequality – as measured by wealth and income metrics – Globally and within many countries. In addition to this social impact, increasing globalization has led to increased carbon emissions, deforestation, exploitation of resources, all which are steady contributors towards the severity of climate changes.
Because of their disproportionate effect on vulnerable and disadvantaged groups, the tangible effects caused by climate change have made inequalities worse. This has resulted in a negative feedback loop in which the poorest portions of the population are being excluded from economic growth and left without the financial resources to navigate the growing climate crisis (see Exhibit 1).
Joined up responses
The world’s governments have investigated a range of mechanisms to reduce carbon emissions to address climate change. These effects can vary depending on the vulnerability of social groups.
Many economists consider putting a price tag on carbon one of the most effective ways to reduce emissions. However, when not properly implemented, carbon-pricing schemes can have negative repercussions on low-income families/individuals and may face strong opposition as was the case with the ‘gilets jaunes’ in France. A few see dwindling political support for carbon taxes in key jurisdictions.
An alternative could be a carbon ‘fee and dividend’ policy such as proposed under the US Energy Innovation and Carbon Dividend Act. This Mandates a gradually rising carbon fee on fossil fuel emissions with carbon dividends or rebates circulated to households. This would help to address the regressive nature more blunt carbon tax instruments.
Emissions reduction strategies that address social inequalities are also possible.
Project Drawdown, for example, is a non-profit organization. Rankings climate solutions by their effectiveness. It suggests initiatives targeting women’s health and the education of girls can be some of the most effective emissions reduction strategies available to reach 2050 climate targets as they have the effect of slowing population growth (a key emissions driver), while improving family resilience to climate change.
These interventions also produce many ‘co-benefits’ which are not directly climate-related including improved health and lower incidences of disease and maternal and child mortality.
For all the above reasons, we believe climate justice – including a just transition to a low carbon economy – is not only desirable, but also necessary.
A socially inevitable policy response?
BNP Paribas Asset Management supports Inevitable Policy Response Initiative (IPR).According to this theory, markets have not yet priced in climate change as a likely outcome.[1]
The IPR initiative is based on the assumption that governments will be forced into more decisive action to address climate change than they have so far. This exposes investor portfolios to significant risk. The more this policy response is delayed the more chaotic and disruptive it will be.
While IPR’s scenarios seek to forecast climate policies with a just transition lens, it’s plausible that a concurrent Social Inevitable Policy Response could emerge given the historically high level of inequality in markets such as the US where the Income and wealth gap between the country’s richest and poorest has risen sharply since the 1980s.
Inequality can only increase so much before policy change occurs – due to pressure at the ballot box or by means that are more dramatic. Analyse from academics at Otto-Friedrich-Universität Bamberg, Germany and Australian National University’s Centre for Applied Macroeconomic Analysis counts income inequality as a direct factor in political polarisation. This is evident in the decline in the economic status of the poorest segments of the population.
A balanced approach
Many climate policies are designed with an environment-first perspective. It is becoming more likely that rising social pressure could spur policy change.
This can partly be attributed to the tangible nature social inequality, which can be more pervasive than the disparate and acute effects of extreme weather or climate disasters. The Covid-19 epidemic, which has highlighted and exacerbated the inequalities experienced by disadvantaged groups will also play a significant roll.
It may be a good idea for those who want to encourage climate action to join social movements that address inequality. However, not all policies that address social inequality will have a positive impact on climate mitigation.
For example, the number of people who are able to afford it is increasing. Minimum wages may alleviate income equality for workers, but it may also increase consumption, waste and emissions as a result of individuals having more disposable income.
We do not believe that this should be a reason to stop raising minimum wages. In fact, such policies may prove vital to address wage stagnation or inequality. To reduce the negative environmental effects of increased consumption, such as carbon pricing, minimum wage increases can be combined with environmental policies.
For policymakers and investors, there is much to be done
As they are both too interconnected, and so urgent to address separately, policymakers should work together to coordinate policies that address both environmental and socio-economic issues.
In their engagement[2] and investment strategies, investors may wish to consider both climate and social regulation that is not yet reflected in today’s markets.
Investors may also want to manage regulatory risk by investing in companies that contribute to or responsibly address the transition to low carbon economy. Stakeholders.
[1] The Inevitable Policy Response aims to prepare institutional investors for the portfolio risks and opportunities associated with a forecast acceleration of policy responses to Climate change. According to the IPR government will be forced to take more decisive actions than they have in the past, which could lead to financial portfolios being exposed to significant risk. See There are no more decades of dithering: It is time to push climate policy – Investors’ Corner (bnpparibas.com)
[2] BNP Paribas Asset Management regards active Stewardship as an essential part of its role as a ‘Future Maker’ and a sustainable asset manager for a changing world, engaging with companies on issues ranging from environmental degradation and social inequality to opaque governance. See Sustainability – Investors must be stewards – Investors’ Corner (bnpparibas-am.com)
The views expressed in this article are the views of the author at the time of publication. They are based upon available information and are subject to change without notice. Individual portfolio management teams might have different views and make different investments for different clients.
Investors might not be able recover their initial outlay due to the volatility of investment returns and income. Past performance is not a guarantee of future returns.
Investing in emerging markets, or specialized or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less protection than many developed markets. This is why services for portfolio transactions and liquidation or conservation on behalf funds invested in emerging markets might be more risky.
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