My interview with Young-Jin Choi on the eve of #COP27: “Financing further fossil fuel-based greenhouse gas emissions is simply inexcusable in a time of grave climate emergency…”

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Young-Jin Choi leads the impact and ESG practice at Vidia Equity, a newly established purpose-driven Private Equity climate impact investor. Prior to joining Vidia, Young-Jin served as the impact investing advisory team’s Head of Research at PHINEO gAG, a leading think-and-do-tank in the German speaking area with a focus on impact measurement and management.

Young-Jin’s previous roles include investment management at 3M’s corporate venture capital unit and strategy consulting in a variety of industries and regions with Monitor Group (now Monitor Deloitte). He holds three master’s degrees in Mechanical Engineering (RWTH Aachen), International Business Studies (University of Maastricht) and Politics, Philosophy and Economics (LMU Munich).

Here are Young-Jin’s diagnoses and the prescriptions, on the eve of #COP27, as he responds to these questions in context of my submission to the Reserve Bank of India on Climate Change consultation.

Praveen Gupta: Would you agree that a fragmented financial regulatory governance makes it more fragile whilst dealing with a climate emergency? Do you think the time to talk about Climate Crisis is running out and it is Poly Crisis that we ought to be addressing?

Young-Jin Choi: The fundamental nature of the problem includes the way our current economic and financial systems are currently designed to work (in terms of purpose, goals, rules, incentives, et al), resulting in a severe market failure. Dealing with the climate emergency requires addressing this market failure, which in turn requires a concerted, coordinated approach between various regulatory institutions, within a country as well as internationally. Financial system regulation can be most effective, when complementary economic system regulation is in place, but it can also be rendered ineffective when the economic system design continues to distort risk – and return profiles in connection with greenhouse gas emissions.

Various humanitarian, economic, geopolitical and stability-related crises continue to be induced and exacerbated through rising global temperatures and extreme weather events.

While it has become more important now to address multiple crises at once (through “multisolving”), I believe it is similarly important to maintain a sharp focus on the climate crisis as the singular, overarching long-term driver and multiplier of various risks and crises. Various humanitarian, economic, geopolitical and stability-related crises continue to be induced and exacerbated through rising global temperatures and extreme weather events, as the analysis by Chatham house of “cascading systemic risks” illustrate: https://www.chathamhouse.org/2021/09/climate-change-risk-assessment-2021/04-cascading-systemic-risks.

PG: What would your advice be to money pipelines in terms of impact investing and decarbonisation?

YJC: ­I would advise capital allocators to take a broader, science-based social systems perspective, taking the sustainability context and ethical minimum aspirations and thresholds into account, when assessing the desirability – as well as undesirability – of an asset’s impacts. Beyond the impact of the asset’s operations and supply chains, this also includes the direct and indirect impacts generated by an asset’s sale of products and services. It should be clear, for instance, that financing further fossil fuel-based greenhouse gas emissions (especially from new fields and projects) is simply inexcusable in a time of grave climate emergency – regardless of their (unethical) profitability and their own operational decarbonization efforts. The same applies to products and services that support or enable fossil fuel operations. At the same time, products and services that significantly support or enable climate solutions deserve proper recognition, too, besides the climate solutions themselves. Of course, climate solutions are not exempt from serious ESG issues and risks – those need to be carefully managed and mitigated over time but shouldn’t represent a dealbreaker per se.

When thinking about putting a price on carbon emissions, it is important to redistribute most of the income generated this way to affected households in order to ensure their continued political support and help lower income households transition. When thinking about rewarding carbon removal, it is important to transform current voluntary carbon markets into a global pay-for-success scheme.

Even if we should and wanted to act as if we all were universal owners and as if ethical materiality matters at least as much as financial materiality, our current instititutional frameworks, mandates, and duties don’t provide institutional investors with the same freedom that an autonomous moral agent enjoys. Moreover, it should be clear that simply cleaning up a single portfolio from polluting fossil fuel assets won’t be enough as long as the asset continues to operate under different ownership. It would also be naïve to expect a fossil fuel company to voluntarily retire a business that is allowed to remain highly profitable. Maintaining ownership of a fossil fuel asset creates an unavoidable economic conflict of interest when it comes to advocating for strong climate policies that would force an accelerated phaseout of fossil fuel production/demand and asset stranding.

We need to recognise these practical legal and economic constraints when it comes to the impact potential of portfolio company engagement and voluntary pledges. We need systemic interventions to improve the alignment between the scale and pace of capital allocations that are normatively needed and the empirical universe of available investable assets that is determined by mandates and duties as well as the way the market prices (or fails to price) impacts.  

PG: Do you prescribe carbon pricing as a tool and would it work as one-size-fits-all?

YJC: Carbon pricing – which should include the whole carbon pricing matrix as described by Delton Chen (https://www.youtube.com/watch?v=6LAiYb4k0go) represents a key instrument needed to accelerate decarbonisation. When thinking about putting a price on carbon emissions, it is important to redistribute most of the income generated this way to affected households in order to ensure their continued political support and help lower income households transition. When thinking about rewarding carbon removal, it is important to transform current voluntary carbon markets into a global pay-for-success scheme, as suggested by the https://globalcarbonreward.org/.

Other key instruments include strong climate policies (e.g. mandatory minimum standards and replacement mandates) as well as increased green fiscal spending e.g. for enabling infrastructure (flexible, integrated power grids) and or de-risking and subsidising climate finance. These instruments need to be combined in a coherent policy package. Its transformational acceleration affect partly depends on their relative strength – higher carbon pricing and/or bolder climate policies can allow for less fiscal spending, and vice versa.

Companies respond with hyperbole instead of admitting that they cannot do what is needed by themselves. But they have a corporate political responsibility.

PG: How big a menace is greenwashing? Do you see effective action coming from regulators?

YJC: There is no doubt that greenwashing is a serious problem that drives complacency and waters down our collective sense of climate urgency. But stricter disclosure and transparency standards won’t by themselves fix market failure. A trend reversal into “green hushing” is not helpful either. In connection with greenwashing, I see an even bigger meta-risk in not recognising greenwashing as what it often is – a sign that voluntarism and current frameworks are insufficient to promote genuine transformations. Companies respond with hyperbole instead of admitting that they cannot do what is needed by themselves. But they have a corporate political responsibility: https://www.hbs.edu/faculty/Pages/item.aspx?num=54635.

If they were honest about their economic and legal constraints and limitations, I’m sure that they would more strongly advocate for governments to set binding rules, mandatory standards, increase fiscal spending for subsidies and de-risking, price carbon etc.  They would make industry associations and thinktanks to support their views or cease support, rather than allowing market failure to continue.

“Unfortunately, the history of COPs doesn’t fill me with much hope. Neither does the counterproductive rise of ultranationalism into positions of government authority in various countries”.

PG: Any thoughts on the relevance of ‘The Ministry For The Future’ in today’s global context?

YJC: I think Kim Stanley Robinson’s book does a great job at showing a possible future in which we barely manage to turn the ship that is our civilisation around. Among the interesting solutions he explores, there is one which I believe represents a critical success factor: Inspired by Delton Chen’s Global Carbon Reward initiative (www.globalcarbonreward.org), the author describes how central banks eventually start to collaborate and mobilise enormous additional financial resources via a carbon currency that are then used to reward successful climate mitigation efforts (and even compensate Petrostates for leaving their fossil resources in the ground). This way, we can transform voluntary carbon markets into a global pay-for-success scheme, in which corporates are incentivised to participate rather than having to purchase carbon credits, and make sure that the carbon price (exchange rate) is as high as needed to serve its purpose.

Most importantly, the post-colonial hypocrisy needs to end …

PG: Do you see COP27 as a catalyst for a fundamental shift?

YJC: Unfortunately, the history of COPs doesn’t fill me with much hope. Neither does the counterproductive rise of ultranationalism into positions of government authority in various countries. It will be more pragmatic if committed large emitters form a climate club (https://www.nature.com/articles/d41586-021-00736-2) and use carbon border adjustment mechanisms, technology transfers, and additional development cooperation resources in order to globally promote and incentivise decarbonisation.

Most importantly, the post-colonial hypocrisy needs to end – developed nations cannot insist on developing their own fossil resources, and fail to deliver the international financial support they had promised. Developing nations are expected to fund the clean energy transition by themselves while voluntarily forfeiting fossil fuel export income. Every country on Earth has the ethical obligation to sign the fossil-fuel non-proliferation treaty and ensure that we keep fossil fuel reserves in the ground. 

PG: Many thanks Young-Jin for these exceptional insights backed by scholarly findings. Here is wishing you all the very best in your endeavours!