Slide 1

Professor Michael Mainelli, Executive Chairman, The Z/Yen Group

[An edited version of this article first appeared as "The London Accord: From Copenhagen Conundrum To Climate Change Investment", Journal of Risk Finance, The Michael Mainelli Column, Volume 8, Number 2, Emerald Group Publishing Limited (March 2007) pages 198-201.]

Can The Existing Financial System Deliver The Necessary Change?

Global risk responses are driven by people’s perceptions.  So why not have a risk column on Climate Change? Yet there is a suspicion that one of our most important problems is how we decide the importance of problems, i.e. how our financial system makes investment decisions.  But, to quote Jared Diamond, “The single most important problem [facing the world today] is our misguided focus on identifying the single most important problem!” [Diamond, 2005, page 498]

Adrian Berendt pointed out to me that, in Operational Risk, there is a focus on the known and the known-unknown (those matters that we can comprehend and do something about), at the expense of the unknown-unknown.  This may be why businesses focus more on disaster recovery from infrastructure disruption rather than climate change, even if the latter were a larger risk.  Events may be viewed as serious if they knock out our single building, but (perversely) less serious if they knock out a whole city.  The reasoning might be - “If there is a catastrophe, our customers will understand that we can’t service them, whereas, if we’ve had a computer glitch, they’ll go to our competitors”. On global risks, “If the catastrophe is so great that all competitors are affected, nothing we do will make a difference.”

In a previous column I said: “Our greatest economic minds and policy makers seem unable to persuade us to re-order our priorities for the world based on rational analysis of costs and benefits.  Shouldn’t we be concerned about the world – are we making the wrong choices? Shouldn’t the leading global economists and policy makers be concerned – are they irrelevant? And if they are irrelevant, aren’t we too?” [Mainelli, 2006] I highlighted both the fascinating application of cost/benefit analysis to global problems and the vitriolic reception the Copenhagen Consensus received from environmentalists when preventing climate change was given much lower cost/benefit ratings than preventing malaria.

There is no denying that we have difficulties applying financial analysis to global problems.  The analytical issues range from the heterogeneity of problems, to measurement of GDP, measurement of quality of life or taxation.  Many critics focus on concerns about the application of typical discount rates to long-term global issues.  The recent Stern Review on the Economics of Climate Change, found it necessary both to explain the ethical ramifications of discount rates when assessing climate change economics and to apply a discount rate significantly below those found in typical financial analyses.  The importance of discount rates warranted a technical annex – “Chapter 2 Technical Annex: Ethical Frameworks and Intertemporal Equity” [] that is well worth reading for an introduction to the complexity of setting a discount rate.  Stern’s approach has serious critics.  For a start see William Nordhaus’, Sterling Professor of Economics at Yale, criticisms, piece of 17 November 2006 -

The application of discount rates is a very rich area for discussion [one interesting blog on environmental issues maintained by Tim Haab and John Whitehead - - points out a reductio ad absurdum argument, “an extra glass of wine for Alexander the Great matters more than all today’s capital stock”]. One can question whether future generations will ever exist, thus increasing the discount rate; whether we know all courses of action today, thus implying a zero or even negative discount rate; or whether there are other issues of similar character and importance to climate change (civilisation-destroying asteroids or avian flu), thus implying we shouldn’t lightly alter the analytical discount rate from the norm or we can’t compare anything – or that discount rates are a waste of time in these analyses.

If a single analytical technique leads to such problems, what amount the totality of financial analysis? Perhaps we should question whether the current system can deliver climate change prevention at all.  While there are signs of increasing interest in alternative energy, perhaps even an alternative energy bubble forming similarly to the internet bubble, it is fair to say that current investment decisions will not affect climate change projections markedly.  The current economic system hasn’t geared up to climate change.  I contend that this is because, as yet, the numbers don’t add up for investment purposes.

Out Of The Analytical Muck To The Greater System Beyond

Climate change prevention should amount to the biggest societal and infrastructure change humankind has ever seen.  We will have to change, at the very least, the organisation of our energy networks, our transportation and our management of emissions.  We will have to change our economies on a global scale, perhaps emitting more carbon in the temperate zones to keep warm while sequestering it elsewhere.  We will have to enforce carbon emission property rights – who will send in the gunboats to shut down an offshore oil-burning facility with a 300 metre high sign, “all tankers welcome, we just export electricity”?

We need to look up from the technical muck of discount rates to the wider systems within which these climate change prevention decisions are applied.  We haven’t defined capitalism properly.  Variety within capitalist systems is great.  We have countries with over 50% of GDP taken by tax, others with as little as 15%.  Some capitalist societies nationalised health or transport or telecoms or energy or broadcasting, others not.  While communists may believe solely in the visible hand, social democrats make sure the visible hand stays in sight at all times as they try to remedy what they see as the inevitable market failures inherent in the system.  In contrast, an overly-pure Chicago School disciple believes that, as the market always provides what is best, then this is the best of all possible worlds, except where freer markets would make it a better world.  So, even if Fukuyama’s thesis is correct, that liberal democracy and capitalism are the end of the road, the new challenge is to decide within liberal democracy and capitalism what is best done by the ‘state’ and what is best done by the ‘market’. There isn’t a single global financial system for the global problem of climate change.

The biggest missing link between climate change and capitalism is credible carbon emission rights.  It has long been recognised that emissions trading rights (‘cap and trade’ in the jargon) have great potential.  These emission trading rights create a property right for people to emit greenhouse gases (frequently expressed in terms of carbon dioxide equivalence for all greenhouse gasses). Obviously, the global nature of climate change is a challenge to establishing these rights, but not an insurmountable one.  Uncertainty about the level at which emission rights will start to take effect, to ‘bite’, impairs large-scale investment at present.  There are investors who are leading the way, but on faith rather than financial analysis.  To get big, mainstream investment to follow, the numbers must add up.  There has to be clarity and credibility on the likely level of carbon emissions, from which flow estimates of their future value and thus projections of the value of investments in climate change prevention.  In turn though, setting the level of carbon emissions is a political decision, and an international one at that.  The political decision will involve how people feel, stable economies versus growing economies, rich versus poor, tolerant versus strident, corporate versus NGO, and many other constituencies and divides.  People endured the London fogs of the 19th and 20th centuries for a long time…

“Cash In, Carbon Out”

In 2006 BP and the City of London Corporation, supported by Z/Yen Group, Forum for the Future and Gresham College, announced a “call for participation in The London Accord” to leading investment research houses and economists.  The London Accord is a cooperative research programme to assess investment in climate change initiatives.  The London Accord is designed to help investors and corporate decision-makers share their thinking and analytical approaches on the best opportunities for investment in climate change mitigation, so that ultimately climate change mitigation will be met through economics.  The London Accord partially follows the path blazed by the Copenhagen Consensus, but focuses solely on climate change prevention investments.  With an estimated expenditure of £5 million to £7 million for 2007, The London Accord will be the largest research project in the world on the economics of climate change.

By focusing on the opportunities for investment in climate change initiatives and providing a rough ordering of cost/benefit in terms of carbon reduction, the project has the potential to influence financial investments made by investment managers of several trillion dollars and investment decisions by major corporations.  The tools developed by the project can be used by NGOs, governments and academics, as well as the primary audience of ‘buy-side’ investment managers, creating a common understanding of the effectiveness of investments in initiatives to reduce man-made climate change.

A distinguishing feature of The London Accord, particularly when contrasted with the Copenhagen Consensus, is its use of mainstream investment research houses, frequently associated with global investment banks, to assess current investment opportunities in carbon reduction and analyse them in terms of “cash-in, carbon-out”. Deutsche Bank, Morgan Stanley, HSBC, Sarasin, Société Générale, CSFB, ABN and Canaccord Adams have each agreed to contribute at least one research paper, and others are likely to join soon.  Generation IM, Universities Superannuation Scheme, Axa IM, Insight Investment, Henderson and the Institutional Investors Group on Climate Change have already expressed strong interest in using the results.  The results are intended for wide publication in late 2007 via Reuters’ syndication and the City of London Corporation Research Series.  The Santa Fe Institute and the London School of Economics are structuring the academic input.

The interaction of private decision-making and public policy is likely to be one of the recurring themes in the many research papers.  Other themes are likely to include the importance of carbon emission rights, the impact of new technologies, the opportunities for greater efficiencies from existing technologies, the importance of further technological research, the complexity of micro-economic interactions and the potential for new business models.

Right now capitalism is all we have.  The influential developing world economist, Hernando de Soto says, “I am not a diehard capitalist.  I do not view capitalism as a credo.  Much more important to me are freedom, compassion for the poor, respect for the social contract and equal opportunity.  But for the moment, to achieve those goals, capitalism is the only game in town.  It is the only system we know that provides us with the tools required to create massive surplus value.” [De Soto, 2001, page 242] The results of The London Accord should be of immense interest to anyone who believes that economics and investment is central to preventing climate change.


My thanks to Adrian Berendt of LA Risk & Financial for highlighting relative risk responses.


  • The London Accord

  • DE SOTO, Hernando, The Mystery Of Capital: Why Capitalism Triumphs In The West And Fails Everywhere Else, Black Swan, 2001.

  • DIAMOND, Jared, Collapse: How Societies Choose To Fail Or Survive, Penguin, 2005.

  • MAINELLI, Michael “The Copenhagen Conundrum - Doesn’t Risk/Reward Analysis Matter”, Journal of Risk Finance, The Michael Mainelli Column, Volume 7, Number 1, pages 101-104, Emerald Group Publishing Limited (January 2006).

  • STERN, Nicholas, The Economics of Climate Change: The Stern Review, Cabinet Office - HM Treasury (November 2006).

Professor Michael Mainelli, PhD FCCA FCMC MBCS CITP MSI, originally undertook aerospace and computing research, followed by seven years as a partner in a large international accountancy practice before a spell as Corporate Development Director of Europe’s largest R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming a director of Z/Yen ( Michael is Mercers’ School Memorial Professor of Commerce at Gresham College (

Z/Yen is a risk/reward management firm helping organisations make better choices.  Z/Yen operates as a think-tank that implements strategy, finance, systems, marketing and intelligence projects in a wide variety of fields (, such as developing an award-winning risk/reward prediction engine, helping a global charity win a good governance award or benchmarking transaction costs across global investment banks.  Z/Yen’s humorous risk/reward management novel, “Clean Business Cuisine: Now and Z/Yen”, was published in 2000; it was a Sunday Times Book of the Week; Accountancy Age described it as “surprisingly funny considering it is written by a couple of accountants”.

Z/Yen Limited, 5-7 St Helen’s Place, London EC3A 6AU, United Kingdom; tel: +44 (0) 20-7562-9562.