In the same month that the UN secretary-general confirmed the world will not meet the target of limiting global warming to below 1.5°C above preindustrial levels, the Nobel Prize was awarded to three economists. Their research demonstrates how technological innovation, from industrial machinery to AI, has repeatedly driven economic growth by improving productivity and expanding opportunity.
This recognition of innovation stands in contrast to the environmental consequences of that very progress. While technology has lifted economies, it has also contributed to rising emissions and resource depletion.
Faced with this tension, society often looks to history for reassurance. Past warnings of collapse have not always come true. Lord Kelvin underestimated the sun’s lifespan due to limited understanding of nuclear fusion. Thomas Malthus predicted food shortages that never materialised.
However, today’s climate warnings are different. The Planetary Boundaries Science Lab recently confirmed that seven of the nine boundaries essential for sustaining life have been breached, with ocean acidification added this year. These are not speculative forecasts but science-based measurements of planetary stress.
Despite this, expressions of concern remain muted. A “make everything great again” mindset has taken hold, driven by confidence in technology, especially AI, to solve or outpace global challenges. Financial markets are surging, regulators are retreating and companies are quietly abandoning climate commitments in favour of profit.
This shift raises a deeper question: have we returned to the days of unrestricted corporate capitalism, with the principles of King IV governance quietly set aside? There is clearly a lot of uncertainty about the future path of the global economy.
The IMF has estimated that the cost of coping with climate change is far more severe than the cost of mitigating it. Given that climate change is here to stay, why have financial markets seemed to shrug it off?
The most optimistic scenario is that the IMF and others are simply wrong. The AI boom could usher in a new era of innovation and productivity. In this view technology will resolve the challenges facing society, and allow progress without trade-offs.
Some argue for less regulation or, as seen with leaders such as Donald Trump and Xi Jinping, for policies that favour national champions to gain economic advantage. This approach contrasts with the view that the biggest contributors to climate change should bear the societal costs of their actions and that global regulations are necessary to manage global challenges.
A more sceptical perspective suggests that financial markets, with their characteristic short-term focus, have yet to fully reckon with the long-term consequences of global warming. Instead, their attention remains fixed on the present earnings cycle, which has exceeded expectations.
Recently, the Prudential Authority released its roadmap on climate risk for financial institutions. This guidance note expects financial institutions to carefully assess their resilience to climate risk.
At the same time, the US is clearly rolling back its climate commitments and allowing its companies to compete without considering the nonfinancial implications of their decisions. This makes it more difficult for other countries to compete with the US and follow through with their own climate commitments.
What does this all mean for investors and the sustainability of the global economy? It is easy to become despondent. However, despite sustained fossil fuel subsidies from vested interests, market incentives are leaning towards cleaner energy.
Despite worsening planetary boundaries, corporate earnings forecasts have risen, recession fears have eased and most central banks plan to keep lowering interest rates through 2026. And, just as those three Nobel prize-winning economists showed, innovation often happens when one least expects it.
I began this article sceptical of anyone’s ability (including my own) to confidently forecast the future in the absence of perfect knowledge. To navigate an uncertain future, investors should remain agile, ready to seize the rewards of innovation while not ignoring the real and rising costs of climate inaction. Positioning portfolios for both possibility and risk is not just prudent; it is essential.
- Crosoer is Chief Investment Officer at PPS Investments.
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