Economic growth at expense of the environment is no longer an option. This episode focuses on how an outdated economic structure is endangering our planet and new approaches that could save it. We also explore the need for greener financial markets. 

The guest on this episode is Chris Canavan, Partner, Lion's Head Global Partners and Chairman of the Governing Board, of the Institute for New Economic Thinking. Canavan’s experience comes from across sectors — academic, corporate, and nonprofit — to bear on his work to foster sustainable development and economic growth.

Background reading: 

• A series of debates from the Institute for New Economic Thinking that examines the role of economics in climate change

Episodes focused on UN SDG 13: Climate Change are co-sponsored by the Institute for Sustainability and Energy at Northwestern (ISEN) and sustainNU.

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Read the transcript of this show below

Annelise Riles [00:00:03] Welcome to the Breaking Boundaries podcast. I met Annelise Riles, Executive Director of Northwestern University's Roberta Buffett Institute for Global Affairs. The Northwestern Buffett Institute is dedicated to breaking through traditional silos of expertise geography, culture and language to surface novel solutions to pressing global challenges. Today's episode will focus on efforts to address climate change through financial innovation. Our guests, Chris Canavan, has spent a career crossing the boundaries between the university, the financial markets and the international institutions devoted to sustainable development. Chris is managing director of Lion's Head Global Partners, a financial advisory firm that specializes in sustainable development. He also chairs the board of the Institute for New Economic Thinking, the Fund for Global Human Rights, and Oberlin College. Previously, he served as director of global policy development at Soros Fund Management and spent more than a decade at Goldman Sachs in several roles, including chief risk officer and head of the Latin American Debt Capital Markets team. Welcome, Chris, and thank you so much for being here.

Chris Canavan [00:01:21] It's a pleasure to be here, Annelise.

Annelise Riles [00:01:23] So what does finance have to do with climate change? Can you give me a sense of the range of ways our climate is impacted by finance for better or for worse?

Chris Canavan [00:01:34] I think that there are two answers to that question. I think that we can try to understand how it is that we got to where we are with the planet that is overheating and ask ourselves whether the financial markets and you know, the way in which we organize ourselves economically have an important role and responsibility and getting us into the mess we're in. That is, in some sense, a a dour retrospective on human history. But we can also ask ourselves whether for better or worse. We do have financial markets that work. They work because they take purchasing power from people who don't need it at the moment and transfer that purchasing power to others who could use it at the moment and see whether we can use all of those mechanisms, those bridges, those so-called markets to mobilize the efforts we need to correct for all of the misdeeds that have gotten us to a warming planet. Because it's clear that the scale and scope of this challenge to slow down the rate at which the planet is overheating, and also to gird ourselves to mitigate our homes, our livelihoods, our environments against the perils associated with climate change. Those challenges are so massive that they really go beyond the capabilities of any one actor. They're going to require collective action. And part of that collective action is the collective action needed to get, as I said, purchasing power from those who don't need it at the moment into the hands of those who could use it to help us address the challenge of climate change. That is perhaps the more optimistic way to think about the link between finance and climate change.

Annelise Riles [00:03:30] So we hear a lot these days about green finance, and I know there are many definitions of that. Can you give us a simple overview of what that term means and what it should mean from your point of view?

Chris Canavan [00:03:43] At its most basic, I think green finance means simply the use of finance, financial markets, financial instruments in order to finance activities, investments that will help us green the economy, help us in our transition to renewable energy, help us mitigate against the perils of climate change and the like. All of those fall under the rubric of green. But I also think that we have to distinguish between what we think green finance means at its core. On the one hand, and the way in which that phrase is used to label activity, on the other hand, because I think that if finance is good at anything, it's in touting its own achievements. And sometimes that leads to a little bit of exaggeration about what we're really up to. And so, we have to be careful that we don't go around labeling everything green just because it has some very tenuous connection to the greening of the economy. And I think we need to be very disciplined and in thinking about what green finance ought to mean and making sure that if we're harnessing the power of the financial markets in order to address climate change, in order to green economies and the like that we're doing it in a way that really does contribute to our goal, right? Rather than simply create a patina of green finance or what you might even call greenwashing in order to suggest to people that the financial markets are making a contribution. When in fact, they're really just supporting the business-as-usual scenario, which we can't afford to support.

Annelise Riles [00:05:36] You were telling me the other day that the field has matured that maybe when it started out it was kind of vague. The expertise was vague, but it really has sort of ramped up in terms of what is expected, what kind of expertise is needed. Pardon the pun. But what's the gold standard in this field now?

Chris Canavan [00:05:54] The green standard. I think that the evolution of sustainable investing, especially with respect to climate and renewable energy, has followed a pattern that we've seen over and over again in many other contexts in which there is initial an initial burst of exuberance and exuberance. Because there is this notion out there that only the financial markets can move the billions and trillions of dollars needed to solve these problems. And so, let's get to it. But that initial exuberance didn't have the kind of rigor that we know we need in order to understand exactly how to harness the financial markets in order to get done exactly what we know needs to be done. The mere vocabulary doesn't quite exist in the form we need it to in order for us to be able to talk to each other about green finance. And certainly, the instruments and the markets and the players are all kind of finding their way, figuring out how to define themselves, how to describe themselves and how to interact with others in order to accomplish what we know we need to accomplish. In fact, what we're doing is we're constructing markets, right? We're not just operating within preexisting markets were constructing markets. And that's why I think of this. And I think it's proper to think of this area of green finance as something that in fact extends beyond the narrow bounds of, say, the way an economist would picture the world, or a financial expert would picture the world. Because many of those paradigms that we borrow from economics or from finance are paradigms that are appropriate for preexisting markets that function already. And so, the only question is, how can I use an existing market to do something slightly different now? For us, the challenge is to construct new markets where they previously didn't exist. And I think that puts us face to face with the reality that we're not prepared for, and that is that these preexisting markets we're accustomed to in at some point back in history, whether it was 100 years ago or three or 300 years ago, they too were being constructed. And all of that hard work, which preceded our presence on this planet, is now getting appreciated. And all of that understanding of what it takes to construct a market, I think is becoming apparent. And so that's why I think that after an initial boost of exuberance and perhaps a little bit of exaggeration, there is a second wave or maybe a third wave of more rigor, more discipline and a little bit more modesty about what can be accomplished simply by harnessing the financial markets. Because it's going to be a lot of work, it's going to require a lot of construction, and it's work that extends beyond the sort of narrow community of financial players that requires the government. So, it requires international organizations, it requires civil society, everyone to kind of buy in collectively to this notion that this phenomenon we call, or this construct we call a market can be part of the solution.

Annelise Riles [00:09:24] Okay, wow. So, you have made dozens of really important points just now. So, I want to kind of slow this down and make sure everybody understands some of this because I think it's really important. So first of all, could you give us an example when you say the market doesn't exist? What do you mean by that? Can you give us an example?

Chris Canavan [00:09:43] What I mean by that is that if one thinks of a market at its most elemental market is effectively a meeting place between those who have something and those who want something. And it's a meeting place that obeys a certain set of rules. And the purpose of those rules is for the buyers and sellers to agree on value, to agree on what value will be ascribed to this thing that someone wants, and someone has, and to exchange for some other good of equal value, usually money. Right. So, at its most elemental, that is a market that seems fairly straightforward if you're. If you have in mind the market for petroleum or the market for saltines because we spend very little time thinking about how it is, we came about deciding that a barrel of oil should be worth 90 dollars or a box of saltines should be worth $3. We just don't spend any time thinking about that. We just take it for granted and then we go, and we participate in this market. But when we start to ask ourselves, what value should we ascribe to the survival of the species as we know it? I don't think there's much debate that survival is a valuable good. I don't think anyone will debate that, but I think that very few people would be able to take that conversation much further and say, here is a way in which we can figure out what the value of half a degree Celsius ought to be. And I think most people would probably prefer to avoid that because it's a very difficult question. It's difficult intellectually. It's also difficult psychologically and emotionally. And yet it is the key question because we have to decide what we're willing to give up in order to get the good of a planet that it's not as hot that it would otherwise be. So, we have to come up with some sense of value, and if we don't do that successfully, then a market can't work since that's elementally what a market is. It's a convening of someone who has and someone who wants and a set of rules that allows them to decide on value. And so, I think and that's why I say that if that's the basic building block of a market, whether it's a market for goods or a market for finance or whatever it might be, at the very least, we have to come up with that building block and it's a very challenging building block to come up with. And it's one that requires us to think not just the way an economist thinks, not just the way a financial person thinks, but to incorporate science, to incorporate ethics, to incorporate sociology and anthropology, to incorporate all of the insights that many other fields have to share on this basic question. What's the value of avoiding a half a degree or a degree worth of overheating over the next 50 years?

Annelise Riles [00:13:10] When you think about bringing all of those insights from fields outside your own field of traditional disciplinary training, economics, ethics, sociology, anthropology, political science and so on into your work and your thinking, how do you actually do that? Because I think that maybe feel quite intimidating to a lot of people who've been trained in one field. You know, how am I? How am I? I don't know all that stuff. How am I supposed to learn and what am I supposed to do with that? Let me just stick to what I know. Which is economics, right?

Chris Canavan [00:13:40] How do you do it? I'm sure I don't have a good answer to that question because it's a huge question. But I also think that one of the fields that is probably underrated but enormously important is what in classical times used to be referred to as rhetoric in the good sense of the word, right? The art of persuasion. And so, for me, if I am talking to, let's say, fellow economists or at least those who are informed by the sort of the economics paradigm, I think rhetorically it's important to appeal to notions that are already fairly well-developed in one's mind, right? Because if you say your entire paradigm is useless in understanding the nature of the problem, you've got to replace it with a different one that tends to be the end of the conversation. In economics, there is a strain that has thought about some of these issues, right? It is that part of economics in which, for example, we talk about market failure. It's that part of economics in which we say there is such a thing as social welfare and there are times when social welfare is greater than simply the sum of everyone's individual welfare. Right? So, there are models, there are tools. There are ways of framing problems that can appeal to tap into the paradigms that we already use, the paradigms they're already familiar to us. And in economics, the one that I find most useful is the notion of a market failure. When is it and why is it that sometimes markets don't emerge when they think when we think they could or they should, or they do emerge, but they're somehow stunted or dysfunctional, because once you've framed it that way, you can have a conversation because you've got a vocabulary, you've got an ontology that can be relied on to have a conversation and to persuade someone to perhaps think about this issue in a slightly different way to say, Look, if you if I can translate the problem of climate change and the imperative of getting the financial markets to help solve this problem, if I can translate that into something that you vaguely understand, then I may be able to persuade you to help me solve this problem. So, if I say fundamentally that the problem of climate change, the problem of of global warming. Can be thought of as a massive example of market failure. Then we can start to ask ourselves, why did markets fail and what could we do in order to construct markets that should have been there in the first place to save us from all of this in order to slow down the global warming? And so, I think appealing to existing paradigms is rhetorically at least an important way to go because as I said, I think that if you say to people, listen, your problem is that you simply don't have the capacity, you're simply epistemological, be incapable of understanding this, then that's a very short conversation and it's a very useless conversation.

Annelise Riles [00:17:02] Lion's Head center of gravity is in the global south. You do a tremendous amount of work in and about and around the global south. What special role do you think that markets in the global south can play in addressing climate change? And how do you think that the green finance new directions will play out in the global south in particular?

Chris Canavan [00:17:24] There are lots of answers to that question. And in our experience, I would say there are two or three insights that are worth sharing. The first insight is that, yes, the global south is in some. I'll put it this way colonial sense behind underdeveloped, less developed, however you want to describe it. There's a virtue to that, though, as well, which is that there's less locked into the incumbent systems, in particular energy distribution, production and distribution systems compared to, say, the United States, right? So, what it takes to replace incumbent fossil fuel-based energy systems with renewable energy systems in the global south, where the infrastructure that was built up to generate and distribute fossil fuel energy is not quite so developed means that leapfrogging over that should be easier as long as we can mobilize the resources to leapfrog over that. So, in Africa, for example, one of the funds that we manage invests in off grid renewable energy projects, right? That's interesting on its face because these are renewable energy projects. But what's what's more interesting to me is the off-grid part, right? The fact that it's distributed renewable energy, it's an entirely different way of distributing energy, irrespective of the source of that energy. And it's much more flexible if we can make it efficient. If we can make it economical, then it's a way of generating and distributing energy that can follow people wherever they need to go. To be big or small. However, they need it to be and not rely on this central infrastructure. These transmission and distribution lines that cost so much to put up costs enormous amount to maintain are themselves vulnerable, very vulnerable to the ravages of climate change, and have a very perverse way of determining who gets included in economic activity and who doesn't. So, it's in the global south because of this, as I said, colonial notion of underdevelopment or less or being behind that there are opportunities. In fact, if they're identified properly and if we can figure out how to mobilize resources to exploit those opportunities can offer possibilities that frankly, we could use in parts of New York, downtown Detroit or wherever might be, but which are going to be much harder to accomplish there because the incumbent systems are so powerful. That's one answer, but I'm sure there are others.

Annelise Riles [00:20:06] We're seeing very much the same thing with our researchers here working on COVID. There are all kinds of innovations happening in Africa around vaccine distribution, around disease prevention that just don't occur to us here but are actually very good solutions. Part of our job is simply arbitrage, bringing them home.

Chris Canavan [00:20:27] Yes, indeed, indeed.

Annelise Riles [00:20:29] Final question, Chris, what are you most hopeful about and what are you most worried about at this moment?

Chris Canavan [00:20:37] I think that what we fail to appreciate is this sort of the non-linearites and life in general. But but in this cluster of issues in particular, and it's those non-linear cities that both worry me very much, but also give me give me hope. They worry me because I think we're finding that the pace of global warming is greater than even. You know what, a few years ago might have been the worst-case scenario precisely because, you know, our models and our brains have a very hard time dealing with. Complex systems with lots of nonlinearity, we have a tendency just to extrapolate in straight lines out into the future, and we're finding that the way in which all of these issues interact with each other is rendering those straight lines useless. On the other hand, many of the solutions that we need to come up with are arriving sooner than we thought they would because they too are the product of lots of nonlinear charities. So, whereas a few years ago, many experts in renewable energy were saying that, you know, the technology just won't get here soon enough, and the efficiencies won't arrive quickly enough in order to drive down the costs of the transition to renewable energy. And yet today we're finding that the technological advances are happening in many cases faster than we expected and that human behavior is changing in ways that would have been really surprising to us just a few years ago. And that's because there are are these nonlinearity? My hope, of course, is that the good non- linearites outpace the bad light nonlinearity, and I'm just going to cling to that hope because if we can't cling to that hope, then what's the point?

Annelise Riles [00:22:35] What a thrilling and challenging answer. Non-linear as both a problem and a possibility for us all. Wow. I think you've given the Buffet Institute a new slogan. Thank you so much, Chris. It's wonderful to to be with you and really inspiring to hear about all you're doing.

Chris Canavan [00:22:55] Well, thank you. I really appreciate the time and good luck.

 

Annelise Riles [00:23:01] For more information on this episode and on the Northwestern Buffet Institute for Global Affairs, visit us at buffett.northwestern.edu.