• Atmospheric CO2 /Parts per Million /Annual Averages /Data Source: noaa.gov

  • 1980338.91ppm

  • 1981340.11ppm

  • 1982340.86ppm

  • 1983342.53ppm

  • 1984344.07ppm

  • 1985345.54ppm

  • 1986346.97ppm

  • 1987348.68ppm

  • 1988351.16ppm

  • 1989352.78ppm

  • 1990354.05ppm

  • 1991355.39ppm

  • 1992356.1ppm

  • 1993356.83ppm

  • 1994358.33ppm

  • 1995360.18ppm

  • 1996361.93ppm

  • 1997363.04ppm

  • 1998365.7ppm

  • 1999367.8ppm

  • 2000368.97ppm

  • 2001370.57ppm

  • 2002372.59ppm

  • 2003375.14ppm

  • 2004376.96ppm

  • 2005378.97ppm

  • 2006381.13ppm

  • 2007382.9ppm

  • 2008385.01ppm

  • 2009386.5ppm

  • 2010388.76ppm

  • 2011390.63ppm

  • 2012392.65ppm

  • 2013395.39ppm

  • 2014397.34ppm

  • 2015399.65ppm

  • 2016403.09ppm

  • 2017405.22ppm

  • 2018407.62ppm

  • 2019410.07ppm

  • 2020412.44ppm

  • 2021414.72ppm

  • 2022418.56ppm

  • 2023421.08ppm

News & Views

Pricing pollution: Why a market-led transition may be insufficient

Part VI of NZI’s Putting a Price on Pollution Series takes a critical look at the 'soft' approach of a market-led transition

Content Tags: Transition 

Rather than introducing measures that price pollution into the world economy, policymakers have so far preferred a 'soft' approach to disclosure frameworks, stewardship activities, and anti-greenwashing initiatives.

From the EU Green Taxonomy, to the Sustainable Finance Disclosure Regulation (SFDR) and the SEC climate disclosure rules, there has been a flurry of legislative activity in this space.

The theory goes that an increase in information and transparency around ESG risks and opportunities will optimise capital allocation, setting the stage for a 'market-led' transition.

However, to be truly effective, stakeholders speaking to Net Zero Investor have suggested that this 'soft' market-led approach needs to be combined with harder policy interventions, such as transition pathways or carbon taxes, as well as increased support for fledging green industries via subsidy packages, and the removal of harmful subsidies.

Without such integrated thinking, which comes with its own challenges - especially political risk and negative social consequences - the market-led transition has four main flaws.

Flaw number one: a faulty logic

The first point is that an enhanced knowledge of ESG risk doesn’t necessarily lead to more progressive investments, as markets “often care more about short-term profit than long term strategic resilience”, as one source put it.

The authors of the latest Proxy Preview report echoed this concern in their analysis of the banking sector.

“Shareholders have engaged with banks for several years over the financing of fossil fuel projects,” said Michael Passoff, founder and CEO of Proxy Impact. 

Also read in this series
Why policymakers struggle to mitigate net zero transition risks

Proposals tend to ask for a transition plan for how each bank intends to align its financing activities with its 2030 sectorial greenhouse gas emissions reduction targets. However, they have received only “modest” support, as investors “apparently still support short gains despite the long-tern risk”.

Another problem is that disclosure frameworks, such as TNFD or TCFD, only work for the signatories of those particular frameworks. In other words, even the best possible scenario – that markets with perfect information do indeed function perfectly – contains omissions.

Simon Zadek, executive director at Nature Finance, said a market-led approach that factors ESG risks and opportunities into capital allocation decisions may work in principle, but would fail to deliver change within the needed timeframe.

“If we're facing an emergency, and the financial community is still allocating resources in a way that makes the emergency worse, then the mechanisms of risk disclosures, anti-greenwashing, communication, and so on, are nice to have but are not going to give us the delta in terms of shifts in asset allocation in the time we need.”

Overreliance on such measures may mean they “become part of the problem” , as markets and policymakers spend too much time and energy on initiatives “that deliver only incremental change over longer periods of time”.

Flaw number two: a binary problem

The emphasis on 'sustainable' versus 'non-sustainable' runs the risk of creating a binary economy in which companies and their investors who care about sustainability are pitted against those that don’t.

“The EU rules have created a very small level of bonafide ESG activities and then there’s everything else, which leaves the large transitional area relatively un-accommodated,” said Gavin Haran, head of asset management policy at Macfarlanes. 

“However, if policymakers focused on shifting the real factors of the pollutant economy, then some of the barriers between sustainable and non-sustainable would break down. Over time, even the concept of a sustainable investor might become obsolete.”

Also read in this series
Better policymaking will stop short-termism from holding back net zero

Haran stressed the three 'sustainability' categories - minimum taxonomy alignment, minimum level of sustainable investment, and consideration of principle adverse impact indicators - in the Mifid II sustainability preference rules as a good example of how a “complex green versus everything else” binary leaves little room for transition investment.

“Policymakers, especially in the EU, seem to be saying ‘we can’t or won’t change the real economy with the same intent, for instance, as the US Federal Government via the Inflation Reduction Act, so we’ll set up a regulatory system that tries to nudge firms and investors instead,” he said. 

“However, right now, the market isn’t moving to where they want it to be nor at the desired speed.”

Some sources have also suggested that certain players are delighted to keep sustainable finance in a complex niche, so long as business-as-usual activities can keep on running alongside it.


If policymakers focused on shifting the real factors of the pollutant economy, then some of the barriers between sustainable and non-sustainable would break down. Over time, even the concept of a sustainable investor might become obsolete.

Gavin Haran, Macfarlanes

Flaw number three: a competence problem

A common theme is the “competence problem” in the complex green rules that have increased compliance burdens with minimal real world impact. 

Simpler measures, such as setting transition pathways or carbon and biodiversity taxes, would have more real world impact without hundreds of pages of technical jargon that take years to implement effectively.

“The EU taxonomy has 700 do-no-significant-harm criteria as well as other requirements, and the complexity has absolutely killed it,” said Faith Ward, chief responsible investment officer for Brunel Pension Partnership, and a member of the UK Green Taxonomy Advisory Group.

“These so-called ‘soft’ measures can actually be incredibly stringent with limited results. While there is merit in policymakers making co-ordinated efforts to standardise green definitions and stop greenwashing, they need to create policies that are usable.”

Two clear signs of the EU taxonomy’s ineffectiveness is the “phenomenally low” level of revenues being reported against it and the launch, two years later, of the usability platform.

Also read in this series
Due diligence laws divide financial firms

While the EU taxonomy is, in principle, a positive step forward, its many problems have reduced appetite for other, potentially more useful taxonomies. 

For example, the proposed traffic light taxonomy would help investors identify what kinds of investments to avoid (red) as well as the fundamentals of transition investment (amber).

“It is difficult to advocate for taxonomy extensions when they haven’t even been able to get the first one right,” Ward said. “We support all initiatives that aim to accelerate the green transition, so long as they are done well.”

Jakob Thomä, co-founder and principal at 2 Degrees Investing, was also critical of the EU’s sustainable financial regulation infrastructure.

“SFDR Articles 8 and 9 are a mess, the benchmark pieces seems to be slowly falling apart, and the Eco label is going nowhere, to say nothing of the taxonomy,” he said. 

“It seems that the EU authorities struggle to both create and process the thousands of pages of these highly technical rules.”

Flaw number four: overreliance on stewardship practices

The basic assumption of a market-led transition is that investors with the right information on ESG risks will support green industries and put pressure on pollutant industries to change their ways.

However, as the banking sector example demonstrated earlier, that isn’t necessarily the case. Short-termism can be as much a problem for shareholders as for governments.

Moreover, without a mandatory regulatory structure surrounding stewardship activities, it can be difficult to gauge the effectiveness of engagement claims made by investors.

To mitigate this risk, Ward recommended making the FRC stewardship code – used by the Brunel Pension Partnership – mandatory for all asset managers. 

“Having multiple approaches to stewardship is not a problem, but they need to be effective, and tools such as the FRC stewardship code can make any kind of stewardship approach more robust,” she said.

However, due to the “rigorousness” of the code, the wider pension fund market is unlikely to support making it mandatory at this time.

Also read in this series
Global firms call for transition pathways and carbon tax

Another more inherent problem with stewardship activities is that the ultimate escalation weapon – divestment – may not achieve a real world impact and may even inadvertently create setbacks. Essentially divestment entails passing on shares to another investor.

Even a 'successful engagement' with, say, an oil and gas company, might result in highly pollutant assets simply being spun off into private markets where there is even less transparency. On paper, the public company has committed to climate goals, in practice, nothing has changed in terms of climate impact.

“Divestment is mainly smoke and mirrors,” Professor Dieter Helm told Net Zero Investor. “It’s inconceivable and impractical to go from an 80%-fossil-fuel-powered economy to ‘let’s just divest’.”

Helm also noted the limitation of targeting public companies for divestment when the majority of fossil fuels are produced by state-owned companies, such as Saudi Aramco.

“If you stop Shell and BP from expanding, it is naïve to think oil and gas will stop being supplied,” he said. “It just allows environmentally worse companies with less transparency to move in.”

Rather than divestment, Helm said governments should focus on transitioning “from an overwhelmingly carbon-based world to one that isn’t”. Pricing pollution into the global economy – although difficult to get right – would help achieve this aim.

Also read in this series
Seven reasons why policymakers aren’t accelerating the green transition

Content Tags: Transition 

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