economist Arvind Subramanian
(Economist Arvind Subramanian)

Green investing could be the next financial bubble

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High-profile economist Arvind Subramanian is warning about the risks associated with large-scale ESG and climate financing. In a commentary for Project Syndicate on Jan.3, the former chief economic adviser to the Indian government, argues that private climate finance is posing serious risks to global markets and the world needs to wake up to the danger as it could be the next financial bubble.

Subramanian writes that the surging green finance trend with  a flood of money pouring into environmental, social and governance (ESG) investments could backfire with economic risks looming large and both markets and economies would suffer.

“If trillions of dollars in climate finance go to emerging markets, the flows could amount to 5-10% of these economies’ GDP – similar to the financing surges that preceded the 1997 Asian financial crisis and the 2013 “taper tantrum”. Unregulated private capital flows of this magnitude will lead to overheating, volatility, imprudent lending, and overvalued exchange rates” he says.

“Eventually, when the mania is seen for what it is, costly consequences will follow: capital flows will reverse, and both output and the financial sector will collapse. We have seen this movie before in country after country, and we know how it ends: badly.”

Subramanian describes opportunities for green projects in developing countries as “over-hyped.” According to him, investors are piling into those projects based on “questionable” ESG standards while ratings result are in “fuzziness” about how to measure the ESG impact of funding. With little certainty on measuring outcomes and the relatively light nature of penalties for noncompliance, some companies may obtain ESG financing only to divert other sources of funding to non-ESG activities.

ESG’s “halo” of perceived social good could also easily lull regulators into leniency and inattention, Subramanian says.

Furthermore, the green finance consensus in richer countries also reflects an “implicit political condescension” to developing economies.

“… A cynical view is that private climate finance could end up damaging poorer economies and producing little by way of climate-positive outcomes, while enabling the financial sector to coat its somewhat tarnished reputation with a patina of green” Subramanian writes.

“Climate change affords investors an opportunity to do global social good without sacrificing profits. And ESG-related lending, which marries conscience and capital, has become a major financial fad. But mounting evidence suggests that this activity is displaying all the pathologies associated with financial manias and bubbles.”

As Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, told The Guardian last year, the climate crisis can never be solved by today’s free markets and real change has to be led by governments, not Wall Street.

Arvind Subramanian holds a B.A (Hons.) Economics from  St Stephen’s College, Delhi. He earned an MBA from the Indian Institute of Management, Ahmedabad and M.Phil & D.Phil degrees from the University of Oxford on an Inlaks Scholarship.

He is a non-resident senior fellow at the Peterson Institute for International Economics (PIIE). He was chief economic adviser to the Government of India between 2014 and 2018. Previously, he was a visiting lecturer at the Harvard Kennedy School. Professor Subramanian’s areas of interest include global development, global economic, financial and trading systems, multilateral institutions, and emerging market countries.

He is also the author of several books. In 2018, Penguin Random House published the best-selling Of Counsel: The Challenges of the Modi-Jaitley Economy reflecting on his time in India. His previous book, the award-winning Eclipse: Living in the Shadow of China’s Economic Dominance, predicting China’s rise as an economic superpower, was published in September 2011 and has been translated into three languages.

Read his commentary for Project Syndicate