Influential economist, Arvind Subramanian, has called out the ‘green’ finance boom as a bubble posing serious risks to global markets.
In a think-piece for Project Syndicate last week, Subramanian says the flood of money pouring into environmental, social and governance (ESG) investments could backfire with devastating economic consequences – especially in poorer countries.
The former chief economic adviser to the Indian government, says investors are piling into “overhyped” green projects based on “questionable” ESG standards with little certainty on measuring outcomes.
Subramanian says if the trillions of dollars allegedly lined up for green-financing deals eventuates then both markets and economies would suffer.
“Unregulated private capital flows of this magnitude will lead to overheating, volatility, imprudent lending, and overvalued exchange rates. 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,” he says.
“… 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 says the green finance consensus in richer countries also reflects an “implicit political condescension” to developing economies.
“An implicit bargain – finance in exchange for fossil-fuel reduction – underlies the current intellectual consensus on climate change: the rich provide the funding while the poor move to renewables,” he says.
But Subramanian says the surging green finance trend poses more important economic risks masked under a “halo of perceived social good [that] could easily lull regulators into leniency and inattention”.
“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,” he says. “But mounting evidence suggests that this activity is displaying all the pathologies associated with financial manias and bubbles.”