Using the Law to Enforce the Fiduciary Duties of Fiduciary Money to Take Action on Climate
New Financing Choices for Financing New Energy Choices, and a New Prosperity.
Climate Science is teaching us that when we extract energy from fossilized hydrocarbons to finance our modern prosperity of scale, and GROWTH in scale, we are commandeering energy that is already being used in Nature for another purpose, a purpose we probably don’t really want to be disrupting.
Climate science has learned over the last 50-75 years that the energy in hydrocarbons is being used by Nature, through a long chain of cause-and-consequence connections, to create the habitats, land forms and life forms on earth that make it possible for us, as humans, to live well, and prosper, in those habitats, on those land forms and with those life forms, on Earth.
When we extract energy from fossilized hydrocarbons to power our prosperity in the short-term, we are commandeering energy that Nature is using to make that prosperity a geophysical and biochemical possibility over the long term, which means we are changing those possibilities on ourselves. And not for the better.
A moment’s reflection on this Science leads very quickly to the realization that if we want to continue prospering as humanity on earth, we better stop extracting energy from hydrocarbons.
Which quickly leads to what I personally experience as the great unasked and therefor unanswered question in the climate crisis, which is this.
If we stop powering our prosperity by extracting energy from hydrocarbons, what will we power our prosperity with?
This, it seems to me, should be THE DEFINING QUESTION in the climate conversation, and the world should be abuzz with grand designs that, in the words of 19th Century urban planning pioneer Daniel Burnham, have the “magic to stir [people’s] blood”.
Maybe it’s me, but I have a hard time finding such grand designs.
There are those who speak, almost off-handedly, about “switching to Renewables” - mostly Wind and Solar - but I have yet to find any truly planetary scale, science-guided imagining of how, as a practical matter, we can replace the entire global hydrocarbon energy economy with new energy technology choices deployed at planetary scales in the short amount of time that I hear Climate Science telling us we have left in which to act, before:
our ongoing and accumulated extraction of energy from hydrocarbons passes trigger points
that will set off chain reactions in the chain of connections between energy stored in hydrocarbons and the habitats, land forms and life forms on earth that we, as humans, need in order to live well and prosper,
chain reactions that will drive changes to those habitats, land forms and life forms that will be adverse to, and possibly, even likely, catastrophic for, our ability to keep our modern society and prosperity ongoing.
Maybe this apparent paucity of planetary science-based energy replacement design and planning within today’s climate change conversation can be explained by referencing the widely held conventional belief that Culture, Government and Markets are the social agencies for social decision making that can and will figure this all out for us, IF we can just find a way to make them get started.
The common wisdom seems to be that Culture informed by Climate Science can make Government and Markets take action to figure out the required action, because Governments and Markets are both accountable to Culture, through electoral politics and the Invisible Hand, respectively. So, if Culture can move people as voters and consumers to demand that Government and Markets take action on climate, the necessary action will, of necessity, be taken.
Another theme that I encounter regularly within social movements is that “we”, i.e. social change movement leaders and members, already know the problem, and its solutions (although none of the proffered solutions that I have encountered measure up as a grand design for a new energy economy), but that our political and business leaders lack the political will to show leadership in calling for a popular mandate; or is it that our electorates lack the political will to issue such a mandate to our political leaders? - I have trouble figuring out what this talk about the lack of political will is really saying, I must confess.
Through adherence to this conventional thinking, society continues in an everchanging pattern of inaction on climate action, and frustration is increasing within the various climate action movements over the apparent inability of Climate Science to energize either Culture or Government or Markets to overcome the inertial resistance of special interests, and take action to figure out what action needs to be taken, and how to take it.
Critical Assessment of Current Thinking About Strategies for Climate Action
Perhaps somewhere in this frustration with recurring promises that “this time it will be different”, I can find resonance for some thoughtful reflection on the root causes of climate inaction, in search of a new theory of change for breaking out of this pattern of inaction and frustration.
Can Adding a New Third Way, a Fiduciary Way, Provide A Breakthrough Path?
I propose we begin this thoughtful reflection by examining the proposition that the reason social action movements are having so much difficulty in moving Culture to move Government and Markets to start moving on a grand strategy for saving modern society from self-destruction is because most people know, intuitively, if not articulately, that those agencies of Government and Markets are just not structurally competent, on their own, to perform this task. We need something more, something new, something that right now is still missing.
Let’s Start with Culture
“culture is how we create meaning, find purpose, understand each other, experience wonder and construct new realities”
Culture connects us
Yo-Yo Ma, Cellist
https://www.creativityculturecapital.org/blog/2021/01/14/culture-connects-us/
How do we create a culture that constructs a new reality of climate action?
I propose that it has to begin with language, and vocabulary, and the words we use to talk about the problem and it’s solutions.
Today there are many signs that we are not being successful at creating the culture we need to create in order to motivate society to take the actions that need to be taken. Maybe we have a language problem, in that we are talking about the problem in the wrong way, a way that does not inspire broad-based support for positive climate action. Maybe we need a new vocabulary, one that talks more inclusively, about replacement, and more pragmatically, about the social agencies we can, should and will authorize to effectuate that replacement.
Consider, for example, the way in which many climate change activists talk about climate change as a carbon problem.
When I look at what Science is showing us about climate change, I do not see a carbon problem.
I see an energy choice problem that is creating an earth habitat stability and security problem, that is creating an economic prosperity stability and security problem, where:
the lynchpin for stability and security is the energy being used by Nature to bind carbon into hydrocarbons
to keep the carbon densities in earth’s sky chemistry at levels
that will allow radiant cooling of the earth to continue at rates
that will set the thermodynamic balance between solar heating and radiant cooling of the planet within ranges
that will keep average air, surface and ocean temperatures on earth within ranges
that will support long-term, large-scale weather conditions that we call climate
that will support habitats on earth that are conducive to our human being;
but where we are pulling the pin on our own future safety as we extract the energy that Nature is using to bind carbon into hydrocarbons, and sustain the geophysical pre-conditions of our continued prosperity, to power our industrial prosperity.
If we imagine our economy as a boat on a lake, we are draining the lake to make our boat bigger.
In pursuit of prosperity today, we are eroding the conditions necessary for us to continue that prosperity into tomorrow.
Which brings me to this question. What social agency are we entrusting with the power to make our energy choices for us? And is that the right agency for being guided by Science in making prudent energy choices for all of society, for today and tomorrow, both, equally?
The answer I hear coming back from both Climate Science and Climate Activism is that Culture can make Government make the Markets make the right new energy choices for climate security today (or is it that Government can by-pass the Markets and make those choices itself, directly - I can never quite get clear on that).
Except for that pesky “lack of political will” problem.
But maybe there is a different problem. Maybe the real problem is that Markets cannot make, or be made to make, the energy choices we need to be making today, and that Governments also cannot bypass the Markets to make those choices itself.
Maybe Culture needs Climate Science and Climate Activism to find a new way, a third way, to make the new energy choices we need to be making, before Society will mobilize to take action on climate.
Why Markets Are Not Capable of Taking Action on Climate
By Markets we mean a social structure for social decision making through Finance that uses securitization for speculation on future movements in market clearing prices within markets that are created and maintained to maintain a market clearing price - and also corporations as the primary form of ownership of enterprise for investment and control (by professional managers, through a self-perpetuating hierarchical management bureaucracies) that gets securitized for speculation in the Markets. - to decide for society where the money can, should and will be made to go to finance the right economy for keeping a good society ongoing.
So when we are talking about Markets, or Corporations or even Business Leaders, more generally, about making new energy choices for us, we are really talking about speculating our way to a future of climate security. Which is a problem.
The origins of our modern Markets for Corporate Finance through securitization for speculation can be traced to 16th Century Holland, where shares in sailing voyages in the Spice Trade and the China Trade came to be commonly sold by shipowners to what we might call today “passive investors” to help cover the significant costs of outfitting such a voyage, as well as the sharing the risk of loss to shipwreck or other calamities that were an inherit peril of these voyages, in what came to be known as the Dutch Auction Method, This is still the method on which Markets operate today. In this method, a market maker receives offers to buy shares and offers to sell shares at listed prices, and effects a sale when there is a match, without the buyer and seller ever negotiating with each other directly, or, in many cases, even knowing who the other party to the trade is.
The legal form of ownership favored for dividing enterprise into shares is generally known as a joint stock company, which I equate with our modern forms of limited partnership or limited liability company. Each company was organized to outfit a specific voyage. Shares were purchased for an equivalent percentage of the total costs of outfitting that voyage, and each share entitled the holder to that percentage of the profits from that voyage, if and when the ship returned and its returning cargo could be sold by the shipowner. Shares were traded during the continuance of the voyage in speculation on when the voyage would conclude, and how much profit it would realize when its returning cargo was sold.
The enterprise itself - a ship voyage - provided the term or end date for each investment, when costs and profits could be calculated, and a determination made as to how successful that investment proved to be.
This construct of selling shares was adopted and adapted by the English in the 17th Century to refinance the debts of the Crown, by creating what we would now call a government bond market.
The English also invented, in the 17th Century, the pesky problem of share price bubbles, when they constituted the South Sea Company as what we would call a special purpose corporation, for the purpose of holding a government-granted monopoly on trade between England and the so-called Spanish Main, or the Spanish colonies on the mainland of South America, in exchange for securitizing war debts that had been accumulated by the Crown, and that would be repaid out of future taxes to be collected by the Government. The debt that was securitized through the South Sea Company was term limited, but the monopoly on Spanish South American trade was not. And neither was the South Sea Company, itself.
In consequence, there was no end date to this enterprise, at which time speculators could “settle up” with the organizers, and determine whether or not their speculations were successful. Instead, buyers bought shares in order to sell those shares to other buyers, as market prices for those shares went up, driven in no small part by the self-fulfilling prophecy of rising share prices supported in large part by activities that we would describe today as stock fraud.
The South Sea Company was conceived as a replica of the British East India Company, that held a government-granted monopoly of the English trade in teas silks and spices from China and Southeast Asia. But the Spanish Trade with South America never materialized at anything even remotely approaching the scale of the trade that ran through the East India Company. In fact, it never became even a profitable trade.
The only really valuable asset that the South Sea Company actually held was what we would call a portfolio of Government bonds, so that the enterprise was, in effect, what we would call a Government bond fund. Except that its shares did not trade at prices that reflected the interest rates and credit risk of the Government bonds it held. Instead, shares traded at prices that reflected speculative aspirations for the wealth that would inure to the Company and its shareholders once trade with South America took off.
But that never happened.
Instead, we got the South Sea Bubble that saw run-away growth in share prices driven by the self-fulfilling prophecies of rising share prices, until prices stopped rising, and the Bubble burst, bringing ruin on many of the speculators, including many famous names of eminently reasonable people “who should have known better”, such as Sir Isaac Newton.
But the bursting of the South Sea Bubble was not the end of the story.
As enterprise became industrialized through the middle of the 18th and into the early 19th Century, this technique of social decision making through speculation on corporate share prices became a popular way for individuals as investors to participate in the wealth being created in this New Age of Coal-Fired Steam Powered Industrialized Manufacture.
At this point in our exploration of why Markets cannot be used to take action on climate, the focus shifts to the United States, and more specifically to New York City, and even more specifically to Wall Street in Lower Manhattan, where a trade in shares in sailing voyages that began in colonial times was evolving into a national and international - and ultimately, transnational, global - scale business of trading in government bonds and corporate shares.
What was also evolving was an institutional variation on individual speculation on future movements in market clearing prices in the markets for maintaining a market clearing price.
During the middle of the 19th Century, the time-honored practice of using marine insurance as a way of laying off some of the risk of loss on sailing voyages to speculators who placed bets on whether or not a particular voyage might be lost to shipwreck or other calamity, based in large part on a statistical analysis of the considerable quantities of data on such occurrences that had been accumulated with the City of London over the course of many, many decades of experience in theTea, Spice and Silk Trades, as well as more local commerce with the Continent, evolved into the new business of life insurance based a new actuarial science that combined statistics on life expectancies with the mathematics of probability and the law of large numbers to provide financial security to policyholders against the financial uncertainties of dying too soon.
These new life insurance companies soon found themselves as the fiduciary owners of large pools of policyholders premiums aggregated into actuarial risk pools.
These vast pools of individual savings for insurance soon found their way into the markets for speculating on corporate share prices, fueling a boom in market clearing prices that concentrated wealth and power in the hands of the trusts during The Gilded Age; a boom that went bust in the Panics of 1893 and 1907, almost bankrupting the US Treasury, and requiring Teddy Roosevelt to ride in to bust up the trusts, while state legislatures made it illegal for insurance companies to speculate on market clearing prices with policyholder premiums.
Next came The Roaring Twenties, when depositary banks started lending customer deposits to share price speculators, taking the shares, at their market clearing prices, as collateral. This fueled another boom in market clearing prices and economic activity that concentrated wealth and power in the new legal-financial innovation of the general purpose business corporation, until that boom went bust in the Crash of ‘29 and the Great Depression, requiring FDR to regulate at the federal level both commercial and investment banking, while creating worker pensions and social safety nets.
Today, we are living within a third market-wide speculative asset pricing bubble that is financing a new economic boom that some are calling The New Gilded Age. This bubble and boom is being financed by Fiduciary Money, the tens of trillions aggregated, collectively, worldwide, into Pensions & Endowments as institutional fiduciary owners of institutional fiduciary money. This current market pricing bubble and economic boom is concentrating wealth and power in the hands of a new class of professional Asset Managers (and especially in the hands of a special kind of Asset Manger known as a Hedge Fund Manager), and a growing class of professional Corporate Executives who manage increasingly large corporations that own increasingly large portfolios of real economy business enterprises as a special kind of “active ownership” mutual fund.
This current institutional speculative asset pricing-fueled boom almost went bust in the Global Financial Crisis of 2008, but governments around the world, through their central banks, led by the United States Federal Reserve, were able to step in to bail out the corporations and governments caught up in this crisis, and get the asset pricing bubble machine going again, this time turbocharged by vast amounts of central bank lending of taxpayer money.
In this way speculation on market clearing prices has come to dominate contemporary conventional thinking about finance, and enterprise, and prosperity and the economy and the role of government in keeping a good society ongoing.
What we are getting by thus letting institutional speculation monopolize contemporary social decision making is an economy of:
short-termism;
corporate gigantism;
economic elitism;
financial system instability;
retirement system unreliablity;
social and environmental injustice;
corporate capture of politics and public opinion;
political divisiveness degenerating towards violence towards the Rule of Law; and
structural inability to take action on climate and other changes in our changing times that require action at the scale of climate.
As noted above, we have seen this pattern of institutional speculation driving social dysfunction before, at least twice. Once in The Gilded Age and a second time in The Roaring Twenties.
What makes us think that this time, things will be different?
Trapped within the logic of institutional speculation as our default form of social decision making, we are limiting ourselves, as society, to being able to see the future only as the forward projection of an historical trend line that is expected to continue without end, until it does end, abruptly and unexpectedly, reducing and exaggerating the flourish and fade of change and prosperous adaptation to life’s constant changes into the boom and bust of creative destruction and techno-optimism.
Within this logic of social decision making through institutional speculation, warnings about future destruction are received only as one factor in the complex decision making process of deciding on what bets to place, and how long to hold them, in order to extract maximize profits by externalizing maximum costs.
When it comes to social decision making on climate action, we are defaulting to institutional speculation in markets that are made for individuals to make our energy choices for us, but institutional speculation is structurally incapable of seeing the connection that Science is showing us, between energy in hydrocarbons and the geophysical pre-conditions of our prosperity extending out into an intergenerational future, unless and until it becomes a factor in the decision of what to buy and what to sell.
There are many voices in society today insisting with great force and volume that we can force institutional speculation to see the connections between energy in hydrocarbons and climate security, and compel our institutional speculators - our Asset Managers and Corporate Executives - to factor the future losses that will be associated with climate-change-driven changes in habitats, land forms and life forms into their share price calculations, forcing them to abandon fossil fuels, catastrophically, in favor of new energy choices, in an heroic exercise of creative destruction, to save the world .
ESGers, for example, contend that we can keep institutional speculation in charge of important social decisions, like climate action and social and environmental justice and business accountability to society, more generally, but make institutional speculators speculate their way to the right choices for a secure future for all of society. They say its easy to do that. They say that all we have to do is just tweak the way we factor future risks into current market clearing prices. They say we can do that by revising disclosure requirements for better transparency that will allow professional critics of institutional speculation to effectively criticize institutional speculators who ignore future risks in their speculation on current market clearing prices.
One of the many problems with this ESG disclosure theory of change is that they are effectively trying to transform a market clearing pricing mechanism that is created by design to be agnostic on social values - relying, instead, on individual market participants to infuse our own individual values into our own individual buy, sell or hold decisions, which then aggregate into a social conscience that modulates the worst excesses of corporate behavior through the infamous Invisible Hand - into a market that has a social conscience built into its market pricing mechanisms. In order to accomplish such a feat, this theory of change has to make professional speculators speculating with institutional money agree to compete with each other for contracts to speculate with institutional money on something other than their ability to “maximize risk-adjusted returns” on a quarterly basis, from quarter to quarter.
Many financial system reformers argue that we can make institutional speculation forego such short-termism to become long term speculators. But how long is long? Term is a legal word for end date. Institutions have no actual end date. They are created and sustained by society to just keep going. They never end. So, there is no actual end date that institutional money can provide. If there is an end date to an investment of institutional money, the end has to be provided by the enterprise being financed, or the structure of the financing itself. The markets, however, are also created by design to be ongoing. There is no end date when a corporation ceases doing business and winds up its affairs, or when a market for maintaining market clearing prices stops maintaining a market clearing price. So, how long is an institution that buys shares in a corporation at market clearing prices supposed to hold those shares? What is to justify not taking profits as soon as those become available? Why hold through a downturn, instead of selling out, to cut one’s loses?
In the absence of any other properly logical, long-term date for measuring investment performance, institutional speculation foreshortens to a perpetual present of moment-to-moment market movements. Every buy, hold or sell decision is constantly being evaluated every movement, from moment to moment, in search of opportunities to extract profits from the markets, or to push losses onto some other market participant, as the stately rhythm of buy-and-hold of individual investors in a marketplace dominated by individuals accelerates first to the faster pace of buy-low-to-sell-high before achieving the frenetic heights of buying high to sell higher.
If we can pull institutional money - which today means primarily Fiduciary Money, the tens of trillions entrusted to Pensions & Endowments as institutional fiduciary owners of institutional fiduciary money - out of the market clearing price speculation markets, and return those Markets to the individuals they are created for, thereby reactivating the Invisible Hand of rational self-interest as expressed by individuals aggregating to the voice of society, more generally, we might be able to realign market speculation with a future of climate security.
But then what will we do with all that Fiduciary Money?
Election Cycles, Corporate Capture and the Inability of Government to Legislate Climate Security
Many, many voices speak passionately, with the energy of great conviction, of the power of government to force the markets - or to sidestep the markets entirely (it is never entirely clear to me what their actual theory of government action really is) - to stop financing the extraction of energy from hydrocarbons and to start doing something else, and of our power, as “the people” to force the government to take such actions.
These words from an article describing the ruling on a recent court case in Australia1 can perhaps help us see why these voices, despite their passionate energy, are largely, even by their own admission, not really having any success, on climate or other things,
“[plaintiff] couldn’t make out the essential grounds of a common law duty of care/negligence case because the relationship relied on between [plaintiff] and the [Government] was more in the nature of a citizen/government relationship and lacked the closeness and directness that the common law has always demanded before finding an applicant is entitled to a legal remedy against a party whose conduct has caused or may cause them harm.”
NOVEL DUTY OF CARE CLIMATE CHANGE CASE FAILS – FOR NOW
March 15, 2022 in Life, Law & Culture
https://fremantleshippingnews.com.au/2022/03/15/novel-duty-of-care-climate-change-case-fails-for-now/
As an exercise in legal reasoning, that decision sounds correct. Governments that are not despotic are accountable to their electorates through election cycles. In the absence of a lawful statute or constitutional rule to the contrary, their only duty is to the popular vote at the ballot box in the next upcoming election. Which tells me that any campaign for climate action that makes government the primary agency for social action on climate will struggle to dominate the many complexities of electoral politics, including the looming problem of Corporate Capture by special interests who use campaign contributions (and maybe more nefarious means) to turn their special interests into the national interest of nation-states.
Government that is accountable to short-term (by climate standards) election cycles and a diverse electorate energized by diverse political issues cannot be used to mandate energy choices driven by climate security.
But the law can be used in a different way, with a different institutional agency of social decision making.
A New Equation for Social Change: Climate Science + Social Change Activism makes Culture make the Law of Fiduciary Duty make Fiduciary Money Finance a Secure Future of Climate Security
Imagine a different lawsuit from the above, brought by a different plaintiff, against a different defendant, alleging a somewhat different violation of a very different duty.
Imagine the defendant is a pension fiduciary.
Imagine the plaintiff is a class of pension plan participants.
Imagine the claim is for a breach of fiduciary duty of prudent loyalty to a secure future.
Imagine the alleged breach of fiduciary duties of prudent loyalty is the willful decision to finance through speculation a future of volatility, uncertainty and insecurity, instead of choosing the safer alternative of financing through negotiation for fiduciary minimum certainty and security.
The duty of pension fiduciaries to their beneficiaries is established in the law beyond question.
The standing of pension plan participants, both current and future retirees, to sue to enforce prudent loyalty to that duty seems beyond any reasonable challenge.
So, the matter in controversy, it seems to me, will be:
does a pension fiduciary’s duty of undivided loyalty to their fiduciary purpose include a duty to “first do no harm” to the future physical security of pension beneficiaries through their investment decisions, and
does institutional speculation cause harm to the future physical security pensions beneficiaries?
A subsidiary question will be whether pension fiduciaries have any safer alternative for investing the fiduciary money entrusted to their good judgement than speculating in markets that are created for individuals, and only function correctly when they are dominated by individuals.
This, I think, is the pivotal question for climate action, because if the answer is “Yes”, and that safer alternative is structurally competent to include future impact on habitat and the possibilities for ongoing human prosperity in present investment decision-making, then it should be, as a matter of law, a violation of fiduciary duty for Fiduciary Money not to choose that alternative. And if Fiduciary Money does choose this Untaken Safer Alternative, then all that tens of trillions of Fiduciary Money, collectively, worldwide, can and should be used to finance energy choices in the global economy that do not break the chain of cause-and-consequence between energy in hydrocarbons and the stability and security of human-friendly habitats on earth.
Which means that Fiduciary Money can be made to be the social agency for taking action on climate that neither Markets nor Government can really, as a practical matter, be made to take.
And Climate Science + Social Change Activism can make Culture make the Law make Fiduciary Money do just that.
A decision by a three-judge Federal Court of Australia upholding an appeal against the earlier decision of the primary judge that found the Commonwealth Minister for the Environment owed the children applicants a common law duty of care to consider the climate change consequences of approving an extension to a coal mine in New South Wales.
In the case of Minister for the Environment v Sharma.