When pricing fails, finance must speak

Financial markets are not shy of making their anxieties felt — in theory.

When Kwasi Kwarteng as UK chancellor of the exchequer gave his infamous fiscally expansive mini-Budget in September 2022, the 10 year Gilt yield spiked nearly 100bp in days.

US president Donald Trump’s global tariff splurge on April 2, 2025 pushed European crossover credit default swap spreads out by a similar amount in a week — a 30% widening. Investment grade spreads, proportionally, weakened even more.

Market moves like this are healthy. They show the world investors are worried. If those with money are fearful, they may withdraw it from parts of the economy, in ways that hurt. Society had better pay attention.

Sometimes market sell-offs even have immediate results. Kwarteng was sacked in three weeks — his boss, Liz Truss, in a month.

When the 10 year Treasury yield soared 50bp after April 2, Trump quickly backed off, reducing his demands.

The president’s on-and-off efforts since April to resolve his war on Iran owe much to the price of oil, which has fluctuated between $72 and $120 a barrel since the war began, having been below $70 for most of the previous year.

Regrettably, markets do not always send such clear and salutary signals.

Multiple times in the past 20 years, the US Congress has been so deadlocked that passing a working Budget was impossible. The government has shut down and default on Treasuries seemed a real possibility.

Despite this frontier market-style behaviour, investors continued to buy and sell Treasuries at the usual kinds of yield.

It was not that they liked the US politicians’ behaviour. They simply had no choice. If they started to pull money out of the $31tr Treasury market on any scale, where were they to put it? Starting a run on Treasuries would only cause themselves losses.

With markets staying apparently calm through such episodes, it’s no wonder US elected representatives think it’s fine to indulge in extreme brinkmanship.

A similar pattern is playing out with regard to global warming. It is perfectly clear to all but a few sceptics and — in the US — a much larger group of ideologically motivated fanatics that damaging climate change has begun.

Science makes it evident that the effects will get much worse. Not only is the human-made greenhouse effect still growing stronger, as we pump more than 50bn tonnes of carbon gases into the atmosphere every year — a number that is still growing.

But the warmer the sea and land get, the more carbon naturally locked up in them gets released, in ways we cannot control.

Yet even when this inexorably approaching calamity causes visible disasters today — such as wildfires taking human lives and destroying property — markets barely react.

It is not that they never do. Ask the governments and business leaders of Caribbean islands which have been repeatedly assaulted by hurricanes, made more intense and frequent by climate change.

Servicing debt, and raising new capital, is expensive when investors know a weather disaster could strike this year, next, or in a few years’ time. Damage can sometimes exceed an island country’s annual GDP.

But most larger economies are not yet experiencing sharp market moves. The effects of climate change are plain to see, but, even when the events are acutely local, the financial cost is diffuse.

Sometimes fires or floods savage a particular region, such as California, badly enough to affect its finances. But mechanisms such as central government support; insurance; and the existence of large, diversified banks serve to spread out perils across the economy.

Even the industrial companies big enough to use wholesale capital markets tend to have production sites in multiple places, or even countries.

This risk sharing is a good thing for society. It creates resilience. But it makes it difficult for markets to react to climate change in a noticeable way. The damage is thinly spread across many securities, so why move from one to another?

At a deeper level, that is exactly the nature of climate change. The causes are real, measurable emissions in specific places — and much of the damage is local. But it is also a global problem. There is only one atmosphere, which everyone shares and has to put up with.

As when investors worry about Congress refusing to approve further borrowing to service US debt, with climate change there is nowhere to hide.

If markets cannot send pricing signals, they have to find other ways to communicate.

The risk investors face is real enough. Global warming will raise inflation, lower economic growth, and if it leads to widespread hardship, will cause defaults and share price losses.

Even on the most blinkeredly literal interpretation of fiduciary duty, climate change is threatening investment returns.

It is therefore investors’ duty to try and avoid this risk, mitigate it, or better still, prevent as much of it as possible.

Cynics might say the financial sector’s green activism was only ever skin deep. Certainly, it has ebbed in the past two years in the face of Trumpism.

With some honourable exceptions, banks and asset managers have dropped some of their sustainability commitments and weakened their advocacy.

This summer’s four months of exceptional heat and dryness must shock the financial industry out of its retreat.

Running away from the problem or pretending it isn’t there can only make it worse.

The financial sector has to find its voice again.

On one hand, it must demand action from governments, and reassure politicians that Big Money will support them, not oppose them, if they take bold steps.

Net zero emissions by 2050 is not yesterday’s slogan, but an absolute imperative.

Adaptation to climate change is also now critically urgent. Huge changes are needed in water supply, storage and management, requiring enormous infrastructure investments, if we are to get through the coming droughts and floods.

On the other hand, banks and investors have to urge on each other. With temperatures hitting record highs, barging over each other to finance the latest data centre fuelled by gas is nothing short of insane.

A single campus in Texas planned by Amazon will be permitted to emit 33m tonnes of gases a year — more than Finland.

Hyperscalers may have plunged heedlessly into a destructive arms race, but there is no reason why banks and investment firms, which have wider needs and vision, should encourage them.

Big financial firms are exposed to the whole economy. They are funnels for risk. Whether it comes in sharp bursts or an endless cloud will vary. But any damage, anywhere, will ultimately hit them.

Who better to speak up against this tide of danger than finance?