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Business and innovation

Business and innovation

Climate change is a ‘Pascal’s wager’: so how will you act?

11 Mar 2020 James McKenzie
Taken from the March 2020 issue of Physics World, where it appeared under the headline "Pascal's wager".

Businesses must take action on climate change, which is why – says James McKenzie – it’s an example of a “Pascal’s wager”

Pascal’s wager
Betting on the Earth: It makes sense to take action on climate change, because the dangers of doing nothing would be huge. (Courtesy: iStock/barisonal)

Do you believe in climate change? I certainly do, though not everyone does – and some people don’t even care. But as businesses are slowly realizing, climate change is an existential threat. Whether it’s the pressure to cut carbon emissions or respond to damage to the local environment, climate change could put a company’s entire livelihood at risk. Climate change is, in other words, an example of a “Pascal’s wager”.

Pascal’s wager is a philosophical argument first presented by the French philosopher, mathematician and (let’s not forget) physicist Blaise Pascal (1623–1662). His logic was simple: God is, or God is not. Reason cannot decide between the two alternatives. The game is being played. You must wager (it’s not optional). Any rational person, Pascal argued in his posthumously published book Pensées (“Thoughts”), should live and act as though God exists regardless of belief.

If God doesn’t exist, you won’t have much to lose by believing in God or merely acting as if you do – you’ll only have forfeited a few pleasures. But if God does exist, then you stand to receive infinite gains (eternity in Heaven) and avoid infinite losses (eternity in Hell). As Pascal pointed out, our actions can have massive consequences, but our understanding of them is flawed.

Climate change is a modern-day Pascal’s wager, because so much is at stake.

Climate change is a modern-day Pascal’s wager, because so much is at stake. Doing nothing to tackle climate change could mean hell – rising sea levels, mass extinctions, droughts, ecosystem collapse, food shortages, famine, conflicts, war and possibly an uninhabitable planet for the next generation. But taking action could lead us to heaven – thriving as a species on a habitable plant. So even if you don’t believe in climate change, it makes sense to act rationally as though you do. The only way out is innovation and positive action.

Company action

Basically, we all need to start acting rationally, as the tech giant Microsoft is doing. In a truly inspirational new-year message released on 16 January, the company’s president Brad Smith promised that Microsoft would become carbon negative by 2030 and that, by 2050, it would have removed from the environment “all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975”.

The company also unveiled a new initiative to use Microsoft technology to help its suppliers and customers to reduce their own carbon footprints. In addition, it announced a $1bn “climate innovation fund” to accelerate the global development of technologies to reduce, capture and remove carbon. And the company promised, from the start of 2021, to make carbon reduction an “explicit aspect of our procurement processes for our supply chain”.

Now when the president of one of the very few companies with a trillion-dollar market capitalization makes such statements, the business world should sit up and take note. This is not some fluffy, feel-good PR stunt. Microsoft has drawn up a detailed plan, with milestones and a commitment to measure progress in its annual reports.

The other significant announcement in the business world was made on 15 January by BlackRock Inc – the world’s largest investment manager – in which it declared it would no longer invest in thermal coal. The company, which manages around $7 trillion of funds, also said it will “drop” any company directors (sell stock, vote against them etc.) who fail to act on financial risks from climate change.

More striking still, BlackRock’s chief executive Larry Fink wrote two letters: one to the heads of all companies it holds stock in and another to all of its clients. Published online, the letters reveal the firm’s environmental, social and governance priorities for the new decade and beyond. To say they’re significant doesn’t do them justice.

In his letter to chief executives, Fink said that climate change has become “a defining factor” in companies’ long-term prospects, pointing to events last September when millions of people took to the streets demanding action on climate change. “Many of them”, he wrote, “emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect.” But, Fink continued, “awareness is rapidly changing, and we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

Of course, businesses always face crises and challenges. But many that Fink has lived through over his 40-year career in finance – inflation spikes in the 1970s and early 1980s, the 1997 Asian currency crisis, the 2000 dot-com bubble, and the 2008 global financial crunch – were all essentially short-term. “Climate change is different,” he added. “Even if only a fraction of the projected impacts are realized, this is a much more structural, long-term crisis.”

Fink reckons that companies, investors and governments must now prepare for a “significant reallocation of capital”. Indeed, he claims that more and more of BlackRock’s clients around the world are looking to reallocate their capital into sustainable strategies. “If 10% of global investors do so – or even 5% – we will witness massive capital shifts. And this dynamic will accelerate as the next generation takes the helm of government and business.”

Young people, Fink pointed out, have been at the forefront of calling on institutions like BlackRock to address climate change, demanding more of companies and of governments, in both transparency and in action. “As trillions of dollars shift to millennials over the next few decades, as they become chief executives and chief information officers, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability.”

Businesses, investors and fund managers are finally waking up and taking responsibility for their actions [on climate change].

My take-away message from these statements is that businesses, investors and fund managers are finally waking up and taking responsibility for their actions. So how will you wager on climate change in your business and personal lives? Will you act rationally? Or will you stick your head in the sand?

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