With the rise of calls to divest from companies that drive climate change, to boycott the fossil fuel sector, or to become net zero by 2030, #climatecrisis is trending on social media. This article puts forward that a Nash equilibrium buttressed by unprecedented international cooperation would be a prerequisite to reach a net-zero carbon equilibrium. We outline findings from new reports and papers that show how investment but also divestment in carbon-based fuel extraction is occurring, analyze the degree to which greenhouse gas (GHG) emissions are disclosed, and discuss how, even in the absence of such disclosure, the «carbon positions» of companies or investors can be proxied.

1. 18 Trendmonitor 3 . 2019 Fokusthema 5
Die Autoren
Dr. Chris Bayer is Principal Investigator at Deve-
lopment International e.V.
Praveen Gupta is Chartered Insurer, former MD
and CEO at Raheja QBE.
Dr. Jiahua Xu is Postdoctoral Researcher in Fi-
nance at the Ecole polytechnique fédérale de Lau-
sanne (EPFL).
Jiahua Xu
Praveen Gupta
Chris Bayer
With the rise of calls to divest from compa-
nies that drive climate change, to boycott
the fossil fuel sector, or to become net zero
by 2030, #climatecrisis is trending on so-
cial media. This article puts forward that
a Nash equilibrium buttressed by unprec-
edented international cooperation would
be a prerequisite to reach a net-zero carbon
equilibrium. We outline findings from new
reports and papers that show how invest-
ment but also divestment in carbon-based
fuel extraction is occurring, analyze the de-
gree to which greenhouse gas (GHG) emis-
sions are disclosed, and discuss how, even in
the absence of such disclosure, the «carbon
positions» of companies or investors can be
proxied.
The elusive equilibrium for carbon
In the current «climate» of carbon stig-
matization, it is easy to lose sight of the
fact that carbon dioxide is an essential
food for plants, and that we depend on
its greenhouse gas effect to prevent our
planet from freezing. Indeed, «without
greenhouse gases, Earth would be a fro-
zen –18 degrees Celsius»1
.
However, when the equilibrium between
carbon emissions and carbon sinks is not
reached, change, by definition, must oc-
cur. Global warming, sadly, has already
exacerbated extreme weather events and
disrupted ecosystems. Furthermore, this
rate of climate change has not occurred
since an asteroid hit the Yucatan 65 mil-
lion years ago, which became the final
nail in the dinasour coffin. If we do not
take heed of climate change, we will face
the domino effect of runaway global
warming, scientists warn.
Concerted international cooperation ad-
vances on the issue, but has been accom-
panied by setbacks. With explicit and
implicit defections from the stated goal
of keeping global warming below two
degrees Celsius above pre-industrial lev-
els, we have yet to reach a Nash Equi-
librium through instruments such as the
Paris Climate Agreement, in which a
change of strategy does not benefit the
change agent in the context of many
players.
The recent Amazon fires, for example,
represent a notable «defection», which
was generally met with international out-
rage. In response to Brazil’s «change of
strategy», investors have put on hold
Brazilian sovereign bond purchases and
corporate actors have boycotted Brazilian
leather.2
While such responses, as well as
a USD 22 million band-aid offered to
Brazil by the European Union, are to be
applauded, the real question is whether
the Amazon’s carbon sink has been prop-
erly valued and compensated, avoiding
the temptation, in the first place, to
slash-and-burn.
Banking on oil and oiling the banks
Despite the consequences of continued
carbonization of the environment which
are well understood and undeniable,
banks and insurance companies continue
to «fuel» coal mining as well as the
growth of big oil and hydrocarbons. For
many, it is pure economics of cost. Al-
though renewables are getting cheaper,
oil remains the darling.
The recent Fossil Fuel Finance Report
Card with the title «Banking on Climate
Change» (BankTrack et al., 2019) points
out that 33 global banks provided USD
1.9 trillion to fossil fuel companies since
the adoption of the Paris Climate Agree-
ment at the end of 2015 and also shows
that the amount of fossil fuel financing
has increased in each of the past two
years. In addition, the report found that
From Nash to Net-Zero: The Quest for Equilibria

2. 19Trendmonitor 3 . 2019Fokusthema 5
USD 600 billion of the USD 1.9 trillion
went to 100 companies which are most
aggressively expanding fossil fuels, high-
lighting business-as-usual practices that
fly in the face of the latest scientific warn-
ings from the Intergovernmental Panel on
Climate Change (IPCC) according to
which «limiting global warming to 1.5
degrees Celsius would require rapid, far-
reaching and unprecedented changes in
all aspects of society»3
.
According to Johan Frijns, Director of
BankTrack, «we’re faced with ever-wors-
ening climate change impacts worldwide,
and the latest IPCC report (IPCC,
2018) provides a stark 2030 deadline for
the deep cuts in CO2 emissions needed
to avoid full climate breakdown»4
. He
expresses his dismay about the fact that,
apart from addressing minor policy
tweaks in the «responsible finance» ini-
tiative, banks still continue to invest bil-
lions in the fossil fuel industry, and won-
ders what it will take to abandon these
investments.
The same IPCC report (IPCC, 2018) not
only outlined the dangers ahead if we
conduct business-as-usual, but also
stressed the fact that USD 2.4 trillion
worth of clean energy investments are
needed each year up to 2035 in order to
stave off the worst of the effects of cli-
mate change. In order to raise this year-
ly investment sum, banks as well as en-
ergy companies must divert capital from
fossil fuel to clean energy.
Alison Kirsch, Climate and Energy Lead
Researcher at Rainforest Action Network,
calls the aforementioned IPCC report a
red alert. She believes that, despite the
groundbreaking Paris Climate Agreement,
a man-made planetary collapse is immi-
nent if the banks continue to increasing-
ly support dirty energy.5
According to BankTrack et al. (2019) the
four biggest global bankers of the fossil
fuel energy sector are the US banks JP-
Morgan Chase, Wells Fargo, Citi and
Bank of America. However, other banks
in the rest of the world including Bar-
clays from the UK, Mitsubishi UFJ Fi-
nancial Group from Japan and Royal
Bank of Canada are continuing to heav-
ily finance the fossil fuel industry.
But, as pointed out in BankTrack et al.
(2019), «the massive economic weight of
the US oil and gas industry can be eas-
ily seen in the fact that the top four
bankers of climate change are all head-
quartered in the United States» and, fur-
ther, the two US banks Morgan Stanley
as well as Goldman Sachs are part of the
top 12, meaning that «all six of the US
banking giants are in the top dirty doz-
en fossil banks» and «account for an as-
tonishing 37 percent of global fossil fuel
financing since the Paris Agreement was
adopted».
Divestment and rating «signals»
While the combination of democracy
and capitalism is not outright delivering
a green outcome, the interplay of envi-
ronmentally conscious citizens and a
growing share of fund managers is slow-
ly but steadily steering capital deploy-
ment towards a cleaner future.
From sovereign wealth funds to rating
agencies, we are observing divestments
and rating downgrades of companies at
the heart of GHG pollution. Recent
headlines read «A $20 billion fund in
Denmark is dumping 10 major oil com-
panies»6
, and «Rating agencies ratchet up
pressure on insurers over ESG risk»7
. The
former article reported that the Danish
pension fund was selling its stake in ma-
jor oil companies due to the incompat-
ibility between their business models and
the Paris Climate Agreement. The latter
article cited Moody’s new report, which
highlighted multiple environmental, so-
cial and governance (ESG) problems of
insurers and warned that «some compa-
nies would struggle to meet their finan-
cial obligations without swift action».
Measurement of carbon footprint
with or without disclosure
Yet, even in high-income economies, the
disclosure of CO2 emissions remains a
«challenge» for many companies. As a
recent set of reports reveals, the further
down the corporate value-chain one
goes, the less companies, in general, are
willing or able to account for their GHG
footprint (see Table 1).
Corporate actors are increasingly ac-
countable, by law, for their greenhouse
gas accounting and performance.8
For
companies that are still opaque on their
CO2 emissions, there are ways to proxy
their «carbon positions» in the context
of a carbon certificate regime. Cogni-
zant that insurers oversee about one
quarter of all invested assets worldwide,
Braun et al. (2019) notably offer in
their recent award-winning academic
paper an asset pricing method to detect
carbon-intensive positions on the bal-
ance sheets of insurance companies in-
vesting their own capital. The paper
suggests monitoring insurance compa-
nies’ financial performance in relation
to the change of price for carbon cer-
tificates, since companies with heavy in-
vestments in carbon-intensive industries
Tab. 1: Proportions of companies disclosing their GHG emissions by GHG emission
scopes for companies in Germany, Sweden and Austria (Source: Bayer et al., 2019a; Bayer
et al., 2019b; Bayer et al., 2019c)
Number of companies
Austria (2018)
Scope 1: Direct
Scope 2: Electricity Indirect
Scope 3: Other Indirect
Germany (2017) Sweden (2017)
84 422 245
46%
37%
20%
33%
26%
17%
48%
39%
27%
GHG Emissions

3. 20 Trendmonitor 3 . 2019 Fokusthema 5
are presumably more likely to suffer
from carbon price hikes.
Concluding remarks
The prospect of a GHG equilibrium ne-
cessitates a two-pronged approach: suf-
ficient compensation for the service of
carbon sinks along with control over
emissions (accompanied by sound car-
bon accounting and reporting). After all,
while climate science is pure chemistry
and physics, a Nash Equilibrium must
exist before a carbon equilibrium would
even be possible.
Notes
1 See https://earthobservatory.nasa.gov/features/
CarbonCycle/page5.php.
2 See https://www.reuters.com/article/us-brazil-en
vironment-­investors-idUSKCN1VK1S0 and htt-
ps://edition.cnn.com/2019/08/30/business/vf-
corp-brazilian-leather-amazon-scli-intl/index.­
html.
3 See https://www.ipcc.ch/2018/10/08/summary-
for-policymakers-of-ipcc-special-report-on-glo-
bal-warming-of-1-5c-approved-by-govern-
ments/.
4 See https://cleantechnica.com/2019/03/22/bank
s-funneled-1-9-trillion-into-fossil-fuels-since-pa-
ris-agreement/.
5 See https://cleantechnica.com/2019/03/22/bank
s-funneled-1-9-trillion-into-fossil-fuels-since-pa-
ris-agreement/.
6 See https://www.bloomberg.com/news/articles/
2019-09-03/a-20-billion-fund-in-denmark-is-
dumping-10-major-oil-companies.
7 See https://www.ft.com/content/3c9f4b4e-9dd
e-11e9-b8ce-8b459ed04726.
8 For example, in the European Union, Directive
2003/87/EC notably provided for the Emissions
Trading System (EU ETS), which has been in ef-
fect since 2005 and targets high-polluting indus-
tries including power generation, iron and steel,
paper and cellulose, chemist as well as refineries.
References
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forest Action Network and Sierra Club. (2019).
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