A recent open letter to the Bank of England raising concerns over the high level of black carbon assets held on London's stock exchange should be noted by urban leaders around the globe. Echoing an earlier commentary by Sir Nicholas Stern in the Financial Times, the letter raises profound questions about the financial risk and exposure of companies, investors and the UK economy stemming from holdings of high carbon assets. Indeed exposure to high carbon investments could be the game changer that determines which global financial centres rise, and which fall, in the immediate future.
London is without doubt a leading financial centre today, likely second only to New York City, but it has not always been that way. French historian Fernand Braudel skilfully traced the history of preeminent western financial centres, from Venice in 1500, via Antwerp, Genoa, Amsterdam, and London, with New York City emerging as the world's financial hegemon around 1930.
The cause and timing of NYC's displacement of London has been examined by several scholars. MIT Economic Historian Charles Kindleberger noted that London's failure to prop up the Great Wall Street crash of 1929 was a sign that NYC had become the dominant financial centre. New York banks had risen due to heavy borrowing from the UK during World War I. Youssef Cassis, however, considered the UK’s abandonment of the gold standard on 21 September 1931 to be the critical turning point in the decline of London as a financial centre relative to NYC.
I explore London's demise further in the Evolution of Great World Cities: Urban Wealth and Economic Growth (University of Toronto Press). Fundamentally, wealth is about ownership of assets, and in the early 20th century many London investors likely got caught out holding the wrong ones. British investors had a long tradition of holding stocks in railways. Indeed ‘American Railroads’ in particular was said to be the largest department of the London Stock Exchange. In 1913, a substantial 41 per cent of British capital was invested in railways, compared to just 9.6 per cent in industrial stocks. But railways and steam engines were soon to become yesterday’s technologies. The UK rail network reached its maximum size in 1928; while track length in the Unites States peaked in 1929.
In comparison to London, the New York Stock Exchange was far more diversified. In 1913, railroad stocks represented only 21 per cent of total market capital, and these were surpassed by the $6.8 billion that was invested in rising industrial companies, which was 26 per cent of the market capital. New York City surpassed London as a financial centre around 1930, because its investors had better diversified into new technologies, while Londoners held yesterday’s stream engines.
With the stark realities of global climate change understood by most leaders on the planet, the carbon age must surely be coming to a close. There is no better time for green growth to occur than now in this economic malaise, but which financial centres will lead the way? In the past two decades London has risen to challenge New York City on some measures as the preeminent financial centre, but which of the two has the greater holdings in low carbon technologies? Or will some other global city emerge as the green financial hegemon of the 21st century?