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Outside the Box: Wall Street has a staggering problem with greenhouse-gas emissions

In the wake of the 2008 financial crisis, legislators and regulators pledged to ensure that the reckless banking giants that crashed our economy couldn’t do so in the future. And yet, just over a decade later, the same banks are at it again, and regulators have largely failed to recognize the urgent need for them to step in to rein in Wall Street before history repeats itself.

This time around, instead of pouring money into destabilizing subprime mortgages, major financial institutions are bankrolling climate-warming fossil fuels such as coal, oil, and gas to the tune of hundreds of billions of dollars every year. We can already see the severe impacts of the climate crisis on our communities and our economy, and these will only intensify if the fossil-fuel industry and its financial backers continue to operate unchecked. 

Breaking news: Wall Street could crumble under the weight of a ‘carbon bubble,’ these groups warn

New study shows who’s responsible

New research, released this week by the Sierra Club and the Center for American Progress, reveals the scale of Wall Street’s contribution to our climate problem. The largest 18 U.S. banks and asset managers alone are responsible for huge quantities of emissions—a total of 1.968 billion tons of CO2 equivalent.

Read the full report: Wall Street’s Carbon Bubble

If the U.S. financial sector were a country, it would be the fifth largest emitter in the world, more than Indonesia, Brazil, and Japan. In fact, this is likely a significant underestimate because only a limited amount of financial information is public. What is left out—including Scope 3 (or indirect emissions of banks’ clients and emissions from underwriting)—suggests the real amount is likely far greater.

Continuing to finance risky fossil fuels not only threatens us with climate chaos in the form of increasingly severe and frequent extreme weather events, it also jeopardizes economic stability. Insurance giant Swiss Re estimates that, by 2050, climate change will reduce global annual GDP by 11% to 14% or around $23 trillion, a loss three to four times greater than the 2008 financial crisis.

Just like the 2008 crash, the people who will be most affected by the economic effects of climate change are the people who did the least to cause it: communities of color and low-income communities in the United States and other industrialized countries, as well as the residents of developing nations.

Risk to financial system

President Joe Biden has set ambitious targets to reduce U.S. emissions, but averting the worst impacts of the climate crisis to our society and our economy won’t be possible unless the financial sector is brought into line. Last month, federal regulators finally acknowledged the risk that climate change poses to the financial system, in a long-awaited report from the Financial Stability Oversight Council. However, the FSOC report was a missed opportunity to treat the problem of climate risk with the urgency it requires. 

Rather than proposing clear actions to limit climate-destabilizing investments, the report only explicitly endorsed assessment and disclosure of climate risks. Unfortunately, the view that expanded disclosure of risky fossil-fuel investments will cause the market to correct itself is misguided. Enhanced disclosure is critical, but it alone is not sufficient to deter financial institutions from fueling the climate crisis.

In fact, despite voluntary moves toward greater transparency, financial institutions are actually increasing their support for polluting industries: total fossil fuel financing from banks in 2020 was higher than in 2016. Even as banks begin to recognize the need to clean up their act, this has only resulted in vague pledges to achieve net-zero emissions in the future, without strong interim targets or a commitment to phase out support for the expansion of the industries that threaten our climate and economy.

Disclosure is not sufficient

Given the scale of U.S.-financed emissions and the severity of risks to our economy, communities, and planet, climate-risk disclosure must be both strengthened and accompanied by ambitious regulatory action that mitigates these risks. 

In addition to scenario analyses to assess climate risks, which were endorsed by the FSOC report, regulators must go further by conducting stress tests to determine impacts of climate change and the energy transition on banks, as well as increasing transparency of information about banks’ exposure and contribution to climate risk.

Regulators must also work to phase down financed emissions so that major U.S. banks truly align their portfolios with the climate targets laid out in the Paris Agreement and stop exacerbating climate risks. Regulators should impose higher capital requirements for riskier, high-carbon assets in order to make banks more resilient to climate risks and to remove incentives for financial institutions to make these kinds of investments.

We must also institute portfolio limits to cap the total amount of greenhouse-gas emissions banks are allowed to finance and require each bank’s holdings to align with science-based emissions targets.

Financial regulators can take these steps within their existing authority—thanks in part to legislation passed in the wake of the Great Recession—so all that’s needed is the will to act. President Biden and financial regulators must act on their mandate to maintain economic stability and implement safeguards that address the grave risks of fossil-fuel investments to our financial system and society.

That means using all the tools available to them to rein in Wall Street’s toxic, risky investments before they do irreversible damage to our economy and our planet. 

Ben Cushing is the campaign manager for the Sierra Club’s fossil-free finance campaign.

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