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

If Wall Street were a country, it would be the fifth-largest emitter of atmosphere-warming carbon emissions, nestling it right between Russia and Indonesia, a new report says.

A study with a title warning of “Wall Street’s Carbon Bubble” by the Sierra Club and the left-leaning Center for American Progress released Tuesday shows that eight of the largest U.S. banks and 10 of the largest U.S. asset managers combined to finance an estimated 2 billion tons of carbon dioxide emissions based on year-end disclosures from 2020.

And bank funding of the oil patch and industrial heavyweights comes even with many financial concerns pledging to cut their own emissions. These companies have been generally embracing, at least through comments, the world’s push to slow climate change, including at the recently-concluded U.N. gathering in Glasgow.

For further comparison, the emissions from Wall Street financing tracked in the report are equal to what 432 million passenger vehicles spew into the air over one year. The number from Wall Street would have been larger if Scope 3 emissions data and other factors were included. Scope 3 tracks emissions produced throughout a company’s supply chain and by its customers. 

Read: Oil and gas are a ‘subprime carbon bubble’ worth $22 trillion: Al Gore

Critics of forcing banks to quickly unravel their exposure warn of systemic upheaval. But Sierra Club and CAP say inaction is what risks a market catastrophe.

“If left unaddressed, climate change could lead to a financial crisis larger than any in living memory,” said Andres Vinelli, vice president of economic policy at CAP.

Insurer Swiss Re has said that the global economy risks losing more than 18% of current GDP by 2048 if no action on the climate crisis is taken. Climate change has brought increased shore erosion, drought, wildfires, flooding and more, driving up insurance and logistics costs, for starters. Tuesday’s report put the expected economic growth reduction from unchecked climate change at 11% to 14% by 2050. By comparison, the Great Recession just over a decade ago squeezed the U.S. economy by about 4.3%.

The report reviewed activities by Bank of America
BAC,
+1.73%
,
Bank of New York Mellon
BK,
+1.47%
,
Citigroup
C,
+1.20%
,
Goldman Sachs
GS,
+1.38%
,
JPMorgan
JPM,
+1.30%
,
Morgan Stanley
MS,
+1.20%
,
State Street
STT,
+1.00%

and Wells Fargo
WFC,
+1.09%
.

The asset managers it reviewed included Bank of NY Mellon Investment Management, BlackRock
BLK,
-2.21%
,
Capital Group, Fidelity Investments, Goldman Sachs Asset Management, JPMorgan Asset Management, Morgan Stanley Investment Management, Pimco, State Street Global Advisors and Vanguard Group.

BlackRock’s leadership, including CEO Larry Fink, has called climate change the most significant financial event of the modern day, but has also faced scrutiny, and has been allegedly exposed over ESG claims by whistleblowers. The critics say its funds aren’t as green as they could be, given such a public push for change by the world’s largest asset manager.

“‘[C]limate change could lead to a financial crisis larger than any in living memory.’”

— Andres Vinelli, Center for American Progress

Issues of concern aren’t simply for the health of the environment, but also the confidence of investors. In all, the financial institutions that operate in the G-20 largest economies have nearly $22 trillion of exposure to carbon-intensive sectors. These sectors will have to adapt or be left behind, most analysts believe, as solar, wind
ICLN,
-3.39%

and nuclear energy get a larger toehold, and as gas-burning cars are swapped for electric vehicles
TSLA,
-3.30%

RIVN,
-3.50%
.

The groups are hoping to dial up the pressure on a Biden White House that has made combating emissions, which are largely generated by burning fossil fuels
CL00,
-1.30%
,
a priority. Biden and leading Democrats have called for net-zero U.S. emissions by 2050, and a 50% reduction by as soon as 2030. One step toward that was announced this week with a pledge to convert the federal government to greener buildings and vehicles, a vow that will require billions in spending across agencies.

But the administration, by some accounts, has been slower to push the financial sector to respond.

The Securities and Exchange Commission is considering requiring tougher climate reporting rules from publicly traded companies, including banks, and recently closed its comment period, meaning that a ruling could come in 2022. The Labor Department has also taken up the issue of climate change and other social issues within retirement-savings plans.

Don’t miss: ‘Substantial amount of work yet to be done’: Major report calls on SEC, Fed, banks and insurers for robust climate-risk disclosure

Follow the money

SEC Commissioner Caroline Crenshaw, a Trump-nominated candidate to a Democratic seat on the panel, said Tuesday during a briefing that followed the report’s release that she noted the legions of public companies making net-zero emissions pledges around the COP26 Glasgow summit.

“This is ostensibly good news,” she said. “Yet, when I dig a little bit deeper, it’s sometimes unclear to me how companies will achieve these goals. Nor is it clear that companies will provide investors with the information they need to assess the merits of these pledges and to monitor their implementation over time. Investors have noted the importance of understanding how the pledges are being implemented this year, five years from now and 10 years from now, rather than simply waiting to see if, in 30 years from now, the goal of net zero emissions comes to fruition.”

“That will simply be too late,” she added.

Crenshaw repeated a push for “metrics calculated using reliable and comparable methodologies that enable investors to decide whether companies mean what they say. This is a core purpose of the SEC is disclosure obligations.”

Crenshaw also said that investors should be privy to lobbying money linked to banks and might better use such information in drawing a clearer conclusion for how much financial companies remain exposed to fossil-fuel companies, for instance.

“After the Paris Climate accord [in 2015], a number of public companies went on the record in support of the accords,” she said. “However, questions remain about whether those companies continue to make political contributions that support opposition to the accords.”

That pact aims to substantially reduce global greenhouse gas emissions in an effort to limit the global temperature increase in this century to 2 degrees Celsius above preindustrial levels, and ideally no more than 1.5 degrees.

Related: Major banks, including JPMorgan and Citi, have invested $3.8 trillion in fossil fuels since the Paris Agreement

“‘Questions remain about whether those companies [saying they back the Paris climate deal] continue to make political contributions that support opposition to the accords.’”

— SEC’s Caroline Crenshaw

Beware one-size-fits-all

Some, mostly Republican, lawmakers and banking trade groups have largely conceded that regulation changes may be inevitable, but have warned against one-size-fits-all rules that could undermine the financial system and unfairly create winners and losers.

BlackRock’s Fink has said that tougher regulations could push firms out of the public realm and into private financing, itself a form of “greenwashing.”

The Federal Reserve, which is allowed to act independently of the White House, has taken a deeper look at the potential systemic issues of climate change, although it, too, has trailed its major-nation counterparts in shoring up official policy, some regulation experts say. Others say monetary policy focused on the short term should not involve reviewing climate change impacts. And other banking regulators have said there soon may be a greater demand for banks to set aside more capital protection for climate-change impacts.

“Disclosure is an essential and foundational step in mitigating market risk,” the 24-page report from CAP and Sierra states. “However, disclosure alone isn’t enough and must be paired with prudential regulation.”

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