Over the past several years, major financial institutions have talked a big game about combating climate change.
Megabanks like JP Morgan, Citibank, and Bank of America have issued splashy new green investment opportunities. Goldman Sachs now markets itself as environmentally and socially responsible. If you take Wall Street at its word, composting toilets are about to be as common in finance as Bloomberg terminals.
But whatever Wall Street invests in sustainable projects only accounts for one half of the carbon equation. A report released last year by the Rainforest Action Network showed that big banks keep lending enormous sums to the industries that contribute the most to rising global temperatures, even as they portray themselves as leaders of a green transition. What gives?
Activists refer to business initiatives that reduce reputational risks more than actual climate change as “greenwashing.” With vanishingly little time to avert the worst effects of rising global temperatures, many believe that Wall Street needs to shed its framework that treats environmentalism as a niche sideline.
“The typical approach sets a very low bar to clear,” said Graham Steele, the director of the Corporations and Society Initiative at Stanford University’s Graduate School of Business, which promotes accountable capitalism and governance. “That’s really different from treating climate as a systemic issue.”
With the new Biden administration in power, environmentalists and politicians are calling on the federal government to use established regulatory tools to stop Big Money from investing in the industries that drive climate change. Relying on banks to do the right thing in a private piecemeal approach, they argue, is destined to fail. Instead, sweeping federal regulations are necessary to force the finance world to recognize that their investments contribute to rising temperatures, and that climate inaction threatens their bottom line.
Banks have treated green initiatives as part of a “net zero” strategy where environmentally sustainable investments somehow cancel out business in the conventional carbon-burning economy. But the climate doesn’t work that way, and their portfolios are lopsided.
In October of 2020, JP Morgan Chase, the biggest bank in America, announced new climate goals in line with the Paris Agreement, including a new internal Center for Carbon Transition, and plans to advise clients on achieving net zero carbon emissions by 2050. Last year it was the largest underwriter of bonds for sustainable investment, helping green projects get $14 billion in funding, according to Refinitiv, a financial data provider.
Yet these initiatives pale in comparison to the bank’s direct financing of the fossil fuel industry, which has ranged between $63 and $70 billion per year since 2016.
“It’s nice that JP Morgan is investing in green bonds, but if they’re investing way more in fossil fuel companies, the ledger doesn’t balance out,” said Steele.
Wells Fargo unveiled a grand five-year corporate responsibility plan in 2016 focused on “the impacts of climate change and natural resource constraints on communities and customers.” Over that same period, the bank put $49 billion into the American fracking sector.
These kinds of tradeoffs have made activists skeptical of industry-driven climate initiatives, which could amount to little more than “an accounting trick,” said Moira Birss, the climate and finance director for environmental group Amazon Watch.
“If you are putting fossil fuels in the atmosphere, you are part of the problem. With financial firms, we cannot allow investment in green energy to make up for continued investment in fossil fuel extraction and expansion, as well as deforestation,” she added.
Kill the ESG
Even when lenders and investors talk about changing their ways, they still frame climate change as a niche issue, rather than a challenge to every aspect of the economy. There’s a term for this method of investing: “environmental, social, and corporate governance,” often referred to by the abbreviation ESG. Financial firms use “ESG” to market a growing number of investment products, but only as one option among many.
“The ESG way of thinking is aspirational, but not a core business practice. Only a segment of the investing public cares about it,” said Steele. “ESG thinking treats green investment as a nice thing to do, but not essential to the operating of the economy and life on this earth.”
But addressing climate change isn’t just “the right thing to do.” It’s crucial to avoid catastrophic losses to real estate, supply chains, business operations, and consumer demand. All of these consequences could lead to unpaid loans and drastic revaluations of financial assets, undermining the overall stability of the financial system.
In a law review article published last year, Steele called the failure to realize that rising temperatures present a web of interconnected global financial risks the “Climate Lehman Moment,” a reference to the 2008 financial crisis in which the Lehman Brothers bank collapsed, along America’s housing market. When banks and investors realize how risky fossil fuel investments truly are, they may panic, leading to sudden sell-offs, changes in prices, bankruptcies, and cascading financial disruption. But they haven’t priced in that risk yet, and the adjustment will be more chaotic and painful the longer they wait.
Call In the Feds
Birss, Steele and prominent liberal advocacy groups like the Center for American Progress have called for comprehensive federal regulation that would compel more aggressive action by the financial sector to shut down fossil fuel lending and investment altogether. But that means dropping the “ESG” frame to focus on ways climate change puts the whole financial system at risk, and acknowledging how the financial system itself exacerbates climate change.
Those with their eyes on finance, including many Democratic members of Congress, want to use a federal body called the Financial Stability Oversight Council (FSOC) to force the entire financial sector to stop contributing to investments that increase climate risks.
The FSOC was created by the post-2008 Dodd-Frank reform package to better coordinate federal regulations, and crack down on firms that pose the biggest risk to the financial system. It’s helmed by the secretary of the treasury, and includes the chairman of the Federal Reserve and top regulators from agencies like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Consumer Financial Protection Bureau.
Under the Obama administration, the FSOC designated a handful of companies as “systemically important firms,” and subjected them to extra scrutiny and rules. But the Trump administration let those designations lapse, and instead used the council to coordinate financial de-regulation.
Now, with Biden in office, the FSOC could be empowered like it was before to exert direct control over particular companies. Firms that pose systemic risks by, say, lending to oil and gas companies on a large scale, could be subject to supervision, and compelled to shed risky assets. Notably, federal regulators would decide just what counts as a climate risk, not the financial firms themselves. That would have swift consequences for the largest industrial polluters and a lot of agribusiness, which are capital-intensive and depend on credit.
While Joe Biden’s legislative agenda may be constrained by the Senate filibuster and moderate Democrats like Sen. Joe Manchin, once federal agency heads are in place, there isn’t much stopping the new administration from using executive powers to crack down on the flow of money to carbon-intensive industries. Indeed, there are signs the Biden administration, some members of congress, and financial regulators are eager to do so.
Yellen, for instance, said in her confirmation hearings that she will appoint a senior Treasury official dedicated to coordinating the department’s climate policy. “There’s movement in the right direction and indications that the administration is seriously paying attention,” said Birss.
The heads of both congressional committees overseeing financial regulation, Senator Sherrod Brown and Representative Maxine Waters, have both said they want the FSOC to tackle climate change. That indicates that the Biden appointees will have the political backing from Congress to make big changes free from obstructive, adversarial hearings.
In January, six days after Democrats took control of the White House and Senate, the Fed announced it was forming a first-ever committee to look at the systemic financial risks posed by climate change.
If Biden-appointed financial regulators do make climate change a priority, they have the power to push banks and other financial firms far beyond “market-based policy solutions.”
But Not Without a Fight
While banks and financial firms may trumpet their own internal greening policies, they will likely fight federal regulation that tries to hold them accountable.
There already seems to be a dawning awareness among banks and financial institutions that the government could eventually step in. Laurence Fink, the head of $9 trillion asset management firm BlackRock, said in a January CNBC interview that he will demand companies BlackRock invests in to disclose how they plan to reduce emissions so that businesses “do it ourselves before the government does it for us.”
But industry groups like the Bank Policy Institute have resisted swift imposition of green financial rules, arguing that “it seems premature to add new climate change scenarios to the macroeconomic stress tests.”
“You can see the financial industry getting ready to push back,” said Steele. “They’ll say climate change is a problem, but they want to be part of the solution, and then lobby to slow things down, water down rules. That’s a strategy that works very well with traditional financial regulation.”