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

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By Rachel Koning Beals

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 the groups offer some policy suggestions ranging from stress testing to boosting deposit insurance tied to climate risks to toughening supervisory ratings, which financial services trade groups worry mix up short-term risks with longer-term risks.

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 /zigman2/quotes/200894270/composite BAC +5.94% , Bank of New York Mellon /zigman2/quotes/200171276/composite BK +2.08% , Citigroup /zigman2/quotes/207741460/composite C +6.07% , Goldman Sachs /zigman2/quotes/209237603/composite GS +3.20% , JPMorgan /zigman2/quotes/205971034/composite JPM +6.19% , Morgan Stanley /zigman2/quotes/209104354/composite MS +3.70% , State Street /zigman2/quotes/209758976/composite STT +3.35% and Wells Fargo /zigman2/quotes/203790192/composite WFC +5.16% .

The asset managers it reviewed included Bank of NY Mellon Investment Management, BlackRock /zigman2/quotes/207946232/composite BLK +1.84% , 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.

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 /zigman2/quotes/205740995/composite ICLN +1.21% and nuclear energy get a larger toehold, and as gas-burning cars are swapped for electric vehicles /zigman2/quotes/203558040/composite TSLA +1.66% /zigman2/quotes/230726939/composite RIVN -3.22% .

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 /zigman2/quotes/209723049/delayed CL00 -1.42% , 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.

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