Climate groups expose huge scale of emissions financed by US banks

December 15, 2021|Written by David Clarke|Federal Reserve

Leading climate groups have laid bare the enormous carbon footprint of the US financial system in a new study. They calculate that in 2020, top Wall Street firms supported emissions greater than the entire economies of Brazil or Japan.

The report – Wall Street’s Carbon Bubble – calls for regulations to bring US financial institutions into line with the Paris climate agreement, including increased capital requirements for loans to fossil fuel-linked companies, and climate risk surcharges on global systemically important banks.

“The US banking sector is endangering itself and the planet by continuing to finance the fossil fuel sector. Because the industry has proven itself to be unwilling to govern itself, regulators including the Securities and Exchange Commission (SEC) and the Office of the Comptroller of the Currency must urgently develop a framework to reduce banks’ contributions to climate change.” said Andres Vinelli, vice president of economic policy at the Center for American Progress (CAP).

Sierra Club and CAP, the publishers of the report, say this is the first time such an attempt has been made to comprehensively calculate the emissions associated with the lending and investment activities of the US financial sector. However, they believe it is likely to be an underestimate due to gaps in the publicly available data.

The groups determine that the 18 largest US banks and asset managers alone were responsible for financing the equivalent of 1.9bn tons of CO₂ in 2020. This figure does not include scope 3 indirect emissions, which account for 88% of the emissions of oil and gas companies.

Part of the report focuses on making the case for enhanced disclosures by banks of the emissions associated with their lending. Currently, banks do not have to publish transaction-level data on credit exposure; something which the authors hope will be remedied in upcoming SEC rules due to be published early next year.

The report also recommends that regulators:

  • mandate specific and robust climate-related disclosures;
  • ensure that investors understand climate risk as being part of their fiduciary responsibility, and act accordingly;
  • issue supervisory guidance on climate risks and incorporate climate risk into stress tests;
  • prioritise racial and economic justice in the design of risk mitigation policies;
  • increase risk weighting for fossil fuels in capital requirements for banks;
  • tighten limits for exposure to segments of the fossil fuel industry;
  • adjust deposit insurance premiums to reflect climate-related risks.

Speaking at a launch event for the report, Rashida Tlaib, a Democratic member of Congress from Michigan, warned that climate change represents a risk to the US financial system several orders of magnitude greater than the 2008 crisis. She backed calls for tough and immediate intervention from regulators.

“The Financial Stability Oversight Council’s own report said that the need for better data and tools cannot justify inaction,” she said. “We have the policy toolkit to act aggressively in addressing a key component of the fight against climate change and act now.”

This page was last updated December 15, 2021

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