Dilemma on Wall Street: Short-Term Gain or Climate Benefit? - The New York Times - 0 views
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team of economists recently analyzed 20 years of peer-reviewed research on the social cost of carbon, an estimate of the damage from climate change. They concluded that the average cost, adjusted for improved methods, is substantially higher than even the U.S. government’s most up-to-date figure.
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That means greenhouse gas emissions, over time, will take a larger toll than regulators are accounting for. As tools for measuring the links between weather patterns and economic output evolve — and the interactions between weather and the economy magnify the costs in unpredictable ways — the damage estimates have only risen.
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It’s the kind of data that one might expect to set off alarm bells across the financial industry, which closely tracks economic developments that might affect portfolios of stocks and loans. But it was hard to detect even a ripple.
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In fact, the news from Wall Street lately has mostly been about retreat from climate goals, rather than recommitment. Banks and asset managers are withdrawing from international climate alliances and chafing at their rules. Regional banks are stepping up lending to fossil fuel producers. Sustainable investment funds have sustained crippling outflows, and many have collapsed.
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In some cases, it’s a classic prisoner’s dilemma: If firms collectively shift to cleaner energy, a cooler climate benefits everyone more in the future
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in the short term, each firm has an individual incentive to cash in on fossil fuels, making the transition much harder to achieve.
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when it comes to avoiding climate damage to their own operations, the financial industry is genuinely struggling to comprehend what a warming future will mean.
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A global compact of financial institutions made commitments worth $130 trillion to try to bring down emissions, confident that governments would create a regulatory and financial infrastructure to make those investments profitable. And in 2022, the Inflation Reduction Act passed.
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What about the risk that climate change poses to the financial industry’s own investments, through more powerful hurricanes, heat waves that knock out power grids, wildfires that wipe out towns?
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“If we think about what is going to be the best way to tilt your portfolios in the direction to benefit, it’s really difficult to do,”
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“These will probably be great investments over 20 years, but when we’re judged over one to three years, it’s a little more challenging for us.”
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Some firms cater to institutional clients, like public employee pension funds, that want combating climate change to be part of their investment strategy and are willing to take a short-term hit. But they aren’t a majority
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And over the past couple of years, many banks and asset managers have shrunk from anything with a climate label for fear of losing business from states that frown on such concerns.
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On top of that, the war in Ukraine scrambled the financial case for backing a rapid energy transition. Artificial intelligence and the movement toward greater electrification are adding demand for power, and renewables haven’t kept up
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All of that is about the relative appeal of investments that would slow climate change
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If you bought some of the largest solar-energy exchange-traded funds in early 2023, you would have lost about 20 percent of your money, while the rest of the stock market soared.
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There is evidence that banks and investors price in some physical risk, but also that much of it still lurks, unheeded.
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“I’m very, very worried about this, because insurance markets are this opaque weak link,” Dr. Sastry said. “There are parallels to some of the complex linkages that happened in 2008, where there is a weak and unregulated market that spills over to the banking system.”
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Regulators worry that failing to understand those ripple effects could not just put a single bank in trouble but even become a contagion that would undermine the financial system.
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But while the European Central Bank has made climate risk a consideration in its policy and oversight, the Federal Reserve has resisted taking a more active role, despite indications that extreme weather is feeding inflation and that high interest rates are slowing the transition to clean energy.
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“The argument has been, ‘Unless we can convincingly show it’s part of our mandate, Congress should deal with it, it’s none of our business,’”
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a much nearer-term uncertainty looms: the outcome of the U.S. election, which could determine whether further action is taken to address climate concerns or existing efforts are rolled back. An aggressive climate strategy might not fare as well during a second Trump administration, so it may seem wise to wait and see how it shakes out.
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big companies are hesitating on climate-sensitive investments as November approaches, but says that “two things are misguided and quite dangerous about that hypothesis.”
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One: States like California are establishing stricter rules for carbon-related financial disclosures and may step it up further if Republicans win
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And two: Europe is phasing in a “carbon border adjustment mechanism,” which will punish polluting companies that want to do business there.
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at the moment, even European financial institutions feel pressure from the United States, which — while providing some of the most generous subsidies so far for renewable-energy investment — has not imposed a price on carbon.
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The global insurance company Allianz has set out a plan to align its investments in a way that would prevent warming above 1.5 degrees Celsius by the end of the century, if everyone else did the same. But it’s difficult to steer a portfolio to climate-friendly assets while other funds take on polluting companies and reap short-term profits for impatient clients.
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“This is the main challenge for an asset manager, to really bring the customer along,” said Markus Zimmer, an Allianz economist. Asset managers don’t have sufficient tools on their own to move money out of polluting investments and into clean ones, if they want to stay in business,
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“Of course it helps if the financial industry is somehow ambitious, but you cannot really substitute the lack of actions by policymakers,”
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According to new research, the benefit is greater when decarbonization occurs faster, because the risks of extreme damage mount as time goes on. But without a uniform set of rules, someone is bound to scoop up the immediate profits, disadvantaging those that don’t — and the longer-term outcome is adverse for all.