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Birmingham, Alabama: A coal-fired power station
On March 1, 2022, NRDC’s Northeast Policy and Legislative Director Richard Schrader presented a version of the following testimony at a public hearing on Banking and Climate Risks sponsored by several New York State Senate Committees. Richard discusses the unique and important role that the banking/financial services sector can play during the global climate crisis.
Every corner of the global economic and social fabric is now affected by the climate crisis. The latest United Nation’s Intergovernmental Panel on Climate Change (IPCC) stressed that the crisis is moving with an even graver rapidity than expected—this from a panel that last August declared the climate crisis a Code Red for humanity and the planet. IPCC Working Group II co-chair Debra Roberts states in the report’s opening comments that tackling climate change means the private sector and civil society “working together to prioritize risk reduction as well as equity and justice in decision-making and investments.” Clearly the IPCC’s call to arms wants all hands on deck—especially the private sector.
The financial services industry has the potential and ability to play a crucial role in reversing climate change’s most serious cause, the expansion in fossil fuel sectors. This is not yet a common policy or practice. According to the research group BankTrack, the world’s 60 largest private sector banks, measured in assets, funneled between 2016 and 2020, nearly $4 trillion into fossil fuel projects and companies globally. Their rhetoric and likely good intentions have not kept pace with the industry’s practice.
We’ve already seen the devastating impacts of the extreme weather which is a direct product of the climate crisis: from Tropical Storms Sandy and Ida to intensified hurricanes, drought in the American West, melting of glaciers at the planet’s poles and rising sea levels the resulting damage is apparent and severe.
Analysts believe that the banking industry faces both transition and physical risks. The decline or actual destruction in value of property that has been invested by the financial services sector are the physical risks. This includes property losses due to flooding or destructive storms and disruptions to supply chains. We are already seeing an increase of forceful storms, which were once rare events.
After Hurricane Laura, a lot of Lake Charles, Louisiana was destroyed by Hurricane Laura, powerlines were left standing over a road.
Banks will experience increased vulnerability if their borrowers are particularly at risk from climate shifts—power grids, water utilities and telecommunication infrastructure have already suffered costly damages.
Economically vulnerable communities are particularly at risk. Their already limited access to capital will be reduced further. There is evidence that the municipal bond market has begun restructuring their price design, particularly on the east coast, in response to rising sea level exposure. This could lead to lower values and, in turn, reduced resources for financial institutions that hold the largest amounts of these instruments.
Banks are also at risk from these transition risks. Banks with large fossil fuel assets are at risk of rapid asset deflation as the economy shifts to less carbon-intensive and market and consumer demand accelerate zero-carbon technology use. New investment in expanded fossil fuel projects is unlikely to pay off if the climate policy goals of regional, state, and national governments are met. Long-term loans and investments can increase the risk of transition.
The New York State Department of Financial Services, (DFS), has been a national leader by setting new terms for climate management in the industry, including the creation of a Division of Climate Risk. DFS gave important guidance to industry on new climate-related responsibilities in a letter sent to the CEOs and Regulated financial Institutions.
- Regulated organisations need to start incorporating the financial risks associated climate change into their governance frameworks, and overall business strategies.
- Designate a board member or assign a full committee to be accountable for the institution’s assessment of climate impacts and subsequent risk management practices;
- Climate-related financial risk disclosure should be given priority
- Conduct risk assessments of both physical and transition risks of climate change—take concrete, transparent steps to mitigate those risks.
In a letter to 11 U.S. Senators, similar regulatory goals are highlighted. The letter was sent by 11 U.S. senators, led in part by Senator Jack Reed from Rhode Island to a group consisting of national financial regulators and Federal Reserve Chair Jerome Powell. The Senators call on the regulators for broader guidance regarding financial risks, including a call for an investment strategy that aligns with investing in companies and public asset investments. They also urge them to adopt as a core principle a climate management strategy supporting a 1.5 C future. The Office of the Comptroller of the Currency committed to creating a framework for industry climate risk guidance at a national level.
American International Group (AIG), an insurance giant, has committed to achieving a net-zero portfolio of greenhouse gas emissions by 2050. The immediate policy changes included an end to investing in or subscribing to the construction of coal-powered plants; an end to investment in or underwriting new oil sands projects; and an end for underwriting Arctic energy exploration activities.
The Basel Committee on Banking Supervision issued a consultative document at the end of last fiscal year that established principles for regulators and banks to better manage climate-related financial risks. Among their strongest recommendations was a call for banks to consider setting limits on their exposure to and investments in companies, geographic sectors or products that do not align with the industry’s newly developed climate-related business strategy. The BCBS recommended that regulators engage a wide and varied range of stakeholders to ensure a complete assessment and, most importantly, ample climate-dedicated resource allocation.
These guidelines, statewide, national and international in scope, are a good starting point for the New York State legislature to consider legislative opportunities to mandate the industry’s expanded mitigation of climate-related risk. At the least, the legislature should consider legislation that will require the financial services industry to bring its policies in line with New York’s landmark Climate Leadership and Community Protection Act (CLCPA). The law, which is the most ambitious climate law anywhere in the country, requires that the state create a 70% renewable electricity grid by 2030, a 100% non-emission electricity sector and reduce greenhouse gas emissions by 40% by 2030, and 85% by 2050.
New York State’s landmark Climate Leadership and Community Protection Act (CLCPA) requires a transition to renewable energy.
This would include an annual disclosure document that shows each bank’s investments in fossil fuel companies and projects. Legislation should also require transparency and a commitment to align risk and investment policies with CLCPA metrics. This would include a year-to date commitment to reduce fossil fuel company and project investments. Also a section of the annual disclosure statement should report on affirmative actions the institution had made and planned to make in the future to support New York’s transition to a low-carbon economy. Another key disclosure would be an analysis of how these new policies impact New York’s most vulnerable communities, a central criterion of both the CLCPA and the Climate Action Council.
These next steps can build on the superb framework established by DFS and the CLCPA to enhance financial stability in the industry and continue New York’s leading climate advocacy in the face of this global crisis.
