The Global Emissions of the US Financial Sector
US banks and asset managers are financing climate breakdown. A new report by the Center for American Progress and the Sierra Club, with research by South Pole, shows that by continuing to finance the fossil fuel industry, the US financial sector is responsible for more emissions than most countries.
The latest report from the Intergovernmental Panel on Climate Change warned that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach.” The report affirmed the dire nature of the climate crisis, with impacts that range from severe heat waves, droughts, wildfires, flooding, sea level rise, and more.
If we are going to avert the worst impacts of climate change and if we are to avoid another financial crisis potentially far more dire than that of 2008, it is critical that we address emissions from the industry that is both fueling the climate crisis and threatening economic stability: the US financial sector.
This report sheds light on the role of US financial institutions in contributing to climate change through the emissions the sector finances. It also highlights the most meaningful actions the Biden Administration and financial regulators can take to curb financial sector investments in the increasingly risky fossil fuel industry and other high-carbon emitting sectors.
Using solely publicly available data, this report provides an indicative assessment of the size of the global carbon footprint financed by some of the largest entities in the US financial sector.
Our results found that just portions of the portfolios of the eight banks and ten asset managers studied in this report financed an estimated total of 1.968 billion tonnes CO2 equivalent (tCO2e) based on year-end disclosures from 2020.
To put this figure in perspective, if the companies in this study were a country, they would have the fifth largest emissions in the world, falling in between Russia and Indonesia. This is based only on the limited publicly available data for a select number of institutions, so this is almost certainly an underestimate.
Despite the scale of US financed emissions, much of the discussion around how to steer the investments of the financial industry has focused on the role of enhanced climate risk disclosure. Equal effort has been devoted to promulgating new voluntary disclosure initiatives to help shed light on the issue and remedy the information gap on climate-related financial risk. While voluntary disclosure is absolutely critical, it alone is not sufficient to deter financial institutions from fuelling the climate crisis. In fact, despite their participation in several such voluntary disclosure initiatives, financial institutions are not only continuing to lend heavily to the fossil fuel industry, but increasing their lending: bank lending to fossil fuels in 2020 remained higher than in 2016, the year immediately following the signing of the Paris agreement.
Climate risk disclosure must be both strengthened and accompanied by ambitious regulatory action that mitigates this risk. With broad recognition from financial institutions and policy makers that climate change poses significant threats to financial stability, it is not only within the mandate of the Biden Administration and financial regulators to address climate change, but necessary to fulfil their mission of maintaining the stability of individual financial institutions and the entire financial system.
Banks financed an estimated total of 668 tCO2e through US$5.3 trillion of credit exposure assessed by our researchers.
Financed emissions from the eight banks studied are equivalent to 145 million passenger vehicles driven for one year or 80 million homes’ energy use for one year.
The utilities, energy, and materials sectors contributed the most to the overall emissions when aggregated for all banks, accounting for an estimated 37% of total financed emissions.
Residential mortgages, or residential real estate lending, accounts for close to 15% of overall credit exposure and has a notable contribution to overall emissions as the fifth largest contributor.
US asset managers
Asset managers financed an estimated total of 1.3 billion tCO2e with over US$27.3 trillion in assets under management (AUM).
Financed emissions from the ten asset managers are equivalent to 287 million passenger vehicles driven for one year or three billion barrels of oil consumed.
The utilities, energy, and materials sectors contributed the most to the overall emissions when aggregated for all asset managers, accounting for an estimated 74% of total financed emissions. However, these three sectors accounted for only 7% of total AUM.
The IT, financial, and healthcare sectors have the greatest value of AUM among the sample analyzed, accounting for 38% of total investment weight. However, these sectors only account for 5% of total emissions estimated.
Capital Markets Regulation
In order to mitigate the climate-related financial risk of asset managers, regulators should:
- mandate specific and robust climate-related disclosures;
- ensure fiduciary responsibility and follow-through;
- incorporate climate risk into the SIFI designation process.
Supervision and Management of Banks
Proper supervision and management is critical to ensure banks internalize climate-related risks and, therefore, make less risky choices. To that end, regulators should:
- issue supervisory guidance on climate-related risks;
- incorporate climate risk into stress tests;
- develop scenario analysis;
- establish a reinvigorated Volcker Rule.
- prioritize racial and economic justice in the design of risk mitigation policies.
Capital Requirements of Banks
In order to help ensure that banks can internalize climate-related risks, start mitigating those risks, and reduce their overexposure to climate-related financial risk throughout the US financial system, regulators should:
- increase risk weighting for fossil fuels;
- implement climate risk surcharges on GSIBs;
- tighten limits for exposure to segments of the fossil fuel industry;
- adjust deposit insurance premiums to reflect climate-related risks.