Joe Biden could accelerate a new battlefront in the fight against climate change by forcing financial institutions to adopt safeguards that would restrict the fossil fuel industry’s access to low-cost capital, pushing producers to keep oil and gas in the ground.
Biden’s official climate plan contains only one line on how he would seek to restrain fossil fuel investments through financial regulations, promising to require “public companies to disclose climate risks and the greenhouse gas emissions in their operations and supply chains.”
But analysts and advocates say the single act of forcing greater climate risk disclosure could portend other financial regulations that would reduce investor interest in fossil fuels, all of which can be done by a Biden administration without Congress.
“The power of disclosure is underappreciated,” said Kevin Book, managing director of the research firm ClearView Energy. “Interrupting the flow of capital into resource production interrupts resource production. It takes money going into the ground to take oil, gas, and coal out.”
Some financial firms are incorporating climate risk on their own, led by BlackRock, the world’s largest investment management firm that has stopped investing in some coal projects, along with a slew of U.S. banks that have restricted lending for drilling in the Arctic.
But national policy could accelerate a move away from fossil fuels when oil and gas producers are losing currency on Wall Street, struggling from the coronavirus pandemic after years of taking on substantial debt without generating returns during the shale boom.
“Producers will be looking to get back on their feet from the oil crash of the pandemic, so access to low-cost capital is going to be more important to them in the coming year than it would have been in early 2014,” said Glenn Schwartz, director of policy at Rapidan Energy Group, a consultancy group led by Bob McNally, a former top oil official in the George W. Bush administration.
The United States has already sustained more than $1.8 trillion in costs from more than 265 climate-related extreme weather events since 1980 and more than $500 billion in economic losses between 2015 and 2019, Ceres projected in a report this month.
The banking giant Citigroup has projected that inaction on addressing climate change could cost world economies $44 trillion in lost gross domestic product by 2060.
“Presidential leadership here makes a big difference,” said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets, which works with companies and investors to take climate risk seriously. “The current is moving in this direction, but every year, climate risk is getting worse because emissions are cumulative.”
This month, Rapidan produced a report projecting the ways a Biden administration could implement climate-focused financial regulations.
The possibilities mirror ideas included in legislation proposed by Democratic senators such as Elizabeth Warren, the former presidential candidate and a contender to be Biden’s running mate, and Brian Schatz of Hawaii, a member of the Banking Committee who has been a leading advocate for climate risk disclosure.
It would start with the Securities and Exchange Commission forcing public companies to disclose information about their exposure to climate-related risks, such as the greenhouse gas emissions it emits or is responsible for, the amount of fossil fuel assets it owns or manages, and how its valuation would be affected based on expected or implemented policies to restrict emissions.
Other measures could include the Federal Reserve subjecting financial institutions to “stress tests” that would measure their exposure to climate change-related risks.
David Livingston, a senior analyst with the Eurasia Group, a geopolitical risk firm, said stress tests could incorporate physical climate risks, such as an agriculture company facing more frequent flooding in the Midwest or a home insurer in California struggling with worsening wildfires.
It would also deal with “transition risk” (the risks companies face as a result of market- and policy-driven actions to address climate change), in which companies would stress-test themselves against different carbon prices and scenarios.
The Biden administration could incorporate climate risk into banks’ capital ratio requirements, which would likely lead to banks reducing lending and offering higher interest rates to fossil fuel companies, Rapidan said.
“There is a ton of authority they can use to regulate banks and related entities without Congress,” Schwartz said.
Supporters of regulations such as these say they aren’t heavy-handed and make economic sense.
In the U.S., there is no policy to price carbon emissions, creating an unlevel playing field in which fossil companies are valued for their economic production without the market considering the harms of pollution they cause.
“I am not suggesting regulatory agencies become climate activists,” Schatz said in a web forum hosted by Ceres on June 17. “I just want them to do their jobs. Their jobs are to ensure a stable and efficient financial system. Climate risks are systemic. If these supervisors were ignoring any other systemwide vulnerability, it would be considered a scandal.”
If companies produced information about their emissions contributions and their exposure to climate change, investors and the public would be more informed when making personal and business decisions.
“This is about changing market incentives, not about shutting off the fossil fuel spigots altogether,” said Graham Steele, director of the Corporations and Society Initiative at the Stanford Graduate School of Business. “It’s about disclosing to market participants and having public authorities grapple with what the risks are and adjusting their behavior accordingly.”
The U.S. is beyond its peers in Europe in managing climate risk, analysts say, even if some financial institutions and personnel are starting to acknowledge the challenge.
The Bank of England began stress-testing the U.K. financial system against climate risks last year, while the Bank of France has pledged this year to subject banks and insurers to stress tests.
In May, the Canadian government announced that companies that receive financing as part of the government’s economic recovery from the coronavirus have to disclose climate risks.
Democrats in Congress have called for similar provisions in pandemic-related legislation and have accused the Trump administration of granting terms in emergency loan programs that benefit fossil fuel companies.
Meanwhile, Senate Republicans have attacked companies moving to greener investing, recently asking financial regulators to investigate whether U.S. banks violated laws by limiting lending to drilling in the Arctic “in order to placate the environmental fringe.”
Jerome Powell, the Fed chairman, appointed by President Trump, has recently hinted the bank may begin to consider the implications of climate change.
In January, he said, “The public has every right to expect, and will expect, that we will ensure that the financial system is resilient and robust against the risks of climate change.” Board of Governors member Lael Brainard, who leads the Fed’s Committee on Financial Stability, said last year, “The Federal Reserve will need to assess the financial system for vulnerabilities to important climate risks.”
Sen. Marco Rubio, a Republican from Florida, a state exposed to sea-level rise, called climate risk “a serious source of financial instability” in a letter this month to a panel of the Commodity Futures Trading Commission that is preparing to produce a report on mitigating the risks of climate change to the financial system.
“The elephant in the room is if the largest, most innovative financial sector in the world is not actively involved in this exercise, it’s not going to move the needle beyond a certain threshold,” Livingston said. “The U.S. embracing disclosure of climate-related risk will provide critical mass to this movement.”
