Lights, Camera, (Climate) Action
The year 2020 marks the start of the decade of climate action. Recently, public opinion has shifted—and continues to shift—in favour of climate conscious policies. As a result, governments across the globe have responded; several administrations have begun to seek efficient economic policies to mitigate the impact of climate change. However, as these social and political powers continue to support advancements in renewable and alternative energy, uncertainty surrounding the timing and extent of renewable investments has bolstered within economic sectors. This is especially evident within the investment banking industry.
Goldman Sachs has been the first influential power to join several nations in pushing for climate action. It has committed a whopping $750 billion USD over the next decade in “financing, investing, and advisory activities” surrounding renewable energy. The firm’s contribution dwarfs the initiatives of many countries in size and scope. Following Goldman Sachs’ investment, Blackrock CEO and Chairman Larry Fink issued a bold call-to-action, urging CEOs around the world to recognize climate risks as investment risks. Specifically, Fink stated that “[sustainable] climate-integrated portfolios can provide better risk-adjusted returns to investors.” With two of America’s most influential firms pushing for environmental-oriented revisions of their current financial activities, Goldman Sachs and Blackrock have sent ripples throughout the global banking industry.
However, despite these actions, nonrenewable investments by the banking and financial sector are not slowing down. Large banks like JP Morgan Chase, Royal Dominion Bank of Canada, and even Goldman Sachs still continue to invest in carbon-intensive projects. Globally, the top 30 banking firms invested over $1.9 trillion USD in fossil fuel expansion projects between 2016 and 2018. With the continued investment in nonrenewable energy by big banks such as Goldman Sachs, promises and demonstrations of climate consciousness appear as a false front. With the global threat of climate change growing exponentially, demonstrations of environmental showmanship—even $750 billion pledges—are rendered moot without nonrenewable divestment.
A Risky Investment
Divestment often refers to institutions actively removing holdings in fossil fuel stocks and funds, and reinvesting in companies with lesser environmental impact. In this case, divestment refers to the shift in investment focus away from traditional energy and towards renewable and alternative energy. This implies a long-term transition of funds from carbon-intensive energy sectors to emerging alternative sectors, such as renewable energy, electric transportation, and carbon-capture technology.
Fortunately for our planet, banks have a growing incentive to divest their portfolios from fossil fuels. Former Bank of Canada Governor Mark Carney, leader of the UN’s Climate Action and Finance initiative, has called for widespread divestment of nonrenewable energy, warning global banking, insurance, and finance sectors of the catastrophic impacts of climate change. Insurance companies have already begun to face the repercussions; specifically, the growing frequency of natural disasters have inched insurance premiums towards unaffordable levels. Munich Re, the world’s largest reinsurance firm, blamed climate change for 2018’s devastating wildfires in California, which incurred over $24 billion USD in losses. Overall, insurance companies have been scrambling to proactively mitigate the risk climate change presents, with many of them divesting from fossil fuels. This stress on the insurance and financial sector will only continue to grow, threatening the stability of the world’s economic system and forcefully affirming Carney’s calls to action.
Carney also pointed out another key fact: the financial risks of climate change may render the assets of some of the world’s largest companies utterly worthless. If banks continue to invest funds into firms and projects negligent of climate change, they open themselves up to unforeseen liabilities. For example, PG&E, a California utility provider, recently filed for bankruptcy following its role in sparking 17 out of the 21 major state fires in 2017. Heralded as the first corporate death by climate change, this major blow to investors further illustrates the gravity of Carney’s warnings. As climate change threatens to accelerate the dissipation of firms’ and investors’ assets, the balance of the financial system as a whole is in danger of toppling.
Divestment: Who Cares?
The growing implications of climate change should ignite immediate action amongst banks. From a basic level, banks’ objectives should strategically balance maximizing returns with their fiduciary duty to their respective clients. We are those respective clients and we should heighten the need for banks to seriously consider climate change when making investment decisions if they aim to create sustainable returns and viability. Millions of people place money into savings accounts with their banks every year. Whether it's a student savings account or a pension fund, the middle class saves for different reasons; for school, home renovations, or for retirement. What we must remember is that this money is invested by banks into company stocks and funds. That is our money, our savings, and our pension funds that have been invested into these carbon intensive projects. These are projects that have and will continue to fuel climate change and its negative consequences on our planet. Put simply, we should care about divestment because where our money is invested determines our profit.
The moral question of corporate responsibility is increasingly important and relevant within the banking industry, which has historically been under-regulated. From national savings to private financing, and in turn, economic growth to financial crises, banks are at the forefront of national economies. As a result, the actions of banks catalyze both economic and environmental issues that ripple throughout the globe. Should banks have a responsibility to consider the societal externalities of these investments? I firmly believe so. Banks should be transparent with these investment decisions and should disclose the financial risk of climate change on our investments. Overall, banks have a responsibility to seriously consider the divestment of their investments—our assets—from fossil fuels.
The Choice is Clear, but Hindsight is 2020
Banks today are presented with an unprecedented opportunity, as well as an unprecedented challenge. They can continue to invest in fossil fuels, uphold the status quo, and deal with the challenges of increased risks and stresses to the financial sector years down the line, possibly suffering major losses. However, this will not just be a loss for giant corporate banks. It will be a loss to the environment and a sustainable future for our generation, a detriment to the economy, and create financial ramifications surrounding the investments, savings, and pensions of the middle class.
Today, banks could choose to begin divesting their funds from fossil fuels. Such a proactive move would protect these firms, the financial sector, and investors’ assets from climate change-related financial risks. Doing so would spur greater capital flow to the renewable energy sector, fueling the transition to an economically and environmentally sustainable economy much quicker than governments could alone. The long-term growth of these renewable sectors could cover the possible short-term costs to divestment. It would also help guarantee a more sustainable future for our generation, and the generation after. Overall, this would be a win for the economy, a win for our environment, and most importantly, a win for middle class investors.
If one assumption can be made, it is that banks will likely choose the status quo for now. History has taught us that banks will often act in their best interest. The least we can do for now, as worried investors and active citizens, is to hold our banks accountable and demand sustainable uses of our money. After all, it is our money and our planet.