Will Wall Street Finally Step Up?
Though the climate change news from President Biden and his team has been extraordinary, Washington is not the only seat of power in America. In terms of financial and economic policy, Wall Street can match it (and at times dominate it), and it will continue to be a critical player in our response to the climate emergency.
In 2019 over $840 billion was invested in oil, gas, and coal industries. Banks alone invested over $600 billion in fossil fuel companies in each of the first three years after the Paris Agreement was signed in 2015, with JP Morgan Chase and other American banks leading the charge. If investment anywhere close to that amount continues, our chances of holding warming to 2ºC, let alone 1.5ºC, are drastically reduced.
On the other hand, the fast-growing fossil fuels divestment movement now includes over 1,200 colleges, universities, churches, foundations, pension funds, and cities worldwide. New York City and more recently New York State pension funds are increasingly being divested. Meanwhile, European investors have called for much stronger governmental action.
All of this has put a great deal of pressure on American banks and asset management investors, and they’ve responded with upbeat talk about sustainability plans for their investments. However, we’d be wise to be suspicious. One prominent billionaire activist investor, Chris Hohn, has warned that most asset managers do not do nearly enough on climate change, especially with investments that claim to prioritize environmental, social justice, governance (ESG) concerns. “ESG for most managers is a total greenwash, and investors need to wake up and realize that their asset managers talk but don’t actually do.”
In January of 2020, BlackRock, the largest asset management firm in the world, announced that it was putting sustainability front and center in its investment decisions. Its chairman, Larry D. Fink, in a letter to the world’s CEO’s, said that climate change will be “a defining factor in companies’ long-term prospects,” and claimed that “we are on the edge of a fundamental reshaping of finance.” Given its size, with managed assets of almost $9 trillion, Black Rock can profoundly influence the behavior of almost every major energy producing and consuming company in the world, as well as the banks that lend to them. As a result Fink’s letter got everyone’s attention. But while some companies announced action steps soon thereafter (Microsoft committed to becoming carbon-neutral by 2030, and Delta announced a $1 billion effort to be carbon neutral in ten years), BlackRock itself took almost no significant steps to act on its new plan. BlackRock’s Big Problem, a network of organizations pressuring the firm to divest from fossil fuels, decries the fact that it still has $85 billion invested in coal, and that it has continued to side with complacent boards of directors over crusading shareholders in almost all cases.
Meanwhile, however, 2020 turned out to be a watershed year for the climate crisis. At the Madrid COP25 conference in December, 2019, no major country stepped up to augment its Paris accord emission reduction commitments, but last year the EU, Japan, and China all made surprisingly substantial new emission reduction promises. The EU and Japan are now aiming to reach net-zero by 2050 and China by 2060. Meanwhile, investors have rushed into firms that promote sustainability (as evidenced by the amazing rise of Tesla stock). Why the sudden shift? One reason is probably the fact that 2020 was the hottest year of record, and fires, hurricanes, and melting glaciers got people’s attention. However, the Covid-induced recession also precipitated a lot of thinking in business and government circles as to how to rebuild the economy in a healthier, more sustainable fashion. In any event, the investor interest supported Fink’s claim that sustainable investment could be profitable and not just moral.
Fink has now written another letter to the world’s CEO’s, this time threatening to take the gloves off. He’s called for all companies “to disclose a plan for how their business model will be compatible with a net-zero economy,” and he’s explicitly talked about a “heightened-scrutiny model” for climate risk and the possibility of withdrawing from companies that don’t step up their plans.
It remains to be seen if BlackRock will do more than talk tough this year. Their critics at Big Problem remain quite skeptical. After all, BlackRock is still investing in fossil fuels, even while they acknowledge the threat climate change poses to society—and to the long-term well-being of their clients. They claim that their hands are tied, as so much of their investments are in so-called passive funds, but Big Problem disputes that.
2021 will reveal whether Wall Street, led by BlackRock and other large asset managers, is willing to take major steps to divest from fossil fuels. Besides angry activist shareholders, they may also have to contend with a dramatically different regulatory scene, as the Biden administration moves in a completely different direction from the Trump administration. The Biden team seems poised to pressure investors that the days of Big Oil are over.
But maybe not. It turns out that Brian Deese, Biden’s chief economic aide, is BlackRock’s former director of sustainable investing. Is he truly committed to climate action? Will he be willing to pressure his former employer? In December, 350.org and other environmental organizations called on him to make “regulation of the financial industry’s contributions to the climate crisis…a top priority for your role in the Biden administration—even if it goes against the interest of your former employer.”
We shall soon learn more.