* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
Most new fossil fuel projects are built with borrowed money – potentially yours
Randell Leach is CEO of Beneficial State Bank and Denis Hayes is CEO of the Bullitt Foundation.
Banks need to stop reckless profiteering that threatens our financial system and instead invest in resiliency.
That’s a less diplomatic phrasing of the message from President Biden’s recent Executive Order on Climate-Related Financial Risk, which recognizes that continued financing of fossil fuel projects represents a huge risk to the U.S. and world economies.
Every loan a bank makes carries risk. If paid enough to take a risk, banks will. And if a bank believes it can pass the cost of a risk to someone else, it will do that too.
However, if a bank doesn’t fully understand the risk it has taken, it can misprice the transaction and suffer a bad outcome. If banks overall don’t understand a huge, systemic risk they are all taking, the consequences can be catastrophic.
The subprime meltdown of 2007-09 was just such a systemic catastrophe. The nation’s largest banks bet staggering sums on complex derivatives that few understood. Banks and investors overlooked the risks as they sought to maximize short-term profits.
When the bubble burst, 12 of the 13 largest banks in the United States found themselves on the brink of failure. Banks deemed “too big to fail” were bailed out at taxpayer expense. The direct, unrecovered cost of the bailout was half a trillion dollars.
The stakes posed by climate disruption are incomparably larger. A vast body of research has examined the consequences of increased threats posed by hurricanes, droughts, forest fires, floods, and more.
In addition to direct climate risks, socio-political risks are cause for immediate action.
For example, on Jan. 20, 2021, as Biden took office, the U.S. government shifted overnight from eliminating environmental regulations to eliminating subsidies for fossil fuels. A project undertaken with a strong tailwind yesterday may encounter a brick wall tomorrow.
Many investors are recognizing this shift and taking decisive action.
On just one recent day, shareholders of Chevron passed a resolution demanding that the company reduce greenhouse gas emissions from consumption of its products; Exxon Mobil saw three of its candidates for the board of directors defeated by protest candidates with climate concerns; and a Dutch court ordered Shell to reduce its carbon emissions by 45% by 2030. One day earlier, none of those actions was widely viewed as plausible.
Unfortunately, U.S. banks are perpetuating business as usual, even in the face of increasing climate havoc. How is this relevant to you?
Essentially every fossil fuel project is built with money borrowed from banks, which are borrowing money from you. Your deposits are funding these projects.
In the five years since the Paris Agreement, the world’s 60 biggest banks have financed fossil fuels to the tune of $3.8 trillion. In the last four years, J.P. Morgan Chase loaned $268 billion to oil, gas, and coal companies, according to a Rainforest Action Network report.
Many of these projects will be stopped from producing fuel long before the ends of their planned lives. They must be if we hope to maintain a livable planet.
These investments in new fossil fuel development have the potential to be the mortgage crisis on steroids. Despite the outsized and known risks of each loan, banks are not recognizing the true cost, which they hope will be externalized to the rest of society. They are not considering the systemic risk involved.
This is what the Biden executive order seeks to avoid. Biden was vice president during the subprime debacle. He recognizes that the federal government and its taxpayers must not be on the hook for fossil fuel risks. Yet, he cannot allow the collapse of the world financial system.
The executive order seeks to assess and minimize climate risk to the U.S. financial system and estimate the financing needs for moving to net zero greenhouse gas emissions by 2050.
The transition to a renewable energy economy will be far-reaching and revolutionary, in the sense of the agricultural revolution or the industrial revolution. Banks will finance critical infrastructure projects, solar, wind, batteries, and many other building blocks of a sustainable future.
We must invest in resiliency. And that cannot include loans for fossil fuels.