Wall Street’s $ 22 trillion time bomb

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(Bloomberg) –

The clock is ticking for banks, insurance companies and asset managers who continue to support oil, gas and coal producers. It is not just the moral imperative – that the use of fossil fuels thereby destroys the atmosphere and life on earth. Your financial health requires leaving such companies behind.

According to Moody’s Investors Service, financial institutions in the group of top 20 industrialized and developing countries have $ 22 trillion exposure to carbon-intensive industries. That equates to about 20% of their total loans and investments. So if these firms don’t move quickly to climate-friendly funding, they run the risk of reporting losses, Moody’s said.

Banks, insurers and asset managers need to “adapt their business models to lend and invest in new and emerging green infrastructure projects while helping companies in high-carbon sectors transition to low-carbon business models,” the credit rating firm wrote in a report last week . Here’s how Moody’s breaks it down:

Exposure to high carbon sectors

  • Banks: $ 13.8 trillion (19% of on-balance sheet loans)
  • Insurer: $ 1.8 trillion (13% of cash and fixed assets)
  • Wealth Managers: $ 6.6 trillion (28% of stock holdings)

Moody’s warning was followed this week by the European Central Bank, which said most lenders have yet to come up with concrete plans showing how they will change their business strategies to address the climate crisis. While around half of the 112 institutions supervised by the ECB “are considering setting exclusion targets for some market segments, only a handful of them mention actively planning to steer their portfolios onto a Paris-compatible course,” said board member Frank Elderson in a blog post from November 22nd.

Taken together, the statements underscore the business urgency of the financial services industry to end its role as a source of dangerous CO2 emissions.

This subject got worse rather than better. Banks, for example, have organized nearly $ 4 trillion in bonds and credit for the oil, gas and coal sectors since the 2015 Paris Climate Agreement, compared with just $ 1.6 trillion in green-labeled bonds and credits, according to this the data compiled by Bloomberg.

Earlier this month it was announced that more than 450 companies are now part of the Glasgow Financial Alliance for Net Zero. The signatories are committed to achieving net zero carbon emissions in their loan and investment portfolios by mid-century. Taking global warming seriously becomes a litmus test for the financial industry as those who fail to keep the moment run increasing risk of public embarrassment. But such promises have been made repeatedly – by nations, corporations, and financial institutions – and broken repeatedly. Public shaming didn’t seem to move the needle. But money could.

The credit impact of a “delayed and disorderly carbon transition” poses the greatest risk to financial firms as the increasing frequency of catastrophic weather events will lead to credit defaults and rising insurance claims, Moody’s wrote in a report released last month, adding that the audit of the The industry’s intermediate climate targets are likely to tighten in the second half of this decade.

“Banks that make a quick but predictable move to climate-friendly financing will do the best to preserve their credit quality,” said Alka Anbarasu, senior vice president, Moody’s.

A good credit rating is of the utmost importance for banks, as they depend on low refinancing costs in order to extend loans at higher interest rates and benefit from the net interest spread. In addition, hardly anyone will want to invest their money in a risky financial institution.

The Energy Transitions Commission estimates that it will take more than $ 1 trillion in financial investment each year to achieve net-zero emissions by mid-century, and bank lending, along with green capital markets, is key to achieving this goal.

Separately, the Organization for Economic Co-operation and Development said it would take $ 6.9 trillion annually through 2030 to meet the climate and other goals of the Paris Agreement, with developing countries needing two-thirds of the funds. The US has announced that it will invest $ 2.3 trillion in climate-resilient infrastructure this decade, and China expects to allocate $ 3.4 trillion to reduce CO2 emissions over the same period.

Banks in Turkey, Russia, Indonesia, India and China are the most exposed to carbon transition risk, with three sectors – manufacturers, transporters, and power producers and other utilities – accounting for more than 75% of the potential non-performing loan risk, Moody’s reported .

Banks in Australia, the UK, the US, France and Germany are the least exposed.

Sustainable financing in brief

  • The Church of England’s ESG campaign meets corporate reality.
  • The European Central Bank says most European banks still don’t have climate strategies.
  • ESG greenwashing allegations are bad news for the German fund giant DWS.
  • CO2 consumption in the European Union climbs to a record high as utilities burn more coal in winter.
  • SWFs are dramatically increasing their focus on ESG.

Bloomberg Green publishes the ESG-focused newsletter every week, which offers unique insights into climate-conscious investing.

© 2021 Bloomberg LP

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