Investors’ climate pledges take center stage amid growing risks

'Hold fossil fuel companies and their enablers to account.'

U.N. Secretary General Antonio Guterres said banks, private equity, asset managers and other financial institutions must be held to account for investing in and underwriting carbon emissions.n.   (Anna Moneymaker/Getty Images)
U.N. Secretary General Antonio Guterres said banks, private equity, asset managers and other financial institutions must be held to account for investing in and underwriting carbon emissions.n. (Anna Moneymaker/Getty Images)
Posted September 22, 2022 at 7:00am

World leaders renewed a call for climate action and a transition from fossil fuels as they convened at the 14th annual Climate Week in New York City.

Many attendees doubled down in particular on the need for global financial institutions to follow through on pledges to scale back the financing of oil, gas and coal projects, reiterating the growing material climate risks from these fossil fuels.

“We need to hold fossil fuel companies and their enablers to account,” United Nations Secretary-General António Guterres told the U.N. General Assembly on Tuesday. “That includes the banks, private equity, asset managers and other financial institutions that continue to invest and underwrite carbon pollution. And it includes the massive public relations machine raking in billions to shield the fossil fuel industry from scrutiny.”

Climate Week takes place every September alongside the U.N. General Assembly and brings together executives, government officials and others to make the case for an all-hands-on-deck approach on global warming, with financial and political pressure in the United States and worldwide to tackle environmental, social and governance issues. 

But they face growing political dissent over the effort to involve Wall Street in tackling climate risk. In the past year, officials in Texas, West Virginia and other red states have enacted laws and adopted regulations aimed to curb ESG investing, including rules to bar state pension funds from investing in financial institutions that boycott fossil fuels.

BlackRock Inc. CEO Larry Fink, who has been targeted by conservatives because of his approach to climate risk in investing, addressed the criticism during the summit, underscoring that consideration of material climate risk is part of investors’ fiduciary duties.

“We’re seeing evidence every day that climate risk is investment risk,” Fink said at an event Tuesday hosted by the Clinton Foundation. “People are waking up to that and that’s creating this tectonic shift.”

The U.N.-convened Net-Zero Asset Owner Alliance, a member-led initiative of institutional investors committed to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050, announced this week that its membership has increased sixfold, to 74, since it was established in 2019. Meanwhile, the group’s combined assets under management have quadrupled to $10.6 trillion. 

So far this year according to the alliance's annual progress report released this week, 44 of its investor members — representing $7.1 trillion in assets under management — have set short-term goals on engagement with companies they invest in, reductions in portfolio emissions, financing transition and emission targets based on sectors,.

Pledges for reductions 

Most of those investors have vowed to reduce portfolio emissions across four asset classes by at least 22 percent by 2025 or by at least 49 percent by 2030. However, just nine financial institutions have set sector-specific targets to reach by 2025.

“While $7.1 trillion in AUM is now encompassed by the Alliance’s pledge, this amount must still grow to create a significant breakthrough in the finance industry,” the initiative said.

The road to decarbonizing finance remains bumpy. While more financial institutions say they are making good on promises to exit fossil fuels or scale down financial support for carbon-intensive projects, many still are backing polluters.

Between 2019 and November 2021, U.S. banks provided $207 billion to the coal industry, according to findings released this week by Reclaim Finance, a nonprofit organization that’s affiliated with environmental organization Friends of the Earth. That makes U.S. financial institutions the second biggest providers of loans and underwriting services to the coal industry after Chinese banks.

“The credibility of U.S. banks’ climate pledges is contingent on whether or not they will translate their net-zero commitments into concrete action by ending all financing to coal developers,” Reclaim Finance said in its report.

Regulators have issued a flurry of rulemaking and recommendations on climate risk in the past year as they attempt to fulfill President Joe Biden’s executive order on climate-related financial risk. Most notably, the Securities and Exchange Commission is working to finalize a climate risk disclosure rule that would require reporting of direct greenhouse gas emissions and indirect emissions from purchased electricity and other forms of energy. 

“We’re not a merit-based regulator. It’s about disclosure,” SEC Chairman Gary Gensler said in a fireside chat Tuesday hosted by the Clinton Foundation. “Investors get to decide what risks they take, but companies have to give full, fair and, yes, truthful disclosure.”

Democrats have largely sided with Gensler that more disclosure on climate risk and other ESG issues is necessary in order to curb global warming, while Republicans remain adamant that ESG considerations such as climate risk are politically based and immaterial.

“Right now, we have investments measuring in the tens of trillions of dollars of assets under management looking for climate disclosure,” Gensler said. “If a company were raising their hand voluntarily saying ‘we’re going to be net-neutral in 20 or 30 years,’ it is relevant to the investors.”