The financial crisis that began in 2008 wasn’t great for Wall Street titans: Regulators cracked down on them, protesters occupied them, and public opinion soured against them. They managed to make out pretty well in the pandemic a little over a decade later, with Blackrock being brought in to oversee an unprecedented bond-buying program. But climate change could turn out to be Wall Street’s best crisis yet. The finance industry’s prolific investments in fossil fuels helped drive emissions up and create an existential threat. But financiers could stand to make a fortune and come out looking like climate heroes.
A two-page memo that’s emerged from bipartisan infrastructure talks gaining steam in the Senate pledges to pay for $579 billion of new spending with both user fees and a gas tax (options the Biden administration has come out against), as well as an array of private-public financing schemes (that it hasn’t). As David Dayen noted at The American Prospect, these financing options include tax-exempt private activity bonds—which allow governments essentially to borrow on behalf of a private company or nonprofit—and more inventive methods like “asset recycling,” which involves selling off existing public infrastructure to private companies to pay for new infrastructure. These schemes appear to save money in the short term but effectively move public assets into private hands, where they become cash cows for the companies that own them through higher rates.
Economist Daniela Gabor has written extensively on the dangers of what she calls the “Wall Street Consensus” of enlisting the state to de-risk private assets rather than having it invest directly in needed infrastructure. “The logic is a logic of austerity: that there are not enough resources to do public investment, therefore we should escort the private sector to give us the infrastructure we need,” she says. “What kind of low-carbon transition can you have when the state becomes a midwife to the private sector instead of an economic agent that allocates and organizes the distribution of resources?”
Whatever 12-dimensional chess Democrats are playing with the bipartisan infrastructure plan, passing it could be dangerous in its own right by opening the way to the backdoor privatization of infrastructure that will be critical in battling and adapting to climate change. But Wall Street is poised to profit from the climate crisis even if the infrastructure bill collapses.
There is already a booming $30 trillion market for “ESG” assets, in funds that take “environment, social, and governance” factors into account. Some firms stand to make a small fortune off the ESG craze, whether climate goals are met or not. Management consultants, for instance, can draft plans for companies under increasing public pressure to go green, branding themselves as attractive to ESG investors. Pricewaterhouse Coopers announced last week that it will bring on 100,000 people over the next five years, in large part to handle the influx of interest in climate reporting. Banks and asset managers can take advantage, too. Investing in questionable new green asset classes and public-private partnerships where the government shoulders most of the risk can be profitable in its own right, and their involvement in green funds and projects helps to distract from the vast sums they spend financing dirty energy.
One consequence of funneling all legislative hope for climate action into a sprawling infrastructure fight is that it positions the solution to the climate crisis as being all about addition: Grow the green economy, make money and save the world as a bonus. But reducing emissions requires subtraction, too, and actively winding down the extractive industries fueling them. ESG simply won’t cut it.
“To me, the focus on ESG is part of a broader political strategy focusing only on the green, positive aspects of the climate finance agenda and trying to bury the more obvious question: that some financial institutions will have stranded assets and have to stop lending to fossil fuel companies,” Gabor says, noting increasing pressure on high-carbon investment from central bankers. “The state has to maintain responsibility for protecting the economy and people and the planet from carbon financiers, and that means not cuddling them.”
Regulators in the United States already have plenty of tools at their disposal to curb the flow of Wall Street cash into fossil fuels, whatever happens in the infrastructure debate. Alexis Goldstein, a former senior policy analyst at Americans for Financial Reform who has worked for Deutsche Bank and Merrill Lynch, says that the Office of the Comptroller of the Currency, or OCC; Federal Deposit Insurance Corporation; and the Federal Reserve—which cover different aspects of the banking sector—could raise capital requirements for institutions that hold fossil fuel assets. That would require banks to protect against the volatility of those sectors by having equivalent investments outside of them. Ideally, Goldstein says, this could be coordinated across each of those agencies. But even if just one decided to put that kind of rule on the books, it “would force the other banking regulators to contend with it.”
Regulators could amend stress tests—which assess banks’ ability to withstand financial crises—to include climate risk. If it were designated a systemically important financial institution, Blackrock—the world’s largest asset manager, which has long fought such a designation—could be forced under Dodd-Frank to divest the roughly $7 trillion it has under management from holdings that pose a risk to the financial system.
“The job of any financial regulator is to oversee their entities and make sure they are being true to their investors and not endangering the financial system,” Goldstein says. “All of the financial regulators are failing to accurately reflect the monetary risk that already exists with climate change.”
Action on this front has been slow. Earlier this month, acting OCC head Michael Hsu told Reuters that regulators would “eventually” have to factor climate risk into their rulemaking. An executive order signed last month gives National Economic Council head Brian Deese and National Climate Adviser Gina McCarthy 120 days to come up with a government-wide strategy to measure, assess, mitigate, and disclose “climate-related financial risk to Federal Government programs, assets, and liabilities,” identifying financing needs to get to net-zero by 2050 and “areas in which private and public investments can play complementary roles” in meeting them. As head of the Financial Stability Oversight Council, Janet Yellen has 180 days to assess climate-related financial risk to the government and the financial system.
Those tasks are unlikely to be finished until after world governments convene in Glasgow for United Nations climate talks in November, where climate finance has been a consistently thorny issue. International climate envoy John Kerry, meanwhile, has preferred to canvass banks for voluntary climate commitments as part of a “net-zero banking alliance.”
There doesn’t seem to be much of a sense of urgency about this. “Wall Street is so short-termist that it’s so easy to say to do something by 2050, but they’re concerned about what their bonus is going to be this year. To have any meaningful commitment from a bank you need to focus on what they’re doing this year,” says Goldstein.
The revolving door between Wall Street and the White House might help explain why more hasn’t been done to crack down on banks. Deese—now tasked with designing the administration’s approach to climate risk—is Blackrock’s former global head of sustainable investment. Having been paid a $2.3 million salary by Blackrock in 2020 and $2.4 million in shares, Deese made a lot of money even by Wall Street standards after leaving the Obama administration, where he served as a top climate adviser. Deputy Treasury Secretary Adewale Adeyemo is another Blackrock alumnus. And Kerry tapped private equity veteran Mark Gallogly to liaise with the businesses, raising criticism from groups who noted that his firm, Centerbridge Partners, has profited from both Puerto Rico’s debt crisis and the California wildfires.
There is some work already being done within the administration to constrain the financial sector’s massive carbon footprint. The Security and Exchange Commission’s proposed rulemaking agenda includes action on disclosures related to climate change and payments by resource extraction issuers. New rules around incentive-based compensation could also feasibly include climate risk metrics. The Federal Trade Commission—where antitrust reformer Lina Khan was just sworn in as chair—also has plenty of power to incorporate stronger climate rules. Rather than asset managers offering more climate-friendly index funds to investors as a fringe side offering, Goldstein says that the FTC (among its menu of tools) could “block any mergers that create undue climate harm,” and work to deter corporate greenwashing.*
Treating the climate crisis like a crisis on the order of, say, the Covid-19 pandemic would mean a much more concerted push on all fronts. Nudges of the sort the bipartisan groups of senators are proposing weren’t enough to get pharmaceutical companies to make vaccines: The U.S. instead poured millions into research and manufacturing capacity through Operation Warp Speed and invoked the Defense Production Act of 1950. Spending $1.9 trillion in a single go to expand the welfare state to cope with mass unemployment didn’t seem to be a problem. The Fed even took the unprecedented step of buying up corporate debt. But the U.S. government is so far not treating the climate crisis like a crisis. In crises, as it has just proven, governments take charge.
Relying on private actors to deliver reform is already failing. Mobilizing private capital has been the watchword of climate finance among G7 nations, who pledged in 2009 to fund $100 billion a year worth of mitigation and adaptation efforts in low- and middle-income countries. In 2018 they raised just $80 billion, much of that structured as loans. Many smaller nations still struggle with eligibility requirements placed on those limited funds by multilateral development banks, and have urged for more support to be dedicated toward adaptation and recovery from the climate-fueled disasters already hitting them. The agreement to furnish $100 billion a year was part of why the Paris Agreement happened at all; the U.S. and other wealthy countries sought to nix more concrete financing commitments to climate finance present in previous pacts. The fact that their more vague pledges are still unfulfilled could now jeopardize the most consequential talks since that deal was brokered in 2015, set to happen in Glasgow this November.
There are plenty of desperately needed investments that simply won’t deliver the returns that investors are looking for. And there are plenty of profitable investments that regulators will need to make unprofitable. Profit motives can’t solve the climate crisis. But they can make a collection of rich investors even richer.
* A previous version of this article mischaracterized the FTC’s powers.