Wall Street is starting to put pressure on the fossil fuel industry—just not aggressively enough

Banks, asset managers, and insurance companies around the world are waking up to the challenge of global warming. Here’s how they can drive change.
March 16, 2020, 8:30 AM UTC
ESS.04.20.Climate Crisis
Illustration by Delcan & Co.

This article is part of a Fortune Special Report: Business Faces the Climate Crisis.

The fossil fuel industry faces a classic business problem: Someone else has come up with a better technology. Over the past decade, engineering advances have helped drive down the price of solar panels and wind turbines by some 90%. Clean energy is now the cheapest way to generate power in most of the world. And today, storage batteries are on the same plummeting price curve—so that, increasingly, the sun’s habit of going down at night is no big deal. Even the car, which has helped define our culture and consumes vast quantities of fossil fuel, is changing fast. No honest person who has driven a Tesla will dispute that it’s a superior machine: fast, with few moving parts, and a quiet elegance that makes a rumbling muscle car seem more than a little old-fashioned. 

Faced with that kind of challenge, incumbent industries usually play for time, trying to eke out another decade or two of profits before wandering off to a well-appointed retirement home. For the energy industry—at the heart of our economy for so long—transition periods have been particularly slow. Fixed investments and established supply lines mean that, in the past, converting from wood to coal or coal to oil has played out over 40 or 50 years or more. Plenty of time for a nice wind-down. 

But the fossil fuel industry also faces a decidedly novel business problem: It turns out that its product is destroying the world.

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Does that sound like hyperbole? This winter, a team of economists at that radical outpost known as JPMorgan Chase prepared a report for high-end clients that eventually leaked to the British press. It explained the current science in great detail and concluded: “We cannot rule out catastrophic outcomes where human life as we know it is threatened.” Quoting many groups from the International Monetary Fund to the UN’s Intergovernmental Panel on Climate Change, the report said policymakers have no choice but to force the transition off coal, oil, and gas because a business-as-usual climate policy “would likely push the earth to a place that we haven’t seen for many millions of years,” sweeping the planet past irrevocable tipping points as the poles melt and oceans acidify. “It is clear that the Earth is on an unsustainable trajectory,” it said. “Something will have to change at some point if the human race is going to survive.”

How the world deals with the fossil fuel industry’s two existential problems, in other words, will define humankind’s future. And it has become increasingly clear that while government plays a key role in the race to solve these problems, so too do banks, insurance companies, and asset managers: Wall Street as well as Washington, if you like shorthand. There’s an emerging agreement among all parties, activists and financiers alike, that if the transition to clean energy goes at the pace that the oil and coal lobbyists would like, the planet will break. 

If that transition instead goes unnaturally fast—well, we can’t stop global warming. Not anymore. But we might limit it to the point at which civilizations endure. I wrote the first book for a general audience on this topic back in 1989, and I can tell you we are at a point we have never seen before. The demand for urgent action is today crashing up against a climate denial script that has been carefully nurtured by the oil industry since the 1990s and is now the reigning wisdom at the White House. Which narrative emerges victorious will not only determine the financial landscape of the planet, but it will also determine the literal landscape—how high the seas rise, how many forests burn, how many people must leave their homes. Changing the climate is the biggest thing humans have ever done, and now we’ll see how effectively we can respond to a mess of our own making. One thing is for certain: The chances of success are very low unless the business world embraces the challenge.

About a decade ago, analysts at a small London think tank, the Carbon Tracker Initiative, published a report laying out the essential underlying facts of the climate crisis. The fossil fuel industry had in its inventory of reserves a vast quantity of carbon: that is, the coal and gas and oil deposits it had identified and told shareholders and regulators it would burn—enough to produce almost 3,000 gigatons of carbon in the form of carbon dioxide. The world’s scientists, however, had concluded that we could really only burn about 600 gigatons more and have any hope of meeting the climate targets that the world’s governments had set. The numbers have fluctuated some over the decade as those targets have shifted, but the ratios remain unchanged: In essence, the industry has far, far more supply than the atmosphere can deal with. 

And that’s a problem not just for life on earth but also for balance sheets. You could call that excess supply a carbon bubble if you’d like—at current prices it may represent something like $20 trillion worth of fossil fuel that is already reflected in the value of these firms but that scientists say we must keep in the ground. (The dramatic decline in crude prices that has helped rock the stock market of late, meanwhile, has put a profit squeeze on Big Oil.) Mark Carney, who just stepped down as governor of the Bank of England in March to become the UN’s climate finance envoy, was far ahead of other regulators in recognizing the danger, telling the world’s insurers at Lloyds of London in 2014 that they were dangerously overexposed to the risk of these potentially stranded assets.

Beginning in 2012, environmental activists around the world, myself included, began calling for institutions to divest their holdings in fossil fuels. At first, we campaigned mostly on moral grounds, and the early respondents were small colleges and religious denominations. But the push quickly gained steam, becoming the biggest anticorporate campaign in history. As of December 2019, some $12 trillion worth of endowments and portfolios had divested, according to Gofossilfree.org, in part because the smart money had come to realize that the fossil fuel sector was lagging everything else in the market.

The institutions that have begun to divest include New York City’s pension fund, half of the colleges and universities in the U.K., the Norwegian sovereign wealth fund (at more than $1 trillion, the biggest pool of investment capital on the planet), the Rockefeller charities (which descend from the planet’s first oil fortune), and the vast University of California system. Not a day goes by without some new announcement: As I was writing this piece, Twitter flashed the news that KiwiSavers, the primary retirement fund in New Zealand, had joined the ranks. Together, divestment has changed the dialogue, not to mention the cost of capital: Coal executives complain it’s nearly impossible to raise money because so many funds have divested, and in last year’s annual report, Shell Oil called divestment a material risk to its business. As America’s favorite stock picker, Jim Cramer, put it in a typically manic diatribe on CNBC this winter, there’s no money to be made anymore in fossil fuel stocks because “we’re starting to see divestment all over the world.” As a result, he said, fossil fuels were “in the death knell phase.”

$20 trillion

Estimated market value of fossil fuels reflected in energy companies that scientists say we can’t afford to burn. Source: Carbon tracker Institute

But that phase-out still isn’t coming fast enough to meet the scientific targets necessary to mitigate the climate crisis. As Carney explained in one of his last appearances as BofE governor in December, big institutional investors tended to have horizons of two to 10 years. “In those horizons, there will be more extreme weather events, but by the time that the extreme events become so prevalent and so obvious, it’s too late to do anything about it.” 

As a result, campaigners have expanded the divestment drive one ring out, this time pressuring the financial institutions themselves instead of just the fossil fuel companies. We have mounted a fast-growing crusade to get the BlackRocks and the State Streets, the JPMorgan Chases and BofAs, the Liberty Mutuals and the Chubbs to end what they call a “money pipeline” that has funneled at least $2 trillion in loans to the fossil fuel industry since the end of the Paris climate talks in 2015. 

On the one hand, it may seem like an unlikely crusade: These are, after all, the richest institutions on planet Earth; even after the global financial crisis of 2008 they mostly emerged unscathed and, in some cases, bigger than ever. Do they have anything much to fear from scruffy protesters?

But the anger of the general public over climate change is reaching a crescendo, especially as people have come to understand the degree to which the fossil fuel industry covered up its early knowledge of global warming. This winter, a poll conducted by Yale researchers found that fully a fifth of Americans were ready to “personally engage in nonviolent civil disobedience” against “corporate or government activities that make global warming worse,” if a person they liked and respected asked them to. One guesses that such sentiment is highly concentrated in precisely the urban and suburban precincts where American money is highly concentrated—Trump may own the bright-red electoral map of the U.S., but the money map tilts in the other direction. And financial institutions need to be a little wary of their customers: There are a lot of Chase credit cards in the hands of people who have come to care about global warming.

Something will have to change… if the human race is going to survive.

David Mackie and Jessica Murray, JPMorgan Chase economists in a February 2020 report titled Risky Business: Climate and the Macroeconomy

In fact, the speed with which these institutions have begun to bend is instructive. Early on in this new Stop the Money Pipeline campaign—which includes big NGOs like the Sierra Club and Greenpeace—protesters gathered outside Liberty Mutual’s Boston headquarters, pointing out that the insurance giant was continuing to invest heavily in fossil fuel projects, even as it was cutting off policyholders in California because climate-fueled wildfires were making their homes too risky to underwrite. And it was only a matter of weeks before Liberty Mutual began to buckle, announcing a policy in December that would restrict its investment in coal and in Canada’s dirty tar sands oil complex. Others like the Hartford soon followed, and that same month even Goldman Sachs proclaimed that it would restrict financing for fossil fuel projects in the Arctic.

A significant breakthrough came in January, when Wall Street behemoth BlackRock—the biggest financial player of all, with $7.4 trillion in assets under management and a key target of the emerging campaign—announced that it was going to put sustainability at the center of its investment strategy. In a letter to investors, CEO Larry Fink said, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” Fink said that BlackRock would vote against management teams that weren’t working toward sustainability goals, and his firm would press companies to disclose plans “for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized.” And since BlackRock is the biggest single stockholder for many public companies, the threat comes with real weight.

Of course, this is only half the equation for businesses thinking about the climate crisis. The other half is all upside: Someone is going to have to build—and finance—the most massive industrial transition in human history. “Achieving net zero emissions will require a whole-economy transition,” Carney said in his valedictory speech to the City of London in late February. “Every company, every bank, every insurer, and investor will have to adjust its business model. This could turn an existential risk into the greatest commercial opportunity of our time.”

Consider just one small example: Late last year, New York City decreed that all big buildings in the five boroughs needed to cut their carbon emissions 40% by 2030. That’s necessary because the 2% of buildings over 25,000 square feet contribute about half the city’s emissions. Meeting the target clearly won’t be easy. As the CEO of the Urban Green Council, John Mandyck, said, “This law could possibly be the largest disruption in our lifetime for the real estate industry in New York City.” You’re a landlord who misses your target? The fines run up to $268 a ton of carbon, which could mean a million dollars for some big property owners. But, on the other hand, think of the money to be made from those repairs: a whole new workforce trained in insulation or overhauling HVAC. It’s all technically achievable. As Vivian Loftness, a Carnegie Mellon professor, explained to reporters, “We’ve got [older] mechanical systems that are running at 50% efficiency, where there’s things on the market that will run at 95% efficiency. We’ve got a lot of room for upgrades for boilers and chillers, air-­handling units, control systems—there’s so much room in just the hardware of buildings.”

Imagine the money to be made from financing that kind of overhaul. And then think of the money to be saved once you have completed the upgrades: If you’re using 40% less energy, year after year, you have suddenly found a remarkable boost to your P&L. Energy efficiency is one of those revolutions that can pay for itself. 

$12 trillion

Total value of asset managers and endowments that had divested from fossil fuels as of December 2019. Source: Gofossilfuelfree.org

But none of it is really worth doing unless it can be done fast. That’s the rub with climate change: Our period of leverage to affect the outcome seems to stretch only a few years into the future. The scientists of the Intergovernmental Panel on Climate Change issued their most recent update in October of 2018, cautioning that unless fundamental transformation of our energy system took place in the decade of the 2020s—and they defined that transformation as cutting carbon emissions in half—we could kiss goodbye any hope of meeting the necessary climate targets. 

And that would be, in the long run, rather expensive. In the same month as that IPCC report, British economists attempted to calculate the damage that would come from global warming that reached about 3.7 degrees Celsius by century’s end, which is in line with our current trajectory. Their figure? $551 trillion. Which is significantly more money than currently exists on planet Earth.

Our options are clear: Invest now with the opportunity to earn a nice return (and save humanity in the bargain), or take unfathomable losses down the line. The correct choice should be obvious to any smart financier. 

Bill McKibben is an author, environmentalist, and activist whose books include The End of Nature (1989) and Falter (2019). He is a cofounder and senior adviser at 350.org, an international climate campaign organization.

A version of this article appears in the April 2020 issue of Fortune with the headline “Putting the Money Squeeze on Fossil Fuels.”

More from Fortune’s Special Report on the Climate Crisis 

Big Oil’s Hail Mary
Plastic that travels 8,000 miles: The global crisis in recycling
—5 charts projecting the cost of climate change by 2100
Sci-fi tech tackles climate change with fake trees
Inside ‘Project Odessa,’ an experiment in greener fossil-fuel power

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