Welcome back to the Climate Nexus finance newsletter – a regular update that looks at the big stories and players at the intersection of climate change, finance, regulation, and energy, with tips for the week ahead.
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Climate change means more SVBs are coming
The collapse of Silicon Valley Bank has big implications for how banks and regulators deal with climate risks. First, smaller banks tend to lack geographic and sectoral diversity (a trait shared by SVB). Second, the story of how SVB collapsed has parallels to the risks posed by climate change to bank safety and soundness. SVB saw an outflow of deposits as rising interest rates squeezed the startups that it served. Today’s tech crunch is tomorrow’s oil and gas phaseout leaving oilpatch banks in a precarious position (again). But, tech is probably coming back, whereas every oil and gas collapse might be the last. SVB’s deposit outflow forced it to sell some of the mortgage bonds it had bought with those deposits. But rising interest rates had depressed bond prices, forcing general writedowns that fueled panic among depositors about SVB’s long-term solvency. We’ve seen studies suggesting mortgage markets are mispricing climate risk – as that changes, banks holding mortgage-backed bonds may find these long-duration assets precipitously dropping in value too. Rumors of climate-risk exposure can serve as a spark to an SVB-style run.
SVB and other smaller banks have fought to “reduce regulatory burden” and government oversight, including regulations related to climate change. Now, these banks will come under increased scrutiny. The New York Department of Financial Services’ pending climate guidance is hugely important: it applies to all banks regulated by the state, not just the biggest ones. Banking regulators are going to take a good hard look at the banks they oversee after this collapse. They shouldn’t neglect climate change as part of that review.
A few other climate-related considerations:
Once again, the Federal Reserve has jumped off of the sidelines with an expansive assessment of its powers, bailing out banks and real economy companies whose risk-taking has become a threat to financial stability. Yet when the Fed is asked to regulate climate risk, Jerome Powell is quick to say the Fed has a very narrow mandate. Maybe it’s time for the Fed to get more aggressive about pushing its authority to regulate risk-taking. Instead of bailing out bad actors.
Republicans and some moderate Democrats opposed the appointment of Saule Omarova to the Office of the Comptroller of the Currency position because she didn’t want to lift regulatory restrictions on these banks, as well as her positions on climate-related financial risks.
Despite its poor performance on risk, SVB was also home to a lot of climate start-up money. The question is where it all goes next.
Alternatively, predictably, Republicans have decided that SVB collapsed under the weight of wokeness. Sigh.
– h/t Yevgeny Shrago and Anne Perrault, Public Citizen
IPCC - climate risk warning
The Intergovernmental Panel on Climate Change (IPCC) began today a final meeting to approve the AR6 Synthesis Report, which integrates and summarizes the findings of six reports in the cycle beginning from 2015. There were 640 delegates from across the world attending the opening plenary, and by March 17 (or 18th or the 19th…we’re taking bets), they will approve the Summary for Policymakers line by line. This huge review of climate science literature will have profound implications for how climate change is understood and also how climate risks are interpreted by governments, investors, and businesses. Especially since the next IPCC report won’t come out for another 5-7 years.
Biden ESG Veto
Speaking of regulations and risk. After Speaker McCarthy signed legislation that repealed a Labor Department rule giving investors more freedom to address risk – including environmental, social, and governance risks – late last week, President Biden now has 10 days to issue his anticipated veto. The rule eliminated unnecessary prohibitions on investors put in place in the waning days of the Trump administration, restoring the government’s neutral stance and protecting Americans’ retirement savings from greater risk of financial harm. Sound risk management considering recent developments.
Mar 21: Elders in rocking chairs protest big banks. Eighty-six events will take place in over half the US states involving rallies, art installations and activists cutting up their bank cards. The day is being organized by Third Act, a group for climate activists over 60 years organized by veteran campaigner Bill McKibben, along with the Sierra Club, Rainforest Action Network and other orgs. The day will mark the first mass action in the US involving people over 60 years of age. Contact Sarah Lasoff at Stop the Money pipeline for more info.
Mar 22: Proxy Preview 2023 by As You Sow, the Sustainable Investments Institute (Si2), and Proxy Impact. Register here.
Mar 22-24: Join Ceres Global and industry leaders from high-emitting sectors to examine what’s needed to transition to a more stable, just, and climate-resilient economy. Register here.
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– Tan Copsey, Katharine Poole, Steve Hargreaves, Jayson O'Neill & Shravya Jain-Conti
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