Welcome 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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Lone Star losses
Right-wing attacks on ESG investing have led some firms to distance themselves from the term. BlackRock has become a central target, enduring GOP-dominated states pulling approximately $13.3 billion from the firm. Last week, the Texas State Board of Education’s Permanent School Fund decided to withdraw $8.5 billion from BlackRock based on the misconception that ESG equates to boycotting energy companies, highlighting the politicized nature of sustainable investing debates. Blackrock called the move “reckless.” Others said the move was putting oil companies ahead of children. This episode reflects the broader trend of declining ESG engagement, evidenced by a noticeable decline in the creation of new ESG-labeled funds across the US and Europe, a dip in related search engine queries, and a reduced mention in investor communications. However, it's crucial to note that, despite these setbacks, the withdrawal from BlackRock represents roughly one-tenth of one percent of its $10 trillion in managed assets.
Reactions like the one from the Texas State Board of Education disregard the potential financial detriment of shunning ESG strategies. Analyses from institutions like the Texas County and District Retirement System (TCDRS) indicate that anti-ESG divestments could result in substantial losses — upwards of $6 billion over a decade for TCDRS alone. Even the Texas Association of Business — a body far from leftist inclinations — has expressed concerns about the economic ramifications of Texas's anti-ESG stance. Research suggests that the boycott laws could cost Texas nearly $669 million in economic activity, over $180 million in reduced annual earnings, the loss of approximately 3,034 jobs, and a substantial decline in state and local tax revenues.
State Farm’s Cali cutback, red states’ data blackout
U.S. homeowners continue to bear the brunt of the climate-driven insurance crisis – the de facto Big Oil tax is also making homeownership even more expensive. The latest blow came from State Farm, which announced it wouldn’t renew insurance for 30,000 homeowners and 42,000 commercial apartment units in California. The not-so-neighborly announcement by State Farm follows several other insurance companies fleeing high-risk, climate-disaster-prone states such as Florida and Louisiana. Insurers claim rates haven’t kept pace with increasingly common and costly climate-driven disasters; State Farm took a $6.5 billion hit, and the sector posted net losses of more than $22 billion last year. California’s insurance commissioner isn’t buying it and wants to look at State Farms’ books, saying the company’s decision raises “serious questions about its financial situation.” State Farm had at least $30 billion invested in fossil fuels as of 2019.
Speaking of transparency (or lack thereof), the Treasury’s Federal Insurance Office’s much-delayed and evolving data collection effort partnership with the National Association of Insurance Commissioners (NAIC) was dealt a blow after the New York Times broke news that some Republican-led states — including those hardest hit, like Florida, Texas, and Louisiana, and possibly others — may share limited data or opt out entirely. It would ensure a mess for policymakers working to protect consumers and develop solutions if the data ignored approximately one-fifth of the market, according to one insurance expert familiar with the partnership.
Proxy power plays
New York City Comptroller Brad Lander already scored two Wall Street wins this proxy season. Last week, Citi joined JPMorgan in agreeing to disclose its green financing ratio, a metric comparing funding for low-carbon energy to fossil fuels. A green financing ratio below one signifies that a bank allocates more funds to fossil fuels than to renewable energy sources. In 2022, the ratio for North American banks averaged 0.6. Earlier in January, Lander, along with three New York City pension funds, filed resolutions at the two banks, plus Morgan Stanley, Bank of America, Goldman Sachs, and Royal Bank of Canada. Shareholders will vote on the resolution at the four remaining banks, joining 26 other environmental shareholder proposals filed at financial companies so far, according to data provider ISS-Corporate. This adds to a record 263 climate-related shareholder resolutions filed at North American companies so far, despite attempts from Big Oil to silence shareholder concerns on climate risk.
The sting is in the tail
The European Climate Risk Assessment was recently released and illustrates how Europe has heated up faster than any other continent since the Industrial Revolution. In particular, it highlights uniquely at-risk regions like Southern Europe and low-lying coastal regions and a critical underpreparedness to address growing threats from heat, floods, and wildfires.
The report coincides with the release of the so-called ‘Scorpion report,’ which seeks to rectify climate modeling that primarily relies on averages, such as that by the European Environment Agency, by calculating ‘tail risks’ — rare but severe events such as the now more frequent extreme flooding. Highlighting a shift towards what it terms 'planetary insolvency,' the report by the Institute and Faculty of Actuaries calls for a new framework to account for these escalating climate risks. It predicts a grim future with a 5% chance of annual insured losses hitting $200 billion in the next decade, pushing total economic damages to over $1 trillion.
Fossil fuels 401(k) performance drag
Shareholder advocacy non-profit As You Sow, in partnership with researchers at the University of Waterloo, released a groundbreaking analysis on the drag fossil fuel investments can have on 401(k) retirement performance. The study examined Google employees 401(k) performance over the last ten years, which has more than $2 billion invested in fossil fuels and over 90% of plan assets held in Vanguard funds, had they divested. The findings showed that Google employees could have earned over $1 billion in additional returns had they dumped fossil fuels a decade ago. The analysis follows similar findings — dumping fossil fuels is a winning financial strategy — by the Institute for Energy Economics and Financial Analysis (IEFFA) in its Passive Investing in a Warming World report from earlier this year. The findings give credence and financial justification to the over $40 trillion in institutional assets committed to divesting from fossil fuels and for others to follow.
