Climate Now Threatens U.S. Banks More than Subprime Mortgage Crisis

This article was published to The Energy Mix on September 21, 2021.

Global heating should be sending a chill up the spines of U.S. bankers as a new report finds that climate risk now imperils balance sheets more than the subprime mortgage crisis did 14 years ago. 

The report by Boston-based sustainability non-profit Ceres finds that “up to 10% of the value of U.S. commercial loans at leading banks is at risk of being wiped out by the effects of floods, fires, extreme heat, and hurricanes,” writes The Hill.

America’s subprime mortgage crisis of 2007-2010, which contributed to a shorter but larger global financial crisis, was driven primarily by predatory lending practices by financial institutions. It produced a housing “bubble” and subsequent economic crash that wiped out nearly nine million jobs between 2008 and 2009. 

The fallout from the crisis collapsed some 465 banks across the U.S., from behemoths like Lehman Brothers to tiny community institutions like Pittsburgh’s Dwelling House Savings and Loan Association, between 2008 and 2012. The banks that survived, Goldman Sachs and Morgan Stanley among the largest, relied on generous government bailouts, but also managed to shed risky debt as the depth of the crisis became clear.

But with the climate crisis, offloading the risk won’t be an option, Ceres co-author Steven Rothstein told The Hill, because climate risk is everywhere, to the tune of some US$250 billion per year for some of the country’s largest financial institutions. 

Smaller community banks, meanwhile, are vulnerable to the financial impacts of hurricanes and floods, since they tend to loan “within a 10- to 15-mile radius,” Rothstein added, with subsequent losses from extreme weather events sparing no one. 

Ceres’ analysis showed that a global failure to rein in global heating could put at risk some “3% per year of all assets the group surveyed,” amounting to “a bigger share of the economy than the subprime mortgages that led to the 2008 financial crisis,” The Hill writes. 

However, America’s banks still have time to “meet the moment,” Rothstein said: alongside the enormous risk they face come enormous opportunities should they choose to invest in the low-carbon economy, in things like electric vehicles and green energy.

But it may be a while before that message lands with the wider financial sector. A new analysis of 107 global firms by Carbon Tracker and the Climate Accounting Project found that more than 70% are neglecting to address climate impacts in their financial statements, BBC News reports. This “glaring absence” stands to “dramatically reduce the chances of meeting global emissions targets.”

“The fact that we don’t have transparency means we have no idea if capital is being allocated to sustainable activities so we can actually transition to a greener future,” Carbon Tracker analyst and lead author Barbara Davidson told the BBC.

Companies should be considering both their own survival in an increasingly carbon-free world, and the financial well-being of those who are investing in them, often unknowingly through pension funds. Davidson warned that companies could “go under because they can’t continue to invest in polluting activities,” a collapse that “will mean a knock-on loss for ordinary pensioners.”

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