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‘$22-Trillion Time Bomb’ Ahead Unless Banks Drop High-Carbon Investments, Moody’s Warns

Financial institutions are facing a US$22-trillion time bomb due to their investments in carbon-intensive industries, Bloomberg News reports, citing a study last week by Moody’s Investment Services.

“Unless these firms make a swift shift to climate-friendly financing, they risk reporting losses,” Bloomberg writes. And “it’s not just the moral imperative—that fossil fuel use is destroying the atmosphere and life on Earth with it. It’s that their financial health requires leaving such companies behind.”

The $22-trillion calculation is based on the 20% of financial institutions’ investments that Moody sees as risky, the news agency explains. The total includes $13.8 trillion for banks, $6.6 trillion for asset managers, and $1.8 trillion for insurance companies.

Moody’s is urging institutions to shift their business models “toward lending and investing in new and developing green infrastructure projects, while supporting corporates in carbon-intensive sectors that are pivoting to low-carbon business models.”

Bloomberg connects the Moody’s report with an assessment just two days earlier, in which the European Central Bank said most of the 112 institutions it oversees have no concrete plans to shift their business strategies to take the climate emergency into account. Only about half of the institutions are “contemplating setting exclusion targets for some segments of the market,” ECB executive board member Frank Elderson wrote in a November 22 blog post, and “only a handful of them mention actively planning to steer their portfolios on a Paris-compatible trajectory.”

The two statements “underscore the business urgency for the financial services industry to end its role as an enabler of dangerous carbon emissions,” writes Bloomberg Senior Executive Editor Tim Quinson. But “on this issue, things have been getting worse rather than better. Banks, for example, have organized almost $4 trillion of bonds and loans for the oil, gas, and coal sectors since the 2015 Paris climate agreement, compared with only $1.6 trillion of green-labeled bonds and loans, according to data compiled by Bloomberg.”

Quinson adds that the kind of promises heard earlier this month from signatories to Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ) “have repeatedly been made—by nations, companies, and financial institutions—and repeatedly broken.”

But while “public shaming hasn’t seemed to move the needle,” he says, “money might.” In a report last month, Moody’s cited “a delayed and disorderly carbon transition” as the greatest risk to financial firms, with more frequent catastrophic climate events triggering loan defaults and driving up insurance claims.

“Banks that adopt a rapid but predictable shift towards climate-friendly finance will best preserve their credit quality,” said Moody’s senior VP Alka Anbarasu.