Morgan Stanley’s net zero pledge is a call to action for Wall Street

By Ben Ratner and Gabriel Malek

US banks have the political and financial leverage needed to play a major role in averting disruptive climate damage to the world economy. But despite strong rhetorical support of the Paris Climate Agreement, the vast majority of America’s largest banks continue to invest in companies ill-prepared for a low-carbon future.

Many of these investment firms have established multi-billion-dollar environmental finance goals – a good start. However, short-term capital allocation strategies too often magnify physical, reputational, and regulatory risks associated with climate change.

Fortunately, Morgan Stanley has broken the status quo this week, becoming the first major American bank to commit to net-zero financed emissions by 2050. This step raises the bar on climate risk management across the entire finance sector and addresses increasing shareholder demand for climate action from big banks.

Why it matters

Adopting net-zero by 2050 benchmarks will allow banks to minimize portfolio-wide climate risks and capitalize on the financial opportunities of the energy transition.

As an advisory panel convened by the Commodity Futures Trading Commission recently noted, climate change “could give rise to systemic financial shocks” that disrupt the banking industry.

Increasingly frequent and severe floods, droughts, and fires could cause companies to default on their loans, straining banks’ balance sheets. Transition risks could also arise, as technological and policy advancements cause the value of high-emitting companies to decline. Given their vital role in the global economy, multinational banks are vulnerable to market-wide pressures presented by climate change.

Banks that lag behind on climate could also face stringent regulatory challenges. Already, the EU and UK require banks to monitor their climate risk. Similar standards may soon come to the US, giving proactive firms like Morgan Stanley a competitive advantage.

Additionally, robust net zero planning can help banks cater to growing demand for climate solutions.

In 2020 alone, companies from Microsoft to BP have committed to net-zero by 2050. Dozens more corporate leaders will likely follow suit to meet the Net-Zero Company Benchmark of the Climate Action 100+.

Turning these decarbonization plans into reality will require private capital for corporate investments in climate friendly business models, technologies, and other innovations. Banks with effective net-zero strategies will be best positioned to meet client needs.

Room for improvement across Wall Street

Morgan Stanley’s pledge could pave the way to a new normal among Wall Street’s big banks. While many of Morgan Stanley’s peers have different starting points on climate, they all have room for improvement.

• JP Morgan: JP Morgan is a founding member of the Climate Leadership Council and has committed $50 billion to green initiatives in 2020. Yet, this past February, JP Morgan pushed the Securities and Exchange Commission to block a shareholder resolution asking the bank to disclose how its lending activities align with the Paris Agreement.
• Bank of America: Bank of America has committed to allocating $300 billion to sustainable business between 2019 and 2030. It is the only major American bank, however, that has not yet pledged to stop financing oil and gas drilling in the Arctic.
• Citi: Citi, the only major American bank that has signed the Principles for Responsible Banking, announced a five-year, $250 billion environmental finance goal in July. But the bank continues to finance projects that harm the planet’s most vital ecosystems, contributing $827 million in debt financing to crude oil drilling in the Amazon rainforest in the last several years.
• Goldman Sachs: Goldman Sachs CEO David Solomon wrote that the “evidence of climate change is clear,” presenting “not only an urgent need to act, but also a powerful business and investing case for doing so.” Although the bank has pledged to deploy $750 billion between 2019 and 2030 to accelerate the climate transition, reports suggest that its environmental policy framework remains misaligned with a 1.5 degree scenario.

And the biggest gap, with very few exceptions, is that banks have not yet supported government policies needed to create an enabling environment for de-carbonization, essential to managing systemic financial risks.

Next steps

While Morgan Stanley has more work to do on implementation, its pledge signals that the time for piecemeal climate commitments is running out.  

Here’s what we think needs to happen next. Other leading banks should commit to net-zero by 2050, devoting particular attention to financed emissions. Establishing an industry-wide emissions accounting standard will help the American banking sector manage risk, meet shareholder expectations around transparency, and seize opportunities. We also encourage banks that have not joined the Partnership for Carbon Accounting Financials to do so.

Turning these commitments into real emissions reduction then depends on action: sector and client specific engagement, climate-aligned asset allocation, and support for government policies and regulations such as carbon pricing, methane and flaring regulation, and green building and clean car standards. Positive examples to build on include supporting flaring regulation like AllianceBernstein, CalSTRS, and JP Morgan Asset Management, advocating for methane regulation like BNP Paribas and Legal and General Investment Management, and participating in coalitions like the CEO Climate Dialogue.

Morgan Stanley has sent a powerful message to the American banking world, its shareholders, and its clients. How Wall Street responds will impact the health of global economy for decades to come.

Follow Ben on Twitter

Follow Gabe on Twitter