Why investors should support climate policy: three myths debunked

A prediction: 2021 will be the year that Wall Street rethinks its relationship with K Street. With corporate political spending and lobbying under increasing scrutiny and a new administration advancing financially material, government-wide climate action, financial institutions have good reason to reassess their climate lobbying.

While some banks and asset managers have pushed for climate-friendly financial regulations, the finance community has traditionally taken a hands-off approach to climate policy advocacy and avoided lobbying for net-zero aligned legislation or regulation of carbon-intensive sectors.

This is a mistake. Voluntary actions by companies to reduce emissions are woefully inadequate to reduce portfolio-wide climate risk. If investors want to successfully manage climate risks and opportunities, they have to do more than ask for better ESG performance and climate disclosure. They must actively support the public policies needed to achieve net zero emissions by 2050. That means abandoning three misguided but entrenched industry beliefs about climate policy advocacy ― myths that have dissuaded many investors from supporting policies that are in their own financial interest.

Myth # 1: The finance community lacks credibility on climate change

This assumption underestimates both the impact of climate change on investors and the value and legitimacy of investor input on climate policy.

The systemic nature of climate change necessitates Wall Street engagement. As the Commodities Futures Trading Commission warned last fall, “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” Or as BlackRock CEO Larry Fink wrote a year ago, “Climate risk is investment risk.” How federal and state governments address these risks will directly impact banks and asset managers, especially those exposed to carbon-intensive sectors.

Moreover, financial acumen is needed to shape and advance bold new policies that help put capital to work in climate-friendly ways. Given the importance of private markets to achieving the Paris Agreement, investors, regulators, and elected officials would benefit from speaking to one another about climate.

And increasingly ― as the Head of ESG at Ares Management Corporation, Adam Heltzer, said on the latest episode of Degrees ― the financial ecosystem understands that climate is a critical part of business.

For example, Climate Action 100+’s over 500 investor members with $52 trillion in assets under management already evaluate companies’ GHG reduction targets, net zero transition plans, and climate lobbying. These efforts showcase investors’ growing expertise on climate and decarbonization ― knowledge that could inform government regulation. Wall Street can still do more to integrate climate into its core business. But claiming that investors lack sufficient standing to engage policymakers on climate ignores the substantive, industry-specific climate analysis taking place at leading financial institutions and skirts firms’ responsibility to asset owners to reduce climate risk.

Myth # 2: It’s not investors’ role to advocate for climate policy

The assumption that “fiduciaries can’t become vehicles for political advocacy” mischaracterizes investor climate engagement as political rather than financial.

Investors can and should support climate policy not to further an ideological agenda but to meet their fiduciary duty. Numerous studies from both academics and investment professionals have shown that climate risk is material to financial returns. Companies that score higher on ESG metrics tend to outperform their competitors that score lower, while climate-integrated funds generate higher returns than their climate-agnostic counterparts.

Lobbying for climate policy helps banks and asset managers further reduce risk and construct more resilient investment portfolios. These actions are consistent with financial institutions’ legal obligations.

Investors who remain concerned about the politicization of their business can establish clear principles to define the scope of their climate advocacy. Prioritizing policies based on projected emissions reductions and Paris alignment can help banks and asset managers lobby in a manner consistent with their clients’ interests.   

Myth # 3: Supporting climate policy hurts our business

This assumption overlooks the financial benefits of backing net zero aligned government action.

As BlackRock CEO Larry Fink noted in his 2021 letter to CEOs, “The climate transition presents a historic investment opportunity.” Major financial institutions have begun to commit to net zero financed emissions not simply to help the planet but to maximize returns in a rapidly shifting global economy.

Reaching these net-zero goals, though, depends on strong climate policy. Financial regulation can push banks and asset managers to integrate climate more holistically into their investment decisions, but it cannot by itself make emerging technologies cost-competitive with carbon-intensive alternatives.

Capital needs somewhere to flow, and Wall Street needs a pipeline of investable projects to capture the opportunities presented by the energy transition. Smart climate policies can unlock this growth potential. With government investment in innovative climate solutions and strict emissions limits in sectors like oil and gas and road transportation, banks and asset managers can reach their financed emissions targets without shouldering undue risk.   

Advocating for climate policy is in investors’ best interest. It’s time for them to come to the table.

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