Dilemma on Wall Street: Short-Term Gain or Climate Benefit?

Portfolio managers have conflicting incentives as the economic and financial risks from climate change become more apparent but remain imprecise.

A team of economists recently analyzed 20 years of peer-reviewed research on the social cost of carbon, an estimate of the damage from climate change. They concluded that the average cost, adjusted for improved methods, is substantially higher than even the U.S. government’s most up-to-date figure.

That means greenhouse gas emissions, over time, will take a larger toll than regulators are accounting for. As tools for measuring the links between weather patterns and economic output evolve — and the interactions between weather and the economy magnify the costs in unpredictable ways — the damage estimates have only risen.

It’s the kind of data that one might expect to set off alarm bells across the financial industry, which closely tracks economic developments that might affect portfolios of stocks and loans. But it was hard to detect even a ripple.

In fact, the news from Wall Street lately has mostly been about retreat from climate goals, rather than recommitment. Banks and asset managers are withdrawing from international climate alliances and chafing at their rules. Regional banks are stepping up lending to fossil fuel producers. Sustainable investment funds have sustained crippling outflows, and many have collapsed.

So what explains this apparent disconnect? In some cases, it’s a classic prisoner’s dilemma: If firms collectively shift to cleaner energy, a cooler climate benefits everyone more in the future. But in the short term, each firm has an individual incentive to cash in on fossil fuels, making the transition much harder to achieve.

And when it comes to avoiding climate damage to their own operations, the financial industry is genuinely struggling to comprehend what a warming future will mean.