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IPCC Report Makes Clear that Banks and Insurers Must Stop Fueling Climate Chaos

By Hannah Saggau and Yevgeny Shrago

Yesterday, the Intergovernmental Panel on Climate Change (IPCC)—the UN body of the world’s leading climate experts—released a new report on climate change’s causes and impacts, identifying a rapidly closing window to avoid the worst-case scenarios. In the words of UN Secretary General Antonio Guterres, the report “is a code red for humanity.” Climate change is here, and its devastation will only increase without dramatic cuts in greenhouse gas emissions in the next decade. The Biden administration and financial institutions must act now to end their role in fueling the climate crisis and set the world on a concrete path to a 1.5°C limit to warming before it’s too late.


Key Takeaways from the IPCC Report

Climate change is happening now—the planet has already warmed 1.1°C since the 19th century.

Emissions, largely from fossil fuels and agriculture, have heated global temperatures by approximately 1.1°C since the late 19th century, and the consequences are already disruptive and sometimes fatal. The past few months alone have seen a slew of climate-induced disasters, from record-shattering heatwaves to devastating floods and wildfires that have killed hundreds and caused horrific ecological destruction. These disasters disproportionately harm the most marginalized populations—Black, Indigenous, people of color (BIPOC) and low-income communities—who have contributed the least to warming. It’s already too late to avoid many of these extreme weather events, and some impacts, like sea level rise, will continue regardless of emissions cuts.

Our window to limit warming to 1.5°C closes by the end of the decade.

It is still possible to avoid the most catastrophic climate harms. Limiting warming will require drastic, rapid cuts in greenhouse gases (GHG) to reach zero emissions. World leaders and corporations have ignored the warning signs for too long—and in the case of the oil and gas industry, covered up what they knew about climate change to continue profiting. At current emissions rates, the world’s carbon budget will be used up by 2034. If governments and corporations fail to dramatically curb emissions, warming will exceed 1.5°C and trigger even more catastrophic climate impacts than those occurring right now. If emissions zero out, heating will cease and the planet’s temperature can stabilize within a few decades. Governments and corporations that have the power to stop driving the climate crisis must act now. Every fraction of a degree of warming avoided translates to lives saved.


What this means for financial institutions and regulators

Financial institutions—banks, insurance companies, asset managers, and pension funds—and their regulators have a key role to play in keeping the planet livable. These corporations are driving the climate crisis by investing in and insuring the fossil fuel projects and companies largely responsible for GHG emissions. Support from financial institutions enables the construction of new and expanded fossil fuel infrastructure and allows existing fossil fuel infrastructure to continue polluting our planet. Financial regulators, meanwhile, have the power and responsibility to prevent a potential financial crisis by stopping these institutions’ risky lending and investments.

UN Secretary General Antonio Guterres sums up the implications of the IPCC report: “This report must sound a death knell for coal and fossil fuels, before they destroy our planet…If we combine forces now, we can avert climate catastrophe. But, as today’s report makes clear, there is no time for delay and no room for excuses.” 

Guterres also has a message specifically for financial institutions: “The climate crisis poses enormous financial risk to investment managers, asset owners, and businesses. These risks should be measured, disclosed and mitigated [emphasis added]. I am asking corporate leaders to…align their portfolios with the Paris Agreement.”


Financial Institutions

Taking the IPCC’s conclusions seriously means understanding that financing of emissions actually fuels the climate crisis. The report is clear that even fractions of a degree matter. When a bank funds new emissions or helps keep existing sources online, it incrementally increases the likelihood and magnitude of future climate impacts. With every fraction mattering, any investment in fossil fuels could increase the magnitude and likelihood of physical harms.

To stop contributing to the crisis, banks, insurers, and asset managers must phase out lending, investments, and underwriting in fossil fuels at a pace that matches the urgency of the problem. Many financial institutions have delayed meaningful climate action through pledges to reach net zero by 2050 without setting interim targets, distracted the public by focusing on disingenuous carbon “intensity” targets, or made excuses for their lack of any meaningful climate commitments. Meanwhile, until COVID, megabanks had invested more in fossil fuels every year since the Paris Agreement. These institutions are greenwashing: talking about sustainability while ignoring how their investment and underwriting portfolios drive rising temperatures. They must adopt real climate commitments.

The insurance industry, for example, provides insurance coverage to coal, oil, and gas projects and invests billions into fossil fuel companies. To date, 26 insurers have restricted their underwriting of coal, and some have committed to phase out coverage for the sector entirely. These policies all urgently need improvement in light of the alarm bells sounded by the new IPCC report. And the insurance industry on the whole has failed to reduce its support for the oil and gas industry, with only a few companies ruling out tar sands underwriting and only one major insurer adopting an oil and gas underwriting phaseout plan. Meanwhile, some insurers have made zero commitments to end or limit underwriting and investments in coal or any other fossil fuel.

Among them is AIG. The field of insurers for coal is narrowing, and the coal sector is feeling the squeeze in the form of rising premium costs and difficulty obtaining insurance for controversial projects such as the Adani Carmichael coal mine in Australia. This leaves AIG increasingly isolated as one of the few major insurers left to insure massive new coal projects. Yet, coal makes up less than 1% of AIG’s underwriting portfolio, underscoring the urgent calls for the insurer to end its coverage of coal. In its first ever “Environmental, Social, and Governance” report, the insurance giant makes claims of climate action while failing to adopt a single policy to curb its support for fossils.

To meet the urgency of the climate crisis and stop enabling it, AIG and the insurance industry must immediately end insurance for fossil fuel expansion and phase out their investments and underwriting in all fossil fuels in line with a 1.5°C limit to warming. Further, the insurance industry must ensure that clients respect and observe all human rights, including the right of Indigenous peoples to Free, Prior, and Informed Consent (FPIC), through robust due diligence and verification mechanisms. The IPCC report signals the insurance industry’s obligation to end its contributions to catastrophic climate change.


Financial Regulators

The IPCC report also highlights just how far behind U.S. financial regulators like the Federal Reserve Board of Governors (Fed), the Office of the Comptroller of the Currency (OCC) and state insurance regulators are in addressing the threat that the climate crisis poses to the financial system and the economy. The physical impacts that the report describes will devastate communities in ways that threaten the value of the assets that back most lending and investment. And the solutions the report calls for will strand trillions in fossil fuel investments by banks, insurers, and asset managers. While the Fed, the OCC, and a few state regulators have acknowledged that the climate crisis will create challenges for banks, their actions have not reflected the magnitude of the threat. 

The Fed and the OCC are charged with protecting the financial system, individual banks, and access to credit for communities. The climate crisis poses an immediate threat to all of these objectives. Yet Fed Chair Jerome Powell has repeated that it’s early days on climate, and declined to set a timetable for even the most basic protective measures. These kinds of delays are sadly typical of U.S. financial regulators. They took a hands off approach as the subprime mortgage bubble inflated, and found themselves doing chaotic damage control when it burst in 2008. The report lays out an even brighter set of flashing warning signs for the effects of the climate crisis than we had for the subprime bubble, and regulators must avoid the mistakes of the past. 

The report makes clear that regulators cannot wait to act until they have thoroughly analyzed and modeled the risks of the climate crisis. Those risks are too proximate to wait and will quickly escalate without immediate action. Instead, regulators should move forward on the assumption that a financial crisis is coming, even if they don’t know exactly when or where. That reality counsels a precautionary approach to managing climate risk. The regulators should identify known sources of risk, like excessive fossil fuel lending, underwriting, and investment, and find ways to reduce that risk. That approach will make banks and insurers more resilient to other threats that the IPCC report identifies that are harder to model and avoid. A precautionary approach also means actually reducing investment levels, instead of relying on hedging and insurance that potentially concentrate risk elsewhere in the system instead of removing it.

A precautionary approach also means reducing institutions’ financing of emissions. The IPCC report definitively links rising emissions and temperatures to the wave of climate catastrophes the world has experienced. It also emphasizes that every fraction of a degree matters for the magnitude of harm. That means that financing emissions directly contributes to worse catastrophes, growing financial risk and threatening the financial system. Taking this conclusion seriously means pushing banks and insurers to make lending, investment, and underwriting decisions in line with the carbon budgets laid out in this and subsequent reports. The Fed, OCC and others need to stop viewing the task of aligning finance with scientific imperatives  as climate policy and instead understand it as akin to reducing investment in poorly underwritten subprime mortgages, or any other assets that threaten the whole financial system.

Finally, the report implicates an issue where financial regulators have a shameful blind spot: racial discrimination. The 2008 financial crisis grew out of poorly policed predatory practices that targeted BIPOC communities, and those communities bore the brunt of the subsequent crisis. The report makes it clear that the climate crisis will have disparate impacts across geographies. It is almost certain that racist land use and lending decisions dating back more than a century also make these communities more vulnerable to climate impacts. The lingering economic effects of the failures of 2008 will only make it harder for these communities to adapt to excessive heat, wildfires, drought, and other harms. Banks and insurers may conclude the safest approach is to stop extending credit and coverage in communities most vulnerable to climate change, compounding the lack of resources available for climate adaptation. And as they phase out fossil fuel finance, they may leave communities dependent on fossil fuel sector jobs in the lurch. But regulators have a suite of tools to prevent banks and insurers from shutting off the flow of credit and coverage or taking advantage of BIPOC communities, along with lending powers that the Fed can deploy to fund communities and not just bail out banks. The regulators must do more now to fund community adaptation and a just transition, not wait to intervene until it’s time to pick up the pieces.

The IPCC report provides a stark picture of what might happen if financial institutions and the government don’t respond adequately to the challenges ahead. All of them must change their orientation, act boldly and not conservatively, and serve communities and not just profits. It may be more comfortable to continue operating under the old paradigm. But reality laid out by the report is stark: We need rapid, aggressive action to decarbonize our economy. Financial regulators and financial institutions can cooperate to actively steer the financial system to this new future, or they can watch it sail into the abyss.