BlackRock Inc, the world’s largest investment management company with about 8 trillion dollars of managed assets, plays a singular role in US President Joe Biden’s climate policy. Indeed, it looks like BlackRock and the Biden administration are married to each other.
The marriage was consumated, one might say, with the appointments and nominations of prominent BlackRock executives to high posts in the administration. All of them are typical of the “revolving door” phenomenon of leading personnel shifting back and forth between government and big finance.
Brian Deese, appointed by Biden to be director of the National Economic Council, served as a senior advisor to President Barack Obama for climate and energy policy. He played a key role in negotiating the Paris Climate Agreement. Afterward, his BlackRock biography says, he became “global head of sustainable investing” at BlackRock “identifying drivers of long-term return associated with environmental, social and governance issues.”
Wally Adeyemo, nominated as deputy secretary at the Treasury Department, was an advisor to and interim chief of staff for BlackRock chairman Larry Fink. Before joining BlackRock, Adeyemo served in various capacities in the Obama administration, including deputy national security advisor for international economics and deputy director of the National Economic Council.
Thomas Donilon, appointed as senior advisor to Biden, was chairman of the BlackRock Investment Institute. He served as national security advisor to then-president Barack Obama and was reportedly considered by Biden as a potential nominee to head the CIA.
Mike Pyle, appointed as chief economic advisor to Vice President Kamala Harris, was the chief investment strategist at the BlackRock Investment Institute.
Looking beyond these up-front appointments, a number of commentators have remarked that BlackRock seems to be taking the place of Goldman Sachs in Wall Street’s symbiotic relationship with the US government.
In fact, BlackRock has had a close relationship to the US government since the 2007-2009 financial crash, when the New York Federal Reserve Bank hired it to manage and liquidate the assets of the bankrupt Bear Stearns Co.
Last year, BlackRock was contracted again by the Federal Reserve to serve as executor of the Fed’s $750 billion corporate bond purchasing program. The New York Times refers to BlackRock as the “Mr Fix-it” of Wall Street.
What does this have to do with climate policy?
BlackRock is disliked by many climate activists, among other things because of its heavy investment in fossil fuels and other “dirty” things. They accuse Fink of trying to “greenwash” the company.
Political correctness has indeed become a very big business, which by its very nature has more to do with image than substance. But Fink’s 2020 conversion to climate activism signifies much more.
BlackRock is evidently positioning itself, as the world’s largest asset manager, to profit from the tectonic shifts in global financial flows that Biden’s climate policies are set to unleash. Other major players in Wall Street, London and elsewhere are following suit.
Will BlackRock, moreover, be called upon by the government to manage and liquidate stricken fossil fuel-based assets, as it did with Bear Stearns’s assets in the 2007-2009 financial crisis?
This time around, the sums could be a hundred times larger.
This brings us to the question: How might actions by the Biden administration, in the name of preventing a climate apocalypse, affect the stability of the financial system?
One can easily imagine scenarios for crises or even a meltdown of financial markets.
The most obvious would be a collapse of the “carbon bubble”: the mass of fossil fuel-based assets, many of which would become virtually worthless in the event the Biden government forced through a rapid transition to a “CO2-free” economy.
The second obvious risk is the collapse of the “green bubble” resulting from:
- Overbuying and speculation in climate-based financial assets;
- Overvaluations based on misjudgment of the sustainability and profitability of various renewable energy and low-carbon investments;
- Overestimation of the willingness and ability of governments to subsidize these technologies – especially in the event of an economic downturn.
Among other things, the real, longer-term cost of wind energy will almost certainly turn out to be far higher than investors believe.
Needless to say, the carbon and green bubble scenarios do not exclude each other.
It is difficult to estimate the size and risk of the green bubble. It currently enjoys widespread support from governments and will no doubt grow many times over under the Biden administration.
For the moment, the carbon bubble is vastly larger and poses more fundamental risks.
Trillions in stranded assets
Proponents of green policies have long warned that the failure of investors to take global warming seriously has led to a huge overvaluation of fossil fuel-linked assets – based on investors’ assumptions that growth in worldwide consumption of these fuels will continue unabated and governments will take no serious action to halt it.
Conversely, a rapid transition to CO2-free energy sources would leave behind a gigantic mountain of “stranded fossil fuel assets,” which will have to be written off because their underlying real value has evaporated. There’s already an abbreviation being bandied about in the jargon-loving financial industry: SFFAs.
Starting before the November 2016 US presidential election, there was considerable discussion in financial circles concerning “transition risk,” or financial risk associated with a transition away from fossil fuels.
A particularly prominent voice was the then-governor of the Bank of England, Mark Carney. In a now-famous September 29, 2015, speech at Lloyds of London, Carney stated::
Changes in policy, technology and physical risks could prompt a reassessment of the value of a large range of assets as costs and opportunities become apparent. The speed at which such re-pricing occurs is uncertain and could be decisive for financial stability…. While a given physical manifestation of climate change – a flood or storm – may not directly affect a corporate bond’s value, policy action to promote the transition towards a low-carbon economy could spark a fundamental reassessment… [A] wholesale reassessment of prospects, especially if it were to occur suddenly, could potentially destabilize markets, spark a pro-cyclical crystallization of losses and a persistent tightening of financial conditions.
Carney has been in the middle of the process of creating an international framework of agreements and financial arrangements in the direction of a “fundamental reshaping of financial markets” by climate policy.
In 2019, while still Bank of England governor, Carney practically called upon investors to drop their financial exposure to fossil fuel-connected assets. In a BBC interview on January 30 that year, he highlighted the threat to pension funds, warning that:
Up to 80% of global coal assets and up to half the world’s proven oil reserves could become stranded assets as the world moves to curb carbon emissions and [as] supplies of clean, renewable energy continue to replace fossil fuels.
What is the size of the carbon bubble?
Start with the most obvious component, state and private ownership of or extraction rights to proven reserves of oil, gas and coal. It is very roughly estimated that a 2% decline in demand for fossil fuels every year, required by the Paris Agreement on climate change would cause a loss of $25 trillion in future income from coal, oil and gas at present prices.
Not just investors but, especially, developing countries would be hard hit. A 2017 bulletin of the International Monetary fund, “Unburnable Wealth of Nations” states:
[I]f there are successful global actions to address climate change, poorer countries that are rich in fossil fuels will likely face a precipitous fall in the value of their coal, gas, and oil deposits. If the world makes a permanent move away from using fossil fuels, the likely result will be a huge reduction in the value of [those countries’] national and natural wealth.
That is just part of the story, however.
To get a vivid sense of the magnitude of the assets that will become stranded, one must take into account not only the fossil fuels themselves but also:
- coal mines,
- the oil and gas extraction industry,
- land values in regions of extraction,
- pipelines and pipeline construction companies,
- oil and LNG tanker fleets and tanker construction,
- harbor and storage facilities,
- fueling stations,
- coal yards,
- fossil fuel power and heating plants,
- coal-based steel plants,
- significant parts of the auto industry supply chains tied to production of internal combustion engines,
- and much, much more.
Some credible estimates say that 20-30% of the total market capitalization of the world’s stock exchanges is tied to fossil fuels. Whatever the actual figure, we can be sure that it will be more than sufficient to cause a financial meltdown if significant numbers of investors were suddenly to drop these asset categories.
Whether or not this will happen depends to a significant extent on perceptions of how fast and how far the Biden administration is willing to go.
So far Big Oil has shown no signs of panic. One could argue that the economic interests tied with fossil fuels are so deeply embedded in the political structure of the US, and of the world, that even the power of the US government would not be enough to defeat them.
According to that view, Biden is basically bluffing, that it’s just political talk and the promised end of the era of fossil fuels is not going to happen.
But how much are you ready to bet on that? Powerful forces within the financial community appear to be readying for a collapse of the carbon bubble – and intend to profit from it.
In fact, some voices argue in favor of deliberately provoking the collapse as soon as possible, before the carbon bubble grows even larger with massive amounts of investment continuing to flow into fossil fuel infrastructure worldwide. The collapse is inevitable, they argue, so better for it to happen sooner than later.
Financial losses from climate change are certain to be larger, is the key argument. Ever more frequent floods, fires, drought, extreme storms will be bad for many investments and especially bad for insurance companies.
How will investors place their bets in the coming period?
In reality, a transition away from fossil fuels – which are still the foundation of the world economy – can only occur gradually over decades. But market expectations can shift within minutes.
In his first weeks in office, Biden has sent strong signals that he means business about getting the world off fossil fuels, starting with the US itself. The signals include America’s return to the Paris climate agreement, termination of the Keystone XL pipeline project, a moratorium on new oil and gas leases on public lands, an instruction to federal agencies to purchase large numbers of electric cars and a declaration of intent to end fossil fuel subsidies.
The day after Biden’s January 27 Executive Order on Tackling the Climate Crisis at Home and Abroad was issued, Fortune Magazine wrote, “Oil and gas companies knew they would face a fight with President Joe Biden, who had campaigned on tackling climate change. Nobody expected fossil fuel to come under such an immediate attack.”
Jonathan Tennenbaum received his PhD in mathematics from the University of California in 1973 at age 22. Also a physicist, linguist and pianist, he is a former editor of FUSION magazine. He lives in Berlin and travels frequently to Asia and elsewhere, consulting on economics, science and technology.