In letter, groups outline how the Fed has prioritized fossil fuels in its response to the pandemic
July 30, 2020, New York, NY — Today in a letter to the Federal Reserve (the Fed), 69 public accountability, environmental, economic justice, science, health, and religious organizations and private companies called on the Fed to stop purchasing corporate debt from the fossil fuel sector through its emergency facilities created to address COVID-19’s economic fallout.
“As the pandemic continues to exacerbate existing racial inequalities, the Fed should not be boosting the sector responsible for climate change, which will impact communities of color the hardest.” said Ericka Taylor, Popular Education Manager at Take on Wall Street. “The Fed fails in its financial stability responsibilities when it is supporting fossil fuel firms that are both deeply culpable in environmental racism and responsible for the growing climate crisis.”
The letter highlights the Fed’s failure to promote systemic financial stability by its continued investment in the debt of a sector responsible for the ongoing climate crisis. The organizations note that the Fed’s overweighting in the fossil fuel sector relative to market benchmarks, despite the increased risks to financial stability this creates, leads to questions about its independence and autonomy.
A recent report from nonpartisan think tank InfluenceMap shows that the Fed’s purchases through its Secondary Market Corporate Credit Facilities (SMCCF) are heavily overweight in oil, gas, and coal companies when compared to several market benchmarks.
According to InfluenceMap, roughly 8% ($748 million) of the Fed’s $9.5 billion of bond purchases through July 10 are in the fossil fuel sector. From that, $134 million has occurred through the direct purchase of corporate debt, the rest through the purchase of Exchange Traded Funds (ETFs) that track corporate debt markets. As of July 10, $124 million of the $748 million (17%) of purchased energy bonds were junk-rated, compared to $856 million of 9.3 billion (9%) for purchases overall across sectors.
“The Fed has previously warned of the financial risks of fossil fuels, as well as the monetary damages associated with environmental catastrophe. But the Fed is now investing public dollars in the debt of the same companies it warned others about,” said Collin Rees, Senior Campaigner at Oil Change International. “Instead of intensifying risks to financial stability by supporting the fossil fuel sector, the Fed needs to reduce systemic risk during this health and economic crisis and stop boosting the industry driving climate devastation.”
The signing groups called on the Fed to:
End the purchase of corporate debt from the fossil fuel sector through the SMCCF, the Primary Market Corporate Credit Facility, or any other emergency facility;
Analyze and disclose the climate risks of all firms represented in the emergency lending portfolio, including the level of greenhouse gas emissions;
Apply meaningful conditions on the credit facilities: a ban on participating companies issuing dividends or buying back its shares, restrictions on executive compensation, and the retention of workers well beyond making a “commercially reasonable effort”;
Focus on mitigating climate risks in the Fed’s role as regulator, instead of exacerbating them in the Fed’s role as lender of last resort.
In late March, 30 groups sent a letter to the Fed after the announcement of the facilities expressing concerns about the lack of conditions on public financial support for an industry whose practices harm the public good, as well as the absence of adequate analysis of climate financial risk in the management and strategy of this program.
In April, U.S. Senators Brian Schatz, Sheldon Whitehouse, Sherrod Brown (Senate Banking Committee Ranking Member), and six other Senators urged the Fed’s Board to consider the long-term financial risks associated with climate change, and warned that the U.S. financial system’s “blindness to climate financial risks means that our response to the current economic crisis will make a future climate crisis more likely.”
“Ultimately, through these debt purchases, the Fed is exposing the public to financial losses through credit risk, market risk, and operational risk due to exacerbation of the climate crisis,” said David Arkush, Climate Program Director at Public Citizen. “The Fed should be doing everything it can to slow and ultimately halt the freight train of economic risk bearing down on us because of the climate crisis. But with actions like these, it's shoveling coal into the boiler."
The full letter to the Fed and list of signers can be found here
The letter sent to the Fed by 30 groups in March regarding BlackRock’s involvement in COVID-19 relief funds can be found here
Senator Brian Schatz’s letter to Fed on Corporate Credit Facilities from April 20, 2020 can be found here
InfluenceMap’s Financial Analysis of the US Federal Reserve's Corporate Bond Market Interventions can be found here