Fossil fuel expansion will be the litmus test for banks’ net-zero promises

Civil society research groups in the United States and Canada are determined to hold the industry’s collective feet to the fire

sustainable finance
Photo by Arild/Flickr

Civil society organizations are gearing up to hold financial industry players accountable on the lofty commitments they made at COP26 in November.

Many of the world’s biggest banks face the enormous challenge of realigning their entire loans and investment operations in the coming years to put themselves on a credible path to achieve net-zero carbon emissions by 2050.

“We want to see whether they are requiring all their clients to actually disclose their [greenhouse gas emissions],” said Danielle Fugere, CEO at As You Sow, a San Francisco–based shareholder advisory service, in an interview. “Ultimately, best practices come down to are we seeing year-over-year changes in their capital flows?”

Under the Glasgow Financial Alliance for Net Zero forged for COP26, the banks have committed to not only decarbonize their portfolios but to adopt a transparent and rigorous short-term strategy that ensures they meet that 2050 target. The alliance, led by former Bank of England governor Mark Carney, comprises separate agreements for various financial sectors.

The banking agreement includes many of the largest financial players in North America, including JPMorgan Chase, Citigroup Inc., Royal Bank of Canada and Toronto-Dominion Bank.

Last week, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) released the results of a pilot study on climate-related risk scenarios conducted with four Canadian insurance companies and two banks. OSFI said it will issue draft guidance for climate risk management for federally regulated financial institutions later this year.

All of the scenarios modelled by the government agencies and financial institutions showed that this transition will “entail important risks for some economic sectors,” a press release about the pilot study said. “Mispricing of transition risks could expose financial institutions and investors to sudden and large losses. It could also delay investments needed to help mitigate the impact of climate change.”

There is, unsurprisingly, considerable skepticism as to whether big North American banks can meet climate-related goals by weaning themselves off the fossil fuel sector and instead focusing on the loans and investment needed to finance the transition to a net-zero economy.

We want to see whether they are requiring all their clients to actually disclose their [greenhouse gas emissions].

-Danielle Fugere, CEO at As You Sow

Civil society research groups in the United States and Canada are determined to hold the industry’s collective feet to the fire. On December 16, Investors for Paris Compliance, a Canadian advocacy organization, released a “best practices” report that aims to guide not only banks but their shareholders, who are increasingly challenging business-as-usual practices at annual meetings.

The report calls on banks to put in place policies that will allow them to cut the carbon emissions of companies they finance by half by 2030, and to immediately end financing for new fossil fuel projects. The banks should adopt science-based targets for 2030 – aligned with the goal of limiting the average global temperature increase to 1.5°C above pre-industrial levels – and tying compensation to progress on meeting the climate goals.

The report notes that the world is already seeing enormous costs from extreme weather events related to climate change, most recently with the catastrophic flooding in British Columbia and the searing heat and drought experienced throughout western North America last summer.

“Climate impacts are now material to investors and [are] set to become even more so,” it says. Banks “fail investors” when they finance that worsening climate picture, it adds.

In the United States, organizations such as the Interfaith Center on Corporate Responsibility; Boston Common Asset Management, an ESG-focused investor; and As You Sow plan to engage with the signatories of the net-zero agreement both directly and at shareholder meetings to press them on implementation.

Banks face risks from the physical impacts of climate change as well as from government policies and emerging technologies that will disrupt their big customers in the carbon-intensive sectors. Still, they continue to allocate new capital to finance coal, oil and gas companies.

The world’s 60 largest commercial and investment banks provided US$3.8 trillion in financing to the fossil fuel sector worldwide between 2016 and 2020, according to a report, Banking on Climate Chaos, produced by a coalition of environmental advocacy groups. JPMorgan Chase and Citi continued to lead that list last year, while RBC and TD banks were among the top lenders to fossil fuel companies.

While short-term profits from financing the fossil fuel sector can be alluring as oil and gas prices soar around the world, credit rating agencies are also warning banks that climate change is a “major threat” to financial institutions. Analysis from Moody’s Investor Services recently concluded that climate risk is becoming a key determinant of banks’ loan quality and creditworthiness.

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