Major banks have been slow to act but it appears as thought they are moving away from dirty energy. Big lending institutions have have pledged to support emissions reductions consistent with the Paris Climate agreement, however, until recently their words have not matched their deeds.
Banks have been involved with sustainability for years and many have set sustainability investment goals. Almost ten years ago Bank of America and Wells Fargo each committed $50 billion for financing sustainable initiatives and green transport. In 2015 Citigroup announced that they would invest 150 billion in sustainability. Valerie Smith, director of corporate sustainability at Citigroup explained that they are responding to demands from their clients and their clients clients: “There is a momentum and focus on solving big global societal problems that everybody is rallying to,” Smith said.
In 2017, UNEP partnered with 11 global banks to encourage climate transparency in financial markets. And in 2018, UNEP came together with 16 of the world’s leading banks to publish “Navigating a New Climate“, a paper that reviews the risks associated with climate change.
A recent study released by Mazars and OMFIF revealed that 70 percent of central banks see climate change as a major threat. However, the 2019 Fossil Fuel Report Card suggests these acknowledgments were hollow. According to the report banks invested $1.9 trillion in fossil fuels after the Paris Climate Agreement was signed.
As observed by investors, banks are showing signs that they are distancing themselves from fossil fuels. They are increasingly refusing to finance fossil fuels in an effort to align their credit portfolios with the Paris Agreement.. They are changing course, due in part to pressure from climate organizers who are increasingly focusing on banks that finance fossil fuels. They are also responding to dimiishing return potential and the desire to minimize their exposure to risk.
The Paris Agreement puts almost a trillion dollars of fossil fuel assets at risk. The dangers of stranded assets were brought home last year when banks refused to refinance the $370 million debt owned by Bluewaters forcing investors to write-off the $1.2 billion dollar coal plant in Australia. Simon Nicholas, an energy finance analyst at IEEFA, thinks coal is becoming a toxic asset. “[T]he long-term future for coal-fired power plants is looking fairly grim and banks are responding to that — they don’t want to finance coal anymore,” Nicholas said.
HSBC, Europe’s largest bank was one of the first to announce that it would no longer finance oil sands projects or pipelines. HSBC is part of an ever growing list of European lenders that have stopped funding fossil fuels. Last summer Deutsche bank announced that it will not finance any new coal, oil, fracking, and oil sands projects. Nor will the bank finance Arctic oil projects. The Frankfort based German bank’s ban on oil sands includes extraction, production, transportation, processing, pipelines, and refineries. In 2020 all the major American banks (Goldman Sachs, Morgan Stanley, Chase, Wells Fargo, Citi and Bank of America) indicated they would stop funding oil and gas exploration in the Arctic.
Even Canadian banks, which are heavily invested in the fossil fuel industry, have begun moving away from certain types of fossil fuel projects. According to the Fossil Fuel Report Card, Canadian banks RBC, TD and Scotiabank are among the top ten fossil fuel financers in the world. Together they provided almost 70 billion to oil and gas companies in 2019 alone. The Bank of Montreal and CIBC have provided $42 billion in funding. Export Development Canada, a federal agency, spent more supporting fossil fuels than every other country in the world except China, according to Oil Change International. Canada is ranked last by the International Institute for Sustainable Development due to its financing of fossil fuels. However, even Canada’s dirty energy powered financial institutions are refusing to fund thermal coal projects and Arctic oil and gas extraction.
In October 2020 RBC was first major Canadian bank to refuse to fund oil drilling in the Arctic refuge. As of December all of Canada’s major financial institutions were on board. This includes Scotiabank, Royal Bank of Canada (RBC), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and Toronto Dominion (TD).
TD has committed to a global effort of 88 banks and financial institutions to standardize assessments of their carbon exposure. TD has promised to align with the Paris agreement and achieve carbon neutrality by 2050. The bank has also pledged to invest $100 billion in renewable energy by 2030. Export Development Canada has committed to reducing the carbon intensity of its investments and it has provided $3/5 billion to clean energy technology companies.
Some smaller banks may try to fill the void but the economics of investing in fossil fuels are risky and this is particularly true of Arctic oil which requires oil prices to be at least $80 a barrel. The current price is around $52 a barrel and even optimistic forecasts suggest that oil will not exceed $70 a barrel in the next couple of years.
The Mazars study indicates that central banks and auditors are responding to the climate crisis and the report anticipates that we will see widespread inclusion of climate considerations going forward.