Latest initiative from the world’s largest banks at COP26 is a step backwards – Philippine Canadian Inquirer
More than 450 banks around the world have committed to a new initiative of the United Nations Conference on Climate Change COP26 which aims to decarbonize their investments. Overseen by former Bank of England supremo Mark Carney, banks and other financial institutions signatories to Gfanz (the Glasgow Financial Alliance for Net Zero) are committed to reporting annually on the carbon emissions associated with the projects to which they lend.
They also aim to provide billions of dollars in green financing, while committing to net zero emissions by 2050. Main signatories at the initiative, initially unveiled in April, include Citi, Morgan Stanley and Bank of America.
While it is very encouraging to see many of the world’s largest banks engaging in sustainable lending, it is hard not to be apprehensive. This is certainly not the first opportunity they have to decarbonize their loan portfolios, and the results so far have not been impressive.
In 2019, the United Nations General Assembly exuberantly launched its responsible banking principles (PRB) with similar goals in mind. The banks that have joined have made a particular commitment to “work with their clients to encourage sustainable practices” and to “align their business strategy” with United Nations Sustainable Development Goals and the Paris climate agreement.
Until there, many of the world’s largest banks have not signed the PRBs, even though the principles have until now been the gold standard for committing to the decarbonization of credit. The main signatories are also far from meeting their demands – let alone those of Gfanz.
Banks can help solve the climate crisis from two angles: their loans and their investments. On the investment side, we saw a tipping point in 2020 when BlackRock, the world’s largest asset manager, announced that it would focus its investments on securities focused on sustainability.
However, credit is still in the early stages of its green transition. And as it is well accepted that it constitutes the majority of corporate finance, this area is decisive for the decarbonization of the industry.
Well over 200 international banks have signed on to responsible banking principles over the past two years, but many of the biggest banks are not part of them. Of the top ten banks (by market capitalization), only Citi, Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China are signatories. Six others – JPMorgan Chase, Bank of America, China Construction Bank, Wells Fargo, Morgan Stanley and China Merchants Bank – are not on the list.
I must stress that being a PRB signatory is a limited commitment. Signatories have four years to comply with the principles. Even then, everything is voluntary and non-binding, so the signatories are not penalized or even appointed and humiliated for not living up to the principles.
To get an idea of the status quo, I watched the lending practices of three major signatory banks – Citi, ICBC and MUFG of Japan – for the years 2016-19. This covers the period immediately after the Paris Agreement until the year of signature of the PRBs. One would have expected that banks that were serious about their commitments would have reduced their carbon-intensive lending during this period.
I focused on bank lending for fossil fuel extraction, because the data is readily available and because that is really the top of the pyramid when it comes to carbon emissions. I also compared three other major non-PRB banks: Wells Fargo, JPMorgan Chase, and HSBC.
I discovered that Wells Fargo and JP Morgan were the world’s largest financiers of such companies during this period (although Wells Fargo fell to third in 2020). Neither has signed the PRBs, although both are now members of Gfanz. Both state in their annual reports that they are committed to the Paris climate agreement. The two reduced their total fossil fuel loans each year from 2018 to 2020, by 57% and 23% respectively.
Citi, meanwhile, was the third largest fossil fuel lender in 2016-19 despite being a signatory to PRBs (and Gfanz), and reached second in 2020. And MUFG and ICBC, which are also PRB signatories, both increased. their loans to fossil fuels during the period. MUFG is also a member of Gfanz, although neither ICBC nor any of the other Chinese banks are part of the new initiative. Also note that HSBC was not a major lender for fossil fuel projects although it was not a signatory to the PRBs (although it also joined Gfanz).
Six banks and fossil finance 2016-19
From this, I see no discernible sign that PRBs have so far made a difference in lending in this area. Despite the roar of the UN General Assembly, my concern is that this tiger will turn out to be toothless – and there is concern that Gfanz is following the same path.
The path to follow
When PRB signatories lend money, they are expected to carry out environmental impact studies and measure greenhouse gas emissions from projects. This is not a minor problem as such work goes beyond the traditional skills of banks and will significantly affect their operational costs.
Signatories are also expected to ensure that loans go to carbon neutral projects. This means that borrowers must commit to taking mitigation measures that last the life of the project. It is part of the obligation of each signatory to ensure that such mitigation actions are carried out, monitoring the project throughout its duration.
Yet, it is suspected that very little is happening on the ground at the moment. To change this, we would probably need to move to a regime where PRBs are mandatory and binding.
Unfortunately, Gfanz does not look like this pattern. While the annual carbon emissions reporting requirements are a step forward, nothing in the initiative is mandatory either. It was also criticized in the weeks leading up to COP26 because members refused to agree to end lending to fossil fuel projects this year. Instead, they aim to halve their carbon emissions within a decade.
In my opinion, it would make no sense to abruptly ban lending to non-green projects now, as we need to avoid hitting harder on the banks that are traditionally the most involved in carbon intensive sectors. Instead, loan portfolios should be treated as a portfolio of projects in different shades of green, with a set trajectory towards greener – but this should be mandatory for signatories.
It is a shame that Mark Carney and other banking executives did not work on strengthening PRBs rather than come up with another initiative. I’m also worried that Gfanz is muddying the waters by combining investing and lending rather than just focusing on lending. We don’t need more roars; we need a tiger that actually has teeth.
We invited the banks mentioned in the article to comment on their lending activities in this area. MUFG has sent us links to its declaration of carbon neutrality and environmental and social policy framework.
JP Morgan, Wells Fargo, Citi and ICBC declined to comment.