More than 450 of the world’s banks they have engaged to a new initiative at the UN Climate Change Conference COP26 that is designed to decarbonize your investments. Overseen by former Bank of England Supreme Mark Carney, the banks and other financial institutions that are enrolled in Gfanz (Glasgow Financial Alliance for Net Zero) commit to reporting annually on the carbon emissions associated with the projects they lend to.
They also aim to provide trillions of dollars in green finance, while committing to net zero emissions across the board by 2050. Main signatories to the initiative, which was originally unveiled in April, include Citi, Morgan Stanley and Bank of America.
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While it is very encouraging to see many of the world’s leading banks committing to sustainable lending, it is hard not to be apprehensive. It’s certainly not the first opportunity they’ve had to decarbonize their loan books, and the results so far haven’t been impressive.
In 2019, the UN General Assembly enthusiastically launched its Responsible Banking Principles (PRB) with similar goals in mind. The banks that signed up agreed, among other things, to “work with their clients to promote sustainable practices” and to “align their business strategy” with UN Sustainable Development Goals and the Paris climate agreement.
Up to this pointMany of the world’s largest banks have not signed the PRBs, even though the principles have been the gold standard until now for committing to decarbonizing loans. The leading signatories are also a long way from meeting your requirements, not to mention Gfanz’s.
Banks can contribute to solving the climate crisis from two angles: their loans and their investments. On the investment side, we saw a turning point in 2020 when BlackRock, the world’s largest asset manager, announced that It would focus its investments on securities that focus on sustainability.
However, the loans are still in the early stages of their green transition. And since it is well accepted that it makes up the bulk of corporate finance, this area is critical to the decarbonization of the industry.
More than 200 International banks have signed the principles of responsible banking in the last two years, but many of the largest banks are not among 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 signatory to the PRBs 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 named and embarrassed for not complying with the principles.
To get an idea of the status quo, Look the lending practices of the three main signatory banks: Citi, ICBC and MUFG of Japan, during the years 2016-19. This covers the period immediately after the Paris Agreement up to the year the PRBs were signed. He may have expected that banks that were serious about their commitments would have cut high-carbon lending in this period.
I focused on borrowing from banks for fossil fuel extraction, because the data is readily available and because this is by far the top of the pyramid when it comes to carbon emissions. I also compared three other major banks that are not PRB signatories: Wells Fargo, JPMorgan Chase, and HSBC.
I found that Wells Fargo and JP Morgan were the largest global funders of these types of companies during that period (although Wells Fargo fell to third place in 2020). Neither of them signed the PRBs, although they are now both members of Gfanz. Both state in their annual reports that they are committed to the Paris climate agreement. Both reduced their total loans for fossil fuels each year from 2018 to 2020, by 57% and 23%, respectively.
Meanwhile, Citi was the third largest fossil fuel lender in 2016-19 despite being a signatory to the PRBs (and Gfanz), and reached second place in 2020. And MUFG and ICBC, which are also signatories to the PRBs, both grew their fossil fuel loans 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 despite not being a signatory to the PRBs (although it has also subscribed to Gfanz).
Six Banks and Fossil Fuel Financing 2016-19
From this, I don’t see any discernible sign that PRBs have so far made any difference in lending in this area. Despite the roar in the UN General Assembly, my concern is that this tiger is showing that it has no teeth, and there is reason to fear that Gfanz will follow the same path.
The way to follow
When PRB signatories lend money, they are supposed to conduct environmental impact assessments and measure greenhouse gas emissions from projects. This is not a minor issue considering that such work is beyond the traditional competencies of banks and will significantly affect their operating costs.
Signatories are also supposed to ensure that loans go to projects that are carbon neutral. This means that borrowers must commit to mitigation actions that last the entire life cycle of the project. It is part of the obligation of each signatory to ensure that said mitigation actions are carried out, by monitoring the project throughout its duration.
However, it is suspected that very little of this is currently happening on the ground. To change this, we would probably have to move to a scheme where PRBs are mandatory and binding.
Unfortunately, Gfanz doesn’t look like that scheme. Although the annual reporting requirements on carbon emissions are a step forward, nothing in the initiative is required either. Was also criticized in the weeks leading up to COP26 because members refused to agree to stop lending to fossil fuel projects this year. Instead, its goal is to cut its carbon emissions in half in a decade.
My own view is that it wouldn’t make sense to abruptly ban lending to non-green projects now, as we must avoid hitting harder banks that are traditionally more involved in high-carbon sectors. Instead, the loan books should be treated as a portfolio of projects in different shades of green, with a defined path towards green, but it should be mandatory for signatories.
It’s a shame Mark Carney and other banking leaders didn’t work to strengthen the PRBs instead of introducing yet another initiative. I am also concerned that Gfanz muddies the waters by combining investments and loans rather than focusing exclusively on loans. We don’t need any more roars; we need a tiger that really has some teeth.
We invite the banks mentioned in the article to comment on their lending activities in this area. MUFG sent us links to your declaration of carbon neutrality and environmental and social policy framework.
JP Morgan, Wells Fargo, Citi and ICBC declined to comment.
This story is part of The Conversation’s coverage of COP26, the Glasgow climate conference, by experts from around the world.
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