2030 Finance | November 12, 2019

Laggards and leaders among biggest bankers of carbon

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Nov. 12 – When heading toward a cliff, first take your foot off the gas. U.S. and global bankers, including JPMorgan Chase, Wells Fargo and Citigroup, provided almost $2 trillion in new fossil fuel financing between 2016 and 2018, despite increasing awareness of climate risks.

“Shareholders own the residual risks of all loans, and are uniquely vulnerable to bank failures resulting from substantial correlated defaults, and systemic failure resulting from ‘business as usual,’” warns a new report from Boston Common Asset Management, which found a “systematic reluctance” by banks to press their high-carbon clients and reduce their risk. Needed: decarbonizing balance sheets, phasing out funding of fossil fuels and deforestation, and a top to bottom cultural shift within banks, including “a willingness to walk away from clients.” 

A small but growing cohort of banks across Europe, Japan and yes, the U.S. are taking the first steps to switch strategies to perhaps mitigate such risks. French banks are leading the way. Dutch, Swedish, and Australian banks are seeing green. “Regulation is really key,” Boston Common’s Lauren Compere told ImpactAlpha.

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Reputation may count as well. Citi, for example, has become the only major U.S. bank to sign the Principles for Responsible Banking, and is reporting its climate-related financial risk policies as per the Task Force on Climate-Related Financial Disclosure, or TCFD, the new bible of risk reporting.

Among countries, one of the most striking turnarounds is Japan. Mitsubishi UFJ Financial Group, Japan’s largest bank, has banned financing for new coal-fired power generation projects or coal from mountaintop mines. Nearly two dozen planned coal-fired power plants have been cancelled across Japan. Turning banks around on climate financing will go very slowly until it goes very fast.

Accounting is destiny

Boston Common found 37 of 58 banks reported substantive progress across climate-related strategy, risk management and opportunities. More than three-quarters are carrying out TCFD risk assessments. More than 30 banks are restricting lending or investment as a result of these assessments. “I have seen a lot of internal infrastructure being set up, new governance committees, a lot of use of scenario analysis and a lot of collaboration,” Compere told ImpactAlpha.

Bon travail 

President Macron is pushing France as a leader in green finance. Natixis has introduced “green weighting” to tip its allocations toward the objectives of the Paris climate agreement (see, “Retooling finance to accelerate the low-carbon transition).Last year, Crédit Agricole was the only bank to assess carbon emissions for its entire lending portfolio, using its P9XCA method.

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Leading laggard

 Citigroup is the third-largest funder of fossil fuels after JPMorgan and Wells Fargo, according to the Rainforest Action Network. But Compere noted Citi is part of the CDP Financial Sector Pilot, a founding signatory of the new Poseidon Principles focused on shipping, and is reporting under TCFD its climate-related financial risk policies. The U.S. Federal Reserve, which is not among more than 30 central banks in the Network for Greening the Financial System, held its very first climate-themed meeting last week.

Risk-disclosure in Japan

“We really started seeing trajectory change,” in the country, says Compere. Unknown a couple years ago, TCFD, the risk-reporting recommendations spearheaded by Michael Bloomberg and the Bank of England’s Mark Carney, are increasingly common (see, “Agent of Impact: Mark Carney”). Sumitomo Mitsui Financial Group is participating in the TCFD Consortium of Japan and is engaging clients on TCFD disclosure. The Japanese government convened corporations at a “TCFD summit”  in Tokyo last week.

Retooling finance to accelerate the low-carbon transition