Banks risk becoming another fossil fuel villain in 2022

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As companies prepared for the COP26 climate summit in Glasgow last year, one of Europe’s largest banks released an update on how it plans to do its part to fight global warming .

Swiss group UBS said it had become a founding member of the new Net Zero Banking Alliance, a UN-united club of mostly Western banks committed to decarbonizing their portfolios.

“We will publish a comprehensive climate action plan later this year, setting science goals, including milestones,” UBS said. It was in April. But there was no new action plan at the end of the year. The bank says it is now targeting March.

One explanation for the delay is that the climate agenda was to be part of a larger strategic vision for UBS, which its new chief executive, Ralph Hamers, is due to unveil in February. But the mismatch also reflects a larger dilemma for the industry: the vast volume of work that banks face as they grapple with net zero liabilities expected to reach 2022 per year, when fossil fuel financing becomes more visible – and inconvenient – than ever before.

The 60 largest private sector banks in the world have invested more than $ 3.8 billion in the oil, gas and coal sectors since the 2015 Paris Agreement

“It’s a huge task,” says Jörg Eigendorf, Head of Communications and Sustainability at Deutsche Bank. Membership of the Net Zero Banking Alliance requires it to calculate and model the carbon footprint of a loan portfolio worth several billion euros, which it will disclose by the end of 2022.

“This will bring much greater transparency and control on the part of regulators, politicians, investors and the general public,” Eigendorf said.

Green financing

You might think that it won’t matter much, given the trend towards green financing. Renewables and other climate-friendly businesses received more bank bonds and loans than the fossil fuel sector for the first time in 2021, and more support is underway.

Deutsche Bank, JPMorgan Chase and HSBC are among more than a dozen banks whose annual green finance commitments now exceed their 2020 support for fossil fuels, according to Autonomous, a financial research firm.

The definitions of green funding may be generous, but the direction of the green journey seems clear – with one exception. Banks may be turning the taps on green finance, but they’re far from turning them off for fossil fuels.

The 60 largest private sector banks in the world have invested more than $ 3.8 trillion (3.3 trillion euros) in the oil, gas and coal sectors since the 2015 Paris Agreement, according to a study NGOs. And a lot has gone to oil and gas companies with big expansion plans.

Zero emissions

With no sign of rapid change, banks face a dual challenge of exposing their fossil funding to closer scrutiny – and accusations of climate wickedness – without showing how they could possibly pull it back.

In theory, the problem should be solved by a group like the Net Zero Banking Alliance, whose 98 members represent more than 40% of global banking assets. They must establish plans to reduce emissions to zero. The problem is brutal math.

Scientists have established that it is much safer to limit global warming to 1.5 degrees. Thus, human-made carbon emissions, much of which comes from the combustion of oil, gas and coal, are expected to be cut by almost half by 2030 and to drop to net zero by 2050. For Long story short: The world must quickly wean itself off fossil fuels, making up about 80 percent of the energy mix, and Ditch plans to widen more.

Banks have reduced their support for coal over time. But very few members of the net zero alliance have released detailed plans showing how and when they could also end their support for oil and gas – the rules give them several years.

An exception is La Banque Postale in France. In October, he announced that he would withdraw completely from the oil and gas industries by 2030, like his deadline for coal. Goldman Sachs, JPMorgan Chase and other alliance banks that have started releasing more detailed net zero plans have yet to follow suit.

They stand to lose more business than the French bank, but some analysts believe the loss in brown funding could be offset by green growth. A growing green industry’s growing demand for loans and other banking services could add up to an additional $ 2.3 trillion a year net for decades, according to Autonomous.

Capital investment

Privately, some bankers recognize the risk of sticking with companies determined to continue to generate lots of shows, but little bank income, especially if rival lenders start to establish themselves on profitable green turf. Others say it is risky to be a trailblazer without meaningful carbon pricing or other government policies to level the playing field on financing.

And what is the point of exiting listed banks from fossil fuels if less supervised private investors get involved? Private equity firms are estimated to have invested more than $ 1 trillion in the energy sector since 2010, mostly in fossil fuels, underscoring the next stage in the net zero financing battle.

“Listed banks are not the end of the problem,” says Mike Hugman, director of climate finance at the Children’s Investment Fund Foundation. Private equity investors should demand that all companies they support have meaningful climate action plans, he says.

Not so long ago, this idea would have seemed fanciful. But times change quickly. Just ask a bank. – Copyright The Financial Times Limited 2022


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