Fossil fuel expansion will be litmus test for banks’ net zero promises

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Civil society organizations are gearing up to hold financial sector actors accountable for the lofty commitments they made at COP26 in November.

Many of the world’s largest banks face the enormous challenge of realigning all of their lending and investment operations in the coming years to put themselves on a credible path to net zero carbon emissions. 2050.

“We want to see if they require all of their customers to actually disclose their [greenhouse gas emissions]said Danielle Fugere, CEO of As You Sow, a San Francisco-based shareholder advisory service, in an interview. “At the end of the day, best practices come down to year-over-year changes in their capital flows?”

As part of the Glasgow Financial Alliance for Net Zero forged for COP26, banks have committed not only to decarbonizing their portfolios, but to adopting a transparent and rigorous short-term strategy that ensures they meet this 2050 target. The alliance, led by former Bank of England Governor Mark Carney, includes separate agreements for various financial sectors.

The banking deal includes several of the largest financial players in North America, including JPMorgan Chase, Citigroup Inc., Royal Bank of Canada and Toronto-Dominion Bank.

Last week, the Bank of Canada and the Office of the Superintendent of Financial Institutions (OSFI) released the results of a pilot study of climate-related risk scenarios conducted with four Canadian insurance companies and two banks. OSFI has announced that it will release draft climate risk management guidelines for federally regulated financial institutions later this year.

All the scenarios modeled by government agencies and financial institutions have shown that this transition “will entail significant risks for certain economic sectors”, said a press release on the pilot study. “A poor assessment of transition risks could expose financial institutions and investors to sudden and significant losses. It could also delay the investments needed to help mitigate the impact of climate change.

There is, unsurprisingly, considerable skepticism about whether major North American banks can achieve climate-related goals by weaning themselves from the fossil fuel sector and instead focusing on the loans and investments needed to finance the transition. to a net zero economy.

We want to see if they require all their customers to actually disclose their [greenhouse gas emissions].

-Danielle Fugere, CEO of As You Sow

Civil society research groups in the United States and Canada are determined to keep industry’s collective feet on fire. On December 16, Investors for Paris Compliance, a Canadian advocacy organization, released a “best practices” report that aims to guide not only banks, but also their shareholders, who are increasingly questioning the customary practices at annual meetings.

The report calls on banks to put in place policies that will allow them to halve the carbon emissions of the companies they finance by 2030, and immediately end financing for new fossil fuel projects. Banks should adopt science-based targets for 2030 – aligned with the goal of limiting the average global temperature rise to 1.5°C above pre-industrial levels – and link compensation to progress towards the targets climatic.

The report notes that the world is already bearing enormous costs from extreme weather events linked to climate change, most recently with catastrophic flooding in British Columbia and scorching heat and drought experienced across western North America l ‘last summer.

“Climate impacts are now important to investors and [are] should become even more so,” he says. Banks “disappoint investors” when they finance this deterioration of the climate, he adds.

In the United States, organizations such as the Interfaith Center on Corporate Responsibility; Boston Common Asset Management, an ESG-focused investor; and As You Sow plans to engage with signatories of the net zero agreement both directly and at shareholder meetings to urge them to implement.

Banks face risks from the physical impacts of climate change as well as government policies and emerging technologies that will disrupt their large customers in carbon-intensive sectors. Yet they continue to allocate new capital to finance coal, oil and gas companies.

According to a report, Banking on Climate Chaos, produced by a coalition of environmental advocacy groups, the world’s 60 largest commercial and investment banks have provided $3.8 trillion in financing to the fossil fuel sector in the world between 2016 and 2020. JPMorgan Chase and Citi remained at the top of the list last year, while RBC and TD banks were among the top lenders to fossil fuel companies.

While the near-term benefits of financing the fossil fuel sector may be alluring as oil and gas prices soar around the world, credit rating agencies are also warning banks that climate change is a “ major threat” to financial institutions. An analysis by Moody’s Investor Services recently concluded that climate risk is becoming a key determinant of loan quality and bank solvency.

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