Paul Hodgson: US climate action – Net Zero financing

A flurry of reports from the CFTC, IEEFA and Ceres, commentary from As You Sow, as well as net zero announcements from banks indicate that pressure is growing on US financial institutions to address their environmentally harmful investments now

“Banks are not on that CA100+ list [of the world’s largest polluters] which is something we disagree with, though some of them have joined as asset managers, JPMorgan included.” This was US shareholder advocate As You Sow’s energy programme manager Lila Holzman’s comment on the November announcement that global investor group Climate Action 100+ had expanded its list by an additional nine companies.

Her comment came on the heels of JPMorgan’s announcement in October this year that it was adopting a financing commitment that would bring it into line with the Paris climate accord. This followed closely on an announcement by Morgan Stanley that it would also reach net-zero financed emissions by 2050.

What precipitated these announcements?

Although they are likely to have been under consideration for some time, the kickstarter was likely a report from the US Commodity Futures Trading Commission in September, whose central finding was: “A sudden revision of market perceptions about climate risk could lead to a disorderly repricing of assets, which could in turn have cascading effects on portfolios and balance sheets and therefore systemic implications for financial stability.” The report also noted that US financial regulators already had broad powers to force banks and financial institutions to make the disclosures necessary to understand their exposure to climate risk.

 It called for these regulators to institute: oversight of systemic financial risk, risk management of particular markets and financial institutions, disclosure and investor protection, and the safeguarding of financial sector utilities. In a piece of massive understatement, the report observed: “Presently, however, these authorities and tools are not being fully utilised to effectively monitor and manage climate risk.” Now maybe, but not once President Elect Joe Biden takes office.

Then, in October, almost on the same day, another two reports came out addressing climate risk for banks. Ceres’ Financing a Net Zero Economy and IEEFA’s [Institute for Energy Economics and Financial Analysis] From Zero To 50: Global Finance Is Fleeing Oil and Gas.

While Ceres’ was more pessimistic – finding “greater exposure to risks associated with the transition to a low-carbon economy than has been disclosed” in banks’ syndicated loans business, IEEFA was more optimistic, noting that having fled coal, financial institutions were now getting “cracking on major oil/gas lending exits”.

The IEEFA report announced, for example, that “50 globally significant financial institutions have introduced policies restricting oil sands and/or oil and gas drilling in the Arctic including 23 to date this year”. And it expected more announcements to be made. Pulling back a little, it noted that not all announcements of restrictions were of the same quality. Only the world’s largest multilateral lender, the European Investment Bank had a policy that stated it will be out of all oil and gas by the end of next year.

“Tighter regulations on carbon-intensive projects is narrowing margins which means that risks are going up while the promised returns are looking increasingly elusive,” said the IEEFA report’s main author Tim Buckley in the press release announcing the report. “As well as avoiding reputational and climate risk, [t]here is no financial rationale for the world’s financial institutions to remain invested in fossil fuel companies developing yet more reserves.”

European financial institutions, no surprise here, have taken the lead in exiting fossil fuels, and have better policies, but, in the US, even Goldman Sachs, JP Morgan, Citigroup, Wells Fargo and Morgan Stanley had all released formal exclusion policies against Arctic drilling within the last four months.

The Ceres report found that over half of banks are exposed to climate transition risk, with potential losses from direct and indirect exposure because of the number of banks lending to each other. It then made 13 recommendations to mitigate risk, including: banks should assess all elements of climate risk and opportunity across their entire balance sheet and should disclose a portfolio risk assessment with backward and forward-looking stress testing, and they should “set and disclose financing portfolio targets that are aligned” with the Paris agreement.

As well as Lila Holzman, I also spoke to As You Sow’s president and chief counsel Danielle Fugere, who said: “The fact that the banks are setting net zero goals is a huge advance, even though there are still questions about what those goals mean and how they are going to be achieved. JPMorgan committing to align itself with Paris goals is significant because it has been the largest funder of fossil fuels. It’s sending a message to fossil fuel companies that it will become increasingly costly for them if they don’t transition.

“Back in the Dakota Access Pipeline days, when we started talking to banks, we raised the concern that they will continue to see protests about their fossil fuel financing. At that time, banks’ response was generally: ‘Don’t look to us, go talk to the oil and gas companies, we have no responsibility’. So the transition from the ‘hands off it’s, not our problem’ response to acknowledging responsibility is very significant. Fossil fuels may be around 5% of a bank’s total portfolio but recently they are likely to be 50% or more of loan defaults.”

I asked if she thought there was substance to the commitments. “It’s too early to tell,” she replied. “With JPMorgan, we believe the bank is working in good faith, but we will know more when it releases an interim target in the spring. It’s important at the moment for us to take the bank at its word; but shareholders’ next question must be ‘how are you going to achieve these goals and how quickly will the emissions you are financing be reduced?’.”

Holzman agreed: “Banks and fossil fuel companies alike have talked about renewables instead of talking about reducing emissions from the dirty stuff. That was our conversation with the banks for a while; they would reply ‘look at how much we are investing in green initiatives’. That’s nice, but that’s not the same thing as assuring that your impact is going to decrease emissions.”

Speaking of a shift in their activist campaigns, Fugere said: “We’re concentrating on banks this year. We will be asking Wells Fargo – Wells Fargo is one of the biggest funders of fossil fuels – and any other banks that haven’t committed to net zero to do so.” And she also pointed out that there were other ways for the CA 100+ initiative to influence the behaviour of finance, such as joining the initiative rather than being included on the list.

“Joining the CA 100+ does help increase the pressure on Blackrock,” she suggested. “It has certainly been held to a higher standard since it joined. Investors and other stakeholders are asking how it can justify, on the one hand, becoming a CA 100+ member while continuing to vote against proposals that have the backing of CA 100+ members?”