(Bloomberg) -- Global banks aren’t living up to targets to cut their financing of activities that are directly fueling climate change, according to a new study by the World Resources Institute.
The analysis, which looked at 25 of the world’s biggest lenders, found that “not only are banks off-track to meet net-zero targets, but many of their pledges are less ambitious than they seem at face value.”
“Despite progress, many banks have no or weak targets in key sectors,” said Anderson Lee and Amanda Carter, the two WRI researchers who wrote the report released on Wednesday. What’s more, “existing targets are not aligned with limiting warming to 1.5C,” they said.
The findings come as the finance industry grows more vocal in defending a business model it says should be focused on client preferences and profit-making, goals bankers say aren’t always aligned with protecting the climate.
Wall Street has also doubled down on warnings against a retreat from fossil fuels, with KKR & Co. co-founder Henry Kravis recently saying that climate activists who “would like to push a button and have no hydrocarbons” simply “don’t understand the facts.” Barclays Plc Chief Executive Officer CS Venkatakrishnan made a similar point, arguing that the world “can’t go cold turkey” on oil and gas.
At JPMorgan Chase & Co., CEO Jamie Dimon has called it “wrong” and “enormously naïve” to expect that fossil-fuel projects be dropped, while Goldman Sachs Group Inc. CEO David Solomon has made clear that oil and gas remain a “hugely important“ sector for his bank. Meanwhile, many of the same Wall Street firms are quitting climate alliances.
The development coincides with an increasingly tense political debate, with Republicans in the U.S. threatening to sue firms perceived to put climate policies above profits. The situation has enraged climate activists, whose response has been to try to disrupt Wall Street through large-scale protests.
“What we find is that, for most sectors, banks on average have not aligned their portfolio emissions reduction efforts to 1.5C pathways and do not expect to do so by 2030,” Lee and Carter wrote. “In other words, banks do not even plan to reduce their emissions as much as necessary — not to speak of actual implementation or follow-through.”
The WRI, which has been examining sustainable finance statements since 2019, said examples of banks failing to reach targets include the auto sector, for which reported portfolio emissions were on average 28 per cent higher than they should have been in 2022 to align with the goal of limiting global warming to 1.5C. It’s also getting harder to course-correct, with reported portfolio emissions set to be three times the benchmark by 2030, according to the WRI findings.
The study also shows that most of the banks analyzed still don’t include things like corporate finance or advisory services in their coal targets, or set thresholds for restrictions too high to have a meaningful impact.
“As a result, the phaseout policies aren’t comprehensive and many companies and activities which profit from coal aren’t affected,” Lee and Carter wrote.
What’s more, the WRI report cautions against taking banks’ headline numbers or announcements on climate goals “at face value.” Details requiring closer scrutiny include the timeline of fossil-fuel phaseout policies and whether capital markets activities are included, Lee and Carter wrote.
Without such details, it’s not possible to judge whether a bank’s commitment can “be considered high quality and credible,” they wrote.
The researchers tracked the portfolio emissions that banks reported from their activities in six key sectors — oil and gas, power, automotive, aviation, cement and steel — between 2019 and 2022, as well as their 2030 emissions reduction targets. They then compared their progress to decarbonization pathways which would limit global warming to 1.5C. Banks in the study included JPMorgan, Mitsubishi UFJ Financial Group Inc., Industrial and Commercial Bank of China Ltd. and BNP Paribas SA.
The finance industry has repeatedly called for greater government support in helping banks and investors align their business with climate-friendly goals. But Lee and Carter note that a number of those same banks have supported lobby groups that actively obstruct pro-climate legislation.
“On the part of banks, it is inconsistent to ask for climate-friendly public policy while at the same time supporting trade associations that oppose them,” they wrote. “This has been the case for some banks, particularly in the U.S.” While there’s evidence that banks have started reviewing the alignment of their trade groups with net zero, “more work is needed to ensure full alignment,” they said.
The International Energy Agency estimates that the world needs to invest about US$4 trillion annually by 2030 to generate the levels of clean energy required to achieve the necessary reductions in emissions. For the energy sector alone, Lee and Carter note that the IEA says 10 times as much needs to be invested in clean energy as goes into fossil fuels. The 10-to-1 target is currently far from reality, with the banks analyzed in the WRI study on average investing just 1.3 times as much in green finance as they do in fossil fuels.
“Backlash from special interests and political forces in the United States that oppose sustainability efforts has led some banks to retreat, at least publicly, from some of their climate commitments,” Carter and Lee said. “Banks need to reverse course and double down on their net-zero commitments — not only to meet their own climate goals, but also to profit from the new business opportunities tied to the climate transition.”
“Leaning into sustainable finance can also help protect banks against growing climate-related financial risks,” they said.
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