Despite warnings from banks’ own economists about the threat of climate change, institutions around the world continue to invest heavily in the fossil fuel industry. As of 2019, the global financial system supported emissions-producing activities capable of raising temperatures to double the limit required to prevent the most catastrophic effects of warming.
However, impact investors continue to push banks to end their financing of fossil fuel-extracting companies. The growing fruits of their efforts point the way toward further success.
Investors Dial Up the Pressure
Europe’s biggest bank announced earlier this year that it would wind down its support of the coal industry—HSBC committed to meeting this goal in the developed world by 2030 and in the developing world by 2040. The move came in response to a shareholder resolution filed by 15 investors managing around $2.4 trillion in assets and working with environmental lobby group ShareAction; they withdrew the proposal after the bank’s announcement.
JPMorgan Chase is the largest source of fossil fuel financing globally; its investments have averaged more than $67 billion since 2015. With the signing of the Paris Agreement, the bank responded to shareholder pressure and in April announced a $2.5 trillion commitment over the next 10 years aimed at renewable energy, clean technology projects, and sustainable development. The bank had also previously announced a commitment to reduce its financing of emissions-related activity.
However, critics say that those moves do not go far enough. For example, they point to the bank’s failure to disclose greenhouse gas emissions financed by its loans and investments. Last year, shareholders narrowly defeated a proposal mandating such disclosures.
Another case in point is Barclays, which has helped arrange more fossil fuel financing than any bank in Europe. In 2020, 11 institutional shareholders filed a resolution demanding that the bank phase out investment in companies not aligned with the Paris agreement. That resolution marks the first time a European bank faced such shareholder actions. The measure failed to pass, though it prompted the bank to reveal plans to cut its emissions to zero over the next 30 years. Shareholders also rejected a second attempt this year.
Banks Face Long Road to Change
Banks that embrace fossil fuel-free investments may find that doing so involves many complexities. As a result, the process is unlikely to happen quickly. According to a KPMG report, “They can’t just flick a switch.”
For example, organizations may have significant resources wrapped up in profitable fossil fuel financing. The shift to investments in renewable energy and other low-carbon industries requires balancing separate needs: undergoing the transition swiftly against meeting fiduciary duties. Divestment may also result in ripple effects; although cutting off financing of coal mines could improve a bank’s carbon disclosures; it could also lead to mine closures and increases in unemployment.
The pressure banks face to phase out investments in emissions-producing sectors may only just be starting to bear fruit. Yet these successes spotlight opportunities for progress—and impact.