Stockholm (NordSIP) – The multiple alarm calls about the climate crisis in recent years often refer to the fact that all of the money needed for the low-carbon transition is already out there, it just needs redirecting. While publicly-listed securities have long been scrutinised through an ESG lens, the environmental impact of banks in distributing capital via loans is less visible, hence the rather belated formation of the Glasgow Financial Alliance for Net Zero (GFANZ) two years ago. Although the intention appears good and banks’ climate reporting has improved, there is still far too much lending activity directed towards fossil fuel projects. It now appears that banks are also sweeping other significant parts of their business under the ESG carpet, according to a new study by non-profit group ShareAction.
Don’t arrest the getaway driver?
The so far luke-warm impact of GFANZ net-zero targets is compounded by the fact that they are characterised by an overwhelming focus on lending, largely ignoring capital markets facilitation. The latter refers to activities where banks do not supply the capital, but rather advise on transaction pricing, structure and process while providing services related to deal arranging and marketing. Banks might argue that as facilitators they are not directly responsible for the underlying projects’ carbon emissions. The same argument could be used by a bank robbery getaway driver, but that tends not to stand up in court. Similarly, ShareAction argues that banks have significant influence over – and full knowledge of – the terms and conditions of the deals they facilitate, and as such can play a crucial role in improving their climate-friendliness, assuming they are serious about their own net-zero commitments.
Cake and eat it too
Some attention is being paid to this discrepancy and a handful of banks have already put in place net-zero targets for capital markets facilitation. However, there is not yet an agreed common methodology and according to ShareAction, efforts to implement lower weightings and shorter applicable time periods could lead to banks seriously under-reporting their climate impact for the foreseeable future. Rather tellingly, banks seem comfortable to account for 100% of their capital markets facilitation when it refers to green financing but propose weights as low as 17% when it comes to carbon emissions. Is this a case of wanting their cake and to eat it too? A working group within the Partnership for Carbon Accounting Financials (PCAF) is working on setting a standard methodology for reporting on facilitated emissions, but the arguments over weighting and time periods continue. The PCAF ran two consultations on these matters, and so far appears to have settled on year-of-issuance reporting rather than the life of the financed project or a fixed 5-year period. The debate over weightings is ongoing, with banks citing capital market volatility, potential double counting and their lower responsibility as facilitators among the arguments for lower weightings.
Bank shareholders need to up the pressure
ShareAction maintains that there are perfectly workable alternative methodologies that overcome these obstacles, but these have been excluded by the PCAF. One that successfully addresses the time-period problem has already been implemented by US bank Wells Fargo. ShareAction also points to several banks that have opted for a 100% weighting, including Goldman Sachs and JP Morgan Chase. It argues that properly including all facilitated emissions in net-zero targets may require additional reporting, but that this is worth the extra effort on banks’ part, given their major role in the transition. If the watered-down proposals do finally get adopted by the PCAF, institutional investors should include this question in their engagement efforts. Otherwise, this whole slice of banking activity will be quietly swept under the carpet, instead of being used to contribute to urgent climate change mitigation.
