The Ukraine crisis could impede banks from dropping fossil fuels

More than 100 of the world’s biggest banks have said that they will stop financing sources of greenhouse gas emissions by 2050. Yet most continue to lend billions of dollars annually to fossil fuel companies.

In total, the world’s 60 top fossil-fuel bankers have lent $4.6 trillion to the industry since the 2015 Paris Agreement was signed, according to a March 30 report by environmental groups. And while some banks are rolling out new policies to accelerate their shift into greener forms of lending, the war in Ukraine and resulting global clamor for more oil and gas are likely to throw a wrench in the works.

The report confirms that US banks are the top supporters of fossil fuels, and finds that total finance is increasing for some sub-sectors, including tar sands and Arctic drilling, that are especially damaging to the environment. The leading recipients of finance include companies like ExxonMobil and Saudi Aramco; their plans to expand drilling operations are beyond what the International Energy Agency says can be compatible with the Paris Agreement.

“There is a massive gap between climate pledges made by banks and their financing to the energy sector,” says Lucie Pinson, executive director of Reclaim Finance, a French nonprofit that co-authored the report. “Most banks are just making a pledge to take action later.”

Banks are taking baby steps on climate change

Banks are a crucial piece of the climate puzzle. If they close off the tap to energy companies that refuse to adopt science-based transition plans, the cost to produce fossil fuels will rise and alternatives will become more competitive. Meanwhile, some economists say, banks should shield themselves and their customers from the risk that fossil fuel companies will default once that transition happens.

In October 2021, Banque Postale in France set a new bar by becoming the first to set a deadline, 2030, to completely exit the oil and gas industries. On March 23, ING in the Netherlands said it would immediately end financing for fossil fuel projects (although it will still provide general corporate loans to fossil companies). Some smaller banks have already gone fossil-free.

As more green investment opportunities crop up, new financial regulations roll out, and younger staff push their bosses for change, banks are reaching a breaking point in their relations with energy companies, said James Vaccaro, executive director of the Climate Safe Lending Network, a group of like-minded bankers and activists.

“Even though this report is disheartening, the philosophical objections have all been dismantled,” he said. “There are now a significant number of people within banks who know they can’t be doing this stuff much longer.”

Ukraine crisis will pressure banks to increase fossil fuel lending

Still, most bank managers think it’s best to remain invested in fossil fuel companies to maintain leverage and help them finance their transitions.

In the immediate term, oil and gas companies continue to be a profitable investment, and banks have an interest in maximizing their profit from the sector before it dries up. That’s especially true now: Although most US and European banks were quick to withdraw from Russia after it invaded Ukraine (and in so doing, demonstrate that rapid divestment of toxic assets is possible), the crisis has politicians begging for more drilling.

That means a lucrative opportunity for fossil financiers that will likely slow progress on climate, especially when most — even those with long-term net-zero targets — don’t currently have policies to exclude oil and gas. Even before the war, when natural gas was already in short supply in Europe, some banks carved out loopholes in their climate policies for Europe-based drilling.

“There is a mad dash for gas going on, and I think it’s going to be a real test for the banks,” Vaccaro said. “How are you going to respond to this?”

In addition to fossil exclusion policies, banks must stop pushing against policies like corporate climate risk disclosures, Pinson says. All of the top fossil banks remain members of trade groups like the US Chamber of Commerce that continue to lobby against climate legislation.

Meanwhile, shareholder resolutions are on the table at Citi, JPMorgan, and other top banks that ask for financing to be aligned with the IEA’s net-zero pathway, which rules out any investment in new drilling. But those resolutions are non-binding, and executives don’t always heed them.

Ultimately, fossil fuels make up a relatively small portion of most banks’ total portfolios — about 8% on average across the banks profiled in the Reclaim Finance report. So leaving them behind shouldn’t be fatal to the bank’s revenue, Vaccaro said, especially once alternatives start to look more attractive.

“You’re driving with a handbrake on into the market of the future,” Vaccaro said. “It doesn’t matter how profitable that cash cow was. Now you’re just dragging it along the road with you.”

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