Banks are incentivised to fund climate chaos. Here’s how to change that
As fossil fuel prices boom, the financial sector requires strict regulation to stop it from funding destruction
The world’s largest banks are investing billions into heavily polluting industries, despite publicly endorsing measures intended to combat the climate crisis.
The banking system is being financially incentivised to prioritise the still-profitable oil, gas and coal industries over long-term investments in emerging renewable technologies – and is likely to continue doing so without strict political oversight.
In March, a report entitled ‘Banking on Climate Chaos’ revealed that, despite the use of cynical PR tactics and attempts to ‘offset’ carbon emissions through carbon reduction initiatives, the 60 largest private banks in the world had poured $4.6tn (£3.8tn) into fossil fuels since the 2015 Paris Agreement.
Barclays Bank, according to the report, had provided the equivalent of £4.1bn for new fossil fuel projects between January 2021 and the COP26 summit in November 2021. JP Morgan Chase, however, was named as the most egregious polluter, with over $382bn in new fossil fuel investments between 2016 and 2021. The bank had set a number of misleading decarbonisation targets the previous year, pledging to reduce the intensity of its emissions, a measure that still permitted overall future fossil fuel investments to increase.
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Financial incentives for destruction
Due to government policies that have extended the longevity of fossil fuels, locking in future coal, oil and gas development, major banks are being incentivised to keep financing environmentally destructive sources of energy. This is in spite of a United Nations’ Intergovernmental Panel on Climate Change (IPCC) report in April that advocated for the “decommissioning and reduced utilisation of existing fossil fuel installations in the power sector, as well as cancellation of new installations”.
Indeed, resurgent post-pandemic energy demand, exacerbated by rising prices created by the Russian invasion of Ukraine, has made fossil fuel investment an attractive prospect for the financial sector. In May, Greenpeace predicted that companies are set to make an estimated £11.6bn windfall on UK oil and gas this year. Shell and BP made record profits in the first quarter of 2022, with Shell gaining £7.3bn, a tripling of the figures for the same period in 2021, and BP saw its profits double to £4.9bn.
The British government has remained reluctant to impose a windfall tax on these companies, eventually issuing a meagre levy of 25%, which coincided with an 80% tax break on new fossil fuel investment. The tax break was condemned by the Greenpeace political campaigner Ami McCarthy, who argued that “this nearly doubles the tax relief available to fossil fuel giants, meaning the more investment they make, the less tax they pay. The chancellor has chosen to turbo-charge climate destruction. This isn’t just a bad move, it is completely unjustifiable.”
Meanwhile, the Glasgow Financial Alliance for Net Zero (GFANZ), an organisation established at COP26 by former Bank of England governor Mark Carney, has been accused of greenwashing. This came after the revelation last month of controversial new loopholes for banks looking to join the alliance – which permit them to continue investing in heavily polluting energy sources. According to The Guardian, the criteria that GFANZ had developed alongside the UN’s Race to Zero initiative (set up to encourage companies to adopt net zero targets) permitted banks to maintain fossil fuel investments beyond 2023
The chair of the Net Zero Banking alliance called short-term divestment from fossil fuels ‘ridiculous and naive’
The original set of criteria developed by GFANZ has also faced criticism for failing to set stringent deadlines to phase out polluting investments, as financial institutions were permitted to make their own judgements on the carbon emissions resulting from their investments. A report published by the environmental campaigning NGO Reclaim Finance argued that “some GFANZ leaders seem keener to talk about why more fossil fuels are needed than to make serious efforts to pressure the industry to face the cruel but unavoidable maths of carbon-budget reality”.
Indeed, despite rhetorical commitments by Carney touting the urgency of rapid decarbonisation in the financial sector, senior figures associated with GFANZ have failed to substantively commit to it. Bill Winters, chair of the Net Zero Banking Alliance (NZBA), a UN-convened group affiliated with GFANZ, argued in an interview with CNBC in April that short-term divestment from fossil fuels was “ridiculous and naive” and would be “very disruptive” to the wider economy.
The financial sector has often looked to the oil and gas industry to accelerate economic recovery, purchasing bonds from oil and gas companies in an attempt to stimulate growth and productivity and to stabilise prices. Under a scheme known as the Corporate Sector Purchasing Programme (CSPP), which began in 2016, the European Central Bank (ECB) held assets from 38 major oil and gas companies, including Shell and Total, alongside assets from 10 corporations active in the coal sector. Analysis from Reclaim Finance stated that by 2019, 63% of assets purchased under the CSPP belonged to corporations with high greenhouse gas emissions, and fossil fuels accounted for 13.5% of the CSPP portfolio.
The CSPP has faced opposition from environmental organisations. In 2021, for instance, legal-focused environmental charity Client Earth sued the National Bank of Belgium for its complicity in implementing the programme. In a letter addressed to ECB president Christine Lagarde, Client Earth called on the ECB to realign its monetary policy with the EU’s environmental objectives.
Client Earth’s claims, however, were rejected by the Brussels Court of First Instance in December 2021, as the court concluded that no specific requirements existed for the ECB and the Belgian bank to assess the climate impact of buying corporate assets.
Protecting fossil fuel companies
The myriad of political, legal and economic barriers to accountability for banks complicit in funding dangerously polluting energy sources have protected the investments of powerful fossil fuel companies, to the detriment of the planet and the rights of those who will be disproportionately affected by climate breakdown.
Taking major banks into public ownership is an effective mechanism for ridding the financial sector of its addiction to fossil fuels. Under stringent regulatory oversight, banks could be compelled to meet social needs rather than pursue private profit, with their investments channelled into renewable energy and low carbon insulation. According to the New Economics Foundation, refinancing initiatives could enable private banks to borrow from central banks at low rates, incentivising them to support clean energy alternatives requiring ambitious, long-term investments.
An overhaul of the banking system has received political momentum – but it needs considerably more support from the government and wider community to create any real change. As part of Labour’s 2019 election manifesto, activists from the party launched ‘Labour for a Green New Deal,’ a programme inspired by US congresswoman Alexandria Ocasio Cortez’s climate plan, also called Green New Deal.
Labour argued that a public green investment bank could work alongside the government to coordinate the investment capacity needed to stimulate a green transition, stating in a 2021 finance report that “the bank’s mandate would focus not just on reducing carbon emissions, but also set meaningful and binding targets on what’s required to get there. A detailed understanding of what tackling the environmental and ecological crises looks like, and how we get there, would drive the bank’s mission.”
Despite major banks’ theoretical commitments to ensuring that their investment portfolios are compatible with decarbonisation, the financial sector remains in thrall to the fossil fuel industry, emboldened by policymakers’ persistent refusal to set limits on investments in oil and gas extraction. Left to its own volition, the financial sector will continue to be complicit in environmental degradation unless stringent mechanisms are put in place to ensure that it complies with net-zero obligations and divests from fossil fuels.
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