Deciphering Wall Street's climate pledges

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Kate Mackenzie's Stranded Assets

Measuring a company's carbon footprint and determining whether it's reducing it has always been difficult. Agreeing on what emissions a bank or investment firm with thousands of different assets and clients is responsible for is a whole other challenge. If a lender extends a revolving credit facility to a diversified miner that has a small share of thermal coal in its portfolio, how much of the company's emissions is the bank actually funding? At what point should a bank that's truly committed to fighting global warming be prepared to lose its most polluting clients altogether? 

These are vital questions if you believe that banks' decisions can drive shifts in the real economy.

A newly popular approach in the financial industry has been to commit to "Paris alignment" — a phrase meant to signal that the firm is willing to bring its entire business in line with global climate goals. Morgan Stanley, JPMorgan Chase & Co, Barclays Plc and HSBC Holdings Plc have all made such pledges, though each announcement was quite different in substance. JPMorgan, which Rainforest Action Network says is the biggest lender to fossil fuel projects globally, stopped short of saying when its lending will target net zero emissions, and noted that oil and natural gas will "continue to play a significant role as sources of energy." Barclays said it will use the IEA's Sustainable Development Scenario, which seeks to achieve net zero emissions around 2070, as a starting point. Although that commitment had shareholder support, both banks have come under pressure from investors to take more aggressive action.

Several firms also name-checked their membership in different multi-bank initiatives. For HSBC and Barclays it was the Paris Agreement Capital Transition Assessment, a plan for measuring the emissions that result from bank loans. Morgan Stanley joined the Partnership for Carbon Accounting Financials. JPMorgan referred to its participation in the Center for Climate Aligned Finance. A number of other banks have also signed up to participate in the Science Based Targets for Financial Institutions, a framework to identify and validate emissions reductions targets which launched this month.

The proliferation of these initiatives underscores how hard it is to allocate responsibility for emissions in banking, an industry that was hardly known for its perspicacity even before climate change became an unavoidable corporate issue. Many are complimentary, so that any single financial institution might be involved in multiple pledges, initiatives and methodologies.

All of these initiatives have to overcome a dispiriting history of attempts since the mid-2000s to develop a definitive way of measuring how banks contribute to climate change, which struggled to address the complexity of the issue without getting bogged down by technicalities that didn't really move the needle. Most recently, civil society groups including RAN and ClientEarth, a environment-focused law firm headquartered in London, have tried to set firmer thresholds for banks, for example, by highlighting the importance of cutting emissions fast enough to limit global warming to 1.5°C.

A simpler approach, advocated by many green activists, is to just stop financing fossil fuels and other high emissions businesses while boosting lending to companies involved in renewable energy. More than 100 financial institutions already have some kind of coal exclusion policy, according to a database compiled by the Institute for Energy Economics and Financial Analysis. But even these policies vary widely, according to France-based NGO Reclaim Finance. For example, Goldman Sachs Group Inc. only says it will phase out "thermal coal mining companies that do not have a diversification strategy within a reasonable timeframe." In contrast, Credit Agricole SA says it will cease financing  coal power plants and mines by 2030 in OECD countries and 2040 elsewhere.

Still, the industry as a whole is heading in the right direction. A growing number of banks are expanding these coal exclusions to other kinds of fossil fuels, such as Arctic oil drilling. Most want to point to the good they are doing, not just the bad they are avoiding. We can expect to see more grand statements about Paris alignment, as well as more intricate and worthy methods for getting there, as financial institutions get more adept at balancing comprehensiveness and complexity. 

The bigger question is whether banks are leading the energy transition, or simply following it. Carbon emissions are likely to have already peaked, so any large bank's portfolio can be expected to become less carbon-intensive in the coming years without any real effort on its part. Which banks are going to drive transition, and which will simply reflect the changing shape of the economies that they service? Those in the former category will probably be the ones setting more challenging goals, like halving their financed emissions by 2030. That's something to keep in mind when evaluating these commitments. Otherwise, plenty of banks will be able to coast along, making nice-sounding statements while simply tracking the gradual decarbonization happening around the world.

Kate Mackenzie writes the Stranded Assets column for Bloomberg Green. She advises organizations working to limit climate change to the Paris Agreement goals. Follow her on Twitter: @kmac. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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