Six of the largest banks in the United States have vowed to align their lending portfolios with the goals of the Paris Agreement. These massive lines of credit are laden with investments in carbon-intensive companies.
Every one of the banks made those promises in the last six months. Three did so in the past week.
The wave of net-zero commitments indicates Wall Street is preparing for the risks of climate change — or, at least, responding to intensifying public pressure to do something about it.
But the announcements raise important questions: Why now, and what happens next?
"The commitments are welcome," said Erik Gerding, a banking law expert at the University of Colorado Law School. But how the lending giants try to reach their goals could dictate whether emissions actually drop.
"How is their balance sheet going to change? How much are they going to be relying on carbon offsets? And how much of this is going to result in actual carbon reductions?" Gerding asked.
Wells Fargo & Co. became the latest to announce its net-zero plans yesterday. Goldman Sachs Group Inc. and Citigroup Inc. unveiled their pledges last week. They followed in the footsteps of Bank of America Corp., Morgan Stanley and JPMorgan Chase & Co., all of which have launched their climate plans since September.
The banking giants are rushing to adopt climate goals as President Biden undertakes an "all of government" approach to global warming. He’s infusing financial agencies with programs to elevate the risks of climate change in economic policies. Treasury Secretary Janet Yellen has repeatedly raised concerns about the effects of rising temperatures on the economy (E&E Daily, Jan. 20).
The momentum hasn’t stopped at the executive branch. It’s also spilled into independent agencies and regulators such as the Securities and Exchange Commission and the Federal Reserve.
Both entities have historically refrained from wading into social and environmental issues. Now that’s changing.
Both the SEC and the Fed have hired senior-level personnel to focus explicitly on global warming since the presidential election. They’ve also ramped up task forces and other initiatives to understand the threats that rising temperatures pose to financial markets and the economy.
Those shifts mark what could become an unprecedented regulatory overhaul with a focus on climate change. With that on the horizon, sources say, major U.S. banks have every reason to begin moving in a greener direction.
"It’s good for regulatory oversight, from their standpoint," said Clifford Rossi, a former chief risk officer at Citi who’s now a professor at the University of Maryland.
"By getting ahead of this and making these declarations about these commitments, it puts them in a positive light with regard to the regulator," he added. "[They’re] demonstrating that they’re being proactive as opposed to waiting until it’s foisted onto them."
The Biden administration isn’t the only driving factor behind the climate pledges.
Also important are competition within the banking sector itself and rising pressure from shareholders who want major corporations to facilitate — rather than thwart — the transition to a low-carbon economy.
"Generally speaking, none of these banks want to be the laggard and the last one holding on to the previous status quo," said Ben Cushing, who directs the Sierra Club’s finance campaign.
‘Circle the troops’
The six firms have moved in lockstep before.
Between December 2019 and the end of 2020, all six lenders officially said they would not provide financing for Arctic energy projects.
The issue at the time was a major focus for advocates working to "stop the money pipeline" between Wall Street and fossil energy companies. Once Goldman Sachs took the step in mid-December, it was only a matter of four months before JPMorgan, Wells Fargo, Citi and Morgan Stanley had done the same.
Bank of America updated its Arctic oil and gas policy in November 2020.
When it comes to net-zero goals, Wells Fargo was the laggard — until yesterday. The firm announced its goal to achieve "net zero greenhouse gas emissions – including its financed emissions — by 2050."
Had the bank not taken the step, it likely would have faced a shareholder resolution — filed by investor advocacy groups including As You Sow — that called on it to measure, disclose and curb the emissions associated with its investments in high-carbon sectors.
Last year, a similar proposal filed at JPMorgan received support from 49% of shareholders — a sign from investors that the world’s biggest, and most carbon-intensive, bank should reconsider its climate risks (Climatewire, May 20, 2020).
All six banks’ net-zero commitments vary in language and detail.
Take Goldman Sachs and Citi, both of which released their pledges last week. Goldman said it will align its "financing activities with a net zero by 2050 pathway," and Citi said it would achieve "net zero greenhouse gas emissions by 2050."
Both approaches were a departure from JPMorgan Chase. The firm made its pledge in October without saying much about net-zero emissions. Instead, it said it adopted a "Paris-aligned financing commitment" (Climatewire, Oct. 7, 2020).
The firms’ announcements do include some additional information regarding next steps and signal that the years ahead will involve working with their high-carbon clients to help them decarbonize their operations. JPMorgan, for instance, said it would announce 2030 decarbonization targets for its energy, power and auto portfolios by the end of 2021.
But by and large, the announcements lacked details and didn’t come close to laying out a comprehensive vision for how they will achieve the decadeslong goals.
That left observers wondering how the banks intend to make good on their commitments — or if they themselves know.
"I’m not at all surprised that the description of their commitments are fairly hazy and will remain that way for some time," said Rossi, the risk management expert.
"It’s more of a strategic vision, maybe aspirational in some sense. The board and the CEO are saying, ‘That’s the direction we need to go; we want that as our target.’ And now they’ll circle the troops and get them marching down a path," Rossi added.
The ‘net’ in net zero
That path is becoming a source of tension, in large part due to prevailing uncertainty around what the "net" part of net zero entails.
Cushing of the Sierra Club said it will be important to ensure banks aren’t overly relying on "carbon offsets or credits that are both potentially ineffective, and have serious concerns around human rights and Indigenous rights."
Dan Firger, who previously led sustainable finance efforts at Bloomberg Philanthropies, doubled down on that point. He raised the issue of "avoided emissions," or the idea that banks could offset the climate impact of their oil and gas investments by providing financing for wind and solar projects.
In his eyes, it won’t be enough for banks to simply expand the energy economy by adding clean investments on top of their "dirty" ones. They will need to help the operations of their planet-warming clients get cleaner — or stop financing them.
"That’s going to take money and smarts. And banks have plenty of both," said Firger, who currently serves as the managing director of Great Circle Capital Advisors, a climate-focused advisory firm.
That debate heated up late last month.
In an interview with Bloomberg Television, sustainable finance heavyweight Mark Carney — who currently heads the climate arm of Brookfield Asset Management Inc. — called Brookfield a net-zero company despite its investments in coal and other fossil fuels.
He defended his assertion by saying the company has an "enormous renewables businesses" that delivers avoided emissions.
James Vaccaro, who directs the Climate Safe Lending Network, is among those who slammed Carney. "I’ve financed a bunch of wind turbines over the years, but they haven’t invented one that sucks carbon out of the atmosphere yet," he said.
Carney later walked back his comment in a statement on Twitter. He emphasized that he is a strong advocate for science-based net-zero targets and recognizes that "avoided emissions do not count towards them."
Even so, in Vaccaro’s eyes, the back-and-forth serves as an example of what could become a "litmus test" for banks: Do they plan to offset their climate impacts, or to actually avoid them in the first place?
The latter of the two options poses major challenges for the Wall Street giants and the companies they lend to.
The fossil fuel sector is a good example. According to a 2020 report by green groups, the six banks have invested more than $980 billion in coal, oil and gas companies since 2016.
So far, the firms have signaled that their new climate pledges don’t mean they plan to exit high-carbon sectors anytime soon.
"We all know that America’s need for power, and frankly global needs for power, will continue. We all need energy; we’re not ready to go back to candlelight and fireplaces," Jon Weiss, Wells Fargo’s CEO of corporate and investment banking, said yesterday on a call with reporters.
Weiss emphasized that the bank views its net-zero commitment as a "collaboration with our clients in these industries to help them in their transition to a lower-carbon economy."
Gerding, of the University of Colorado, said there are some "legitimate concerns" with the idea of the world’s largest banks cutting ties with whole sectors of the economy. The banks themselves could face significant losses, and major industries would lose access to capital they’ve long relied on to stay in business.
Rossi, the University of Maryland professor, agreed.
"You get the top 10 banks in the world starting to move toward exiting certain markets altogether, you have executed a major destabilization of certain markets which can lead to further destabilization of financial markets," Rossi said.
But climate activists said it shouldn’t take years of strategy and research for the banks to understand that they need to start with companies involved in the principal drivers of climate change: fossil fuels and deforestation.
"No one is saying banks need to stop funding cement production, or shipping, or aviation, right? Those are necessary industries that have a credible [transition] path," said Cushing of the Sierra Club.
But "fossil fuel producers, whose core business is pulling hydrocarbons out of the ground and burning them, don’t have a credible pathway to do that," he added. "That’s the hard truth that a lot of financial institutions don’t want to admit out loud."