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.
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.