Financial Sector Lagging Behind – But Gathering Pace

By Ciara Shannon

Recent analysis from InfluenceMap shows the finance sector as a whole is lagging behind on climate change and is not moving the needle fast enough and portfolios held by the 15 largest asset management groups are significantly misaligned with the targets of the Paris Agreement. HSBC, Standard Chartered, Barclays and Royal Bank of Scotland continued to invest in coal to the tune of a whopping £24.7 billion between 2016 and 2019. In the USA, BlackRock, JP Morgan Chase, Wells Fargo and Citigroup continue to pour vast amounts of money into fossil fuel companies.

In Australia, the big four banks – ANZ, CommBank, NAB and Westpac have provided direct finance for 17 new fossil fuel projects (despite committing to 2°C) in the last few years. These projects are expected to release 4.9 billion tonnes of CO2 – enough to cancel out Australia’s emissions reduction commitment (2021-2030) almost five times over.

Investor Advocacy is On the Rise

Globally, we are seeing a raft of investor climate coalitions forming. One example is Climate Action 100+, an impressive investor stewardship and lobbying coalition that is engaging or directly influencing the world’s largest corporate GHG emitters to take action. Plus, a record number of investors are mobilising under the ‘Investor Agenda’ to ask governments for clear policy signals to achieve a 1.5°C world. And a group of investors managing close to US$4 trillion in assets have committed to converting their investment portfolios to net-zero emissions by 2050 through the UN-convened Net Zero Asset Owner Alliance.

These are significant announcements given the immense influence that these investors hold. As part of the Investor Agenda a record number of investors, some 631 investors managing over US$37 trillion signed the Global Investor Statement to Governments on Climate Change and called on world governments to step up ambition to tackle the ongoing climate crisis. This is the largest-ever group of investors to call for climate action.

Divestment from Fossil Fuels is Increasing

It is significant that the mighty Goldman Sachs (with 2018 annual revenues of about US$ 38 billion), will stop financing new drilling for oil in the Artctic and will not invest in thermal coal anywhere in the world (announced Dec 15, 2019). This is the most progressive move so far in the US by any bank. Praise should also go to the Indigenous Gwich’in communities in Alaska and Canada and other NGOS that have been pressing Goldman Sachs to stop financing Arctic drilling for some time.

There was also the announcement that Standard Chartered will withdraw from the lending consortia for three new coal-fired power plant projects– two of which are in Vietnam. They will also end their support for thermal coal companies by 2030, making it the first major UK-based bank to stop their support to coal, but, their phased reduction between 2021 – 2030 is weaker than other European banks. Plus, news that the new parliament in Switzerland, may soon instruct the country’s central bank to drop all fossil fuel assets from its US$800-billion investment fund is also important as the Swiss National Bank is one of the biggest reserve banks in the world. Its portfolio includes shares in Arch Coal, ExxonMobil, and Chevron (for now).

To date, about 120 financial institutions globally have put some restrictions on coal finance, several with fully phasing out coal finance. While coal is the primary offender to climate stability and air pollution, oil and particularly gas production and consumption need to be reduced in line with meeting the Paris Agreement objectives.

Climate Stewardship

Strong climate stewardship is being shown by the asset management arms of Legal & General, UBS, Aviva, AXA, Allianz and Credit Agricole (all participants of the Climate Action 100+) and by Walden Asset Management, Trillium Asset Management, and Zevin Asset Management in the USA. Other bright lights come from asset owners such as large pension funds – Calpers, NY State Common and Swedish AP system, who collectively own over US$28 trillion of assets globally (OECD, 2018).

An interesting new development is that the Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund (US$1.6 trillion) is no longer allowing short selling of its US$700 billion + equity portfolio, focusing instead on greater control of its long-term ESG #stewardship responsibilities.

Still A Long Way to Go

According to WRI, there is not yet an accurate way of showing sustainable financing versus brown financing and some banks think comparing sustainable finance commitments against fossil-fuel financing is misleading. However, WRI’s graph below is an interesting one, for example JPMorgan Chase financed US$63.9 billion in the fossil fuel sector in 2018, compared to their sustainable finance commitment of US$22.2 billion.

Of importance are the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB) and chaired by Michael Bloomberg. TCFD aims to increase climate transparency in financial markets and their recommendations help financial companies understand and manage their climate risks, as well as help the market know where climate risks exist in portfolios.

While the demand for TCFD disclosure is enormous, much more needs to be done to get markets to price in climate risks and it will be interesting to read the final language of Article 6 being discussed at COP25. Mark Carney said recently of the TCFD that “progress in both quantity and quality is uneven across sectors.” According to the Global Sustainable Investment Alliance’s survey of 272 investment professionals, 87% said they didn’t believe that markets were yet pricing climate risks into company and sector valuations.

Source: Global Sustainable Investment Alliance