Green Trillions Face ‘Acid Test’ After Bankers Toast COP Pledges

(Bloomberg) -- The City of London’s top ambassador was in celebration mode Wednesday night.

Speaking to the 150 climate-summit guests gathered for a nightcap on the banks of the River Clyde in Glasgow, Lord Mayor of London William Russell toasted the finance industry. Its commitment to fighting climate change, he said, had been confirmed that day.

But away from the bamboo business cards and bicycling bankers on display at the COP26 talks in Scotland’s largest city, the gaping question remains whether financiers accustomed to making billions on fossil-fuel deals will have the willpower to stop. 

“The acid test for financial institutions around this is: Are they willing to draw back?,” said Catherine Howarth, chief executive officer of ShareAction, a nonprofit that campaigns for responsible investing standards. “That is an enormous pivot for the financial community.” 

Banks, investors and insurers representing $130 trillion in assets have now committed to decarbonizing their business by mid-century. Getting that many signatories was the crowning achievement of a campaign driven by former Bank of England Governor Mark Carney. As co-chair of the Glasgow Financial Alliance for Net Zero, Carney has spent the better part of the year wooing bankers across continents in the hope of unveiling an enormous sum at the COP26 summit.

According to the terms of GFANZ, signatories must commit to decarbonize their operations by 2050, use science-based guidelines, and provide 2030 interim goals. Michael R. Bloomberg, the owner and founder of Bloomberg News parent Bloomberg LP, is co-chair of GFANZ.

The list of members includes some of the biggest names on Wall Street and in the City of London: JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley, BlackRock Inc. and HSBC Holdings Plc. Together, members make up 40% of global financial assets. Absent from the list are the world’s three biggest banks, all of which are Chinese and all of which are major providers of coal finance. 

The commitments GFANZ members have agreed to will be hard to police, according to Cynthia Cummis, director of private sector climate mitigation at the World Resources Institute. What’s more, the whole setup is voluntary. But for investors and others keen to track how well banks are living up to their net zero pledges, there are some key numbers to track, she said.

“One important metric to look at is what is the rate of finance invested in fossil fuels versus the capital flows going to climate finance,” Cummis said. “If you look now, the rate of finance going into fossil fuels is more than twice as large as the capital going into climate finance.”

Brown Finance

Since the 2015 Paris Agreement, banks have facilitated almost $4 trillion of fossil-fuel financing and scored $17 billion in fees in the process, according to data compiled by Bloomberg. That compares with about $1.5 trillion channeled into green investments over the same period.

This year alone lenders have arranged about $460 billion of bonds and loans for the oil, gas and coal sectors, and even those to have signed up to GFANZ have made clear they won’t be abruptly exiting the space. 

JPMorgan, which only joined the alliance last month, has made about $985 million in revenue since the end of 2015 arranging debt and lending for the oil, gas and coal industries. That compares with the roughly $310 million it generated in income from green finance.

Another recent signatory, Goldman Sachs Group Inc., has also made it clear it won’t stop working with fossil fuels, warning it could fuel inflation. 

“We have to balance good public policy with the short-term implications and that’s why it is a transition,” Chief Executive Officer David Solomon said last month. That echoed comments by Standard Chartered Plc CEO Bill Winters, who has criticized “simple edicts like: No more fossil fuels. It’s just not practical.”

$200 Trillion

Even if all GFANZ signatories start to move away from brown financing, there’s plenty of capital waiting in the wings to fill the gap. The 450 firms that have signed up to the alliance are vastly outnumbered by those that have snubbed the network. In fact, almost $200 trillion of financial assets sit outside GFANZ. Aside from China, banks from Russia and India aren’t on the list.

Also absent: the thousands of smaller, closely-held boutique finance firms that don’t have to answer to increasingly green-minded investors or regulators of public markets.

BlackRock CEO Larry Fink groused Tuesday about this disconnect, saying “the largest capital-market arbitrage in our lifetimes” was under way, as hydrocarbon assets move from public to private hands. “There’s more movement away from hydrocarbon assets into private hands than anytime, ever,” Fink said. “That does not change the net zero world. That’s window dressing, that’s greenwashing.” 

And firms looking to incorporate sustainability into their investing practices may be years away from truly embedding it in their systems. Take hedge funds. Most say investor demand and regulatory pressure mean they expect environmental, social and governance investing to become a vital part of their business going forward. But nearly two-thirds don’t have a dedicated specialist on staff, according to a survey of 100 firms from the Alternative Investment Management Association.

GFANZ Skepticism

And then there are questions as to how GFANZ’s giant headline figure -- $130 trillion -- should be interpreted. It’s not sitting on the sidelines waiting to be deployed but instead is already invested in existing assets, meaning lenders will need to divest existing holdings.

The figure also disguises some double counting, according to a person familiar with how the alliance does its calculations. That’s because GFANZ doesn’t correct for asset values represented by sub-units of parent firms whose holdings have already been counted, said the person, who asked not to be identified revealing internal processes. 

In other words, a financial conglomerate that has signed up to more than one sub-alliance will have its assets counted more than once. 

Growing Momentum

Despite the caveats, even skeptics agree that $130,000,000,000,000 is too large a figure to ignore. And momentum is building. This year, aggregate financing for green projects topped that of fossil fuels for the first time, Bloomberg data shows. 

Demand for sustainable investments from both retail and institutional clients is soaring. More and more investors are avoiding listed companies with negative climate angles, according to Hester White, head of Client Relationship Management and chair of the Diversity & Inclusion Committee at Peel Hunt.

“We have reached a tipping point in finance this week,” said Huw van Steenis, the veteran bank analyst and former Bank of England adviser who is leading UBS Group AG’s push into sustainable finance. “Leaving COP, the focus will be on getting the right data and metrics, and engaging with companies, on financing the transition to clean energy.”

That won’t be easy. Fink said during a COP panel on Wednesday that “deploying that capital is going to be far harder” than securing the commitments.

But after the panel was finished and the sun had set on a day of climate pledges, it was time to celebrate. A kilt-wearing saxophonist was standing in the wings, waiting for his instructions. 

“Turn the music back on,” Russell said at the close of his remarks. “Enjoy yourselves.”

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