The Finance Industry Passed a Climate Turning Point This Year
This was the year when making strong statements on climate change became de rigueur for the financial sector. From BlackRock chief Larry Fink’s global warming-themed scarf at Davos, to several big Wall Street banks announcing a sustainability plan, to major Japanese and Korean financial institutions pledging to restrict financing for regional coal projects, there was a constant stream of fresh, green declarations.
The industry seems to have passed a turning point. As inflows to ESG-themed funds and demand for climate-related financial services grow, claiming to treat the environment as a serious issue has no perceptible downside and great advantages.
Greenwashing was rampant, too. Citigroup Chief Executive Officer Michael Corbat wrote in August that if banks’ clients didn’t adequately reduce their greenhouse gas emissions, “then we must have the courage to walk away.” However, the bank was the world’s second-biggest lender to fossil fuels in 2019, according to data compiled by Rainforest Action Network. It was a juxtaposition that played out repeatedly during the year.
The finance industry knows that most claims will be scrutinized by clients, the public, and scientists, who tell us emissions have to halve in a decade to have even a chance of a safe climate. But it’s still counterintuitive for bankers obsessed with returns to wind down industries while they’re still profitable.
That said, there were some developments that moved the needle. Here are a few of the most striking examples that went beyond mere signaling:
- Shareholders voted to support a resolution that required Australian oil and gas company Woodside to state how closely its emissions targets for its operations and along its entire value chain aligned with the limits to global warming sought in the Paris Agreement—the first time such a resolution passed.
- Investors began pressuring foreign governments to take more aggressive climate action. Investors with several trillion dollars under management warned Brazil that a proposal to legalize private occupation of public land could force them to reconsider their investments in the country as it would threaten the Amazon rainforest. A coalition of investor groups called for Japan to be more ambitious in cutting emissions. The efforts had mixed results, but the new trend could lead to a more climate-aligned international finance system.
- Admittedly, this happened in November 2019, but the European Investment Bank’s decision to stop lending to all fossil fuel projects—including natural gas—from 2022 was unprecedented amongst policy lending banks. At the Finance in Common Summit last month many of its peers including the World Bank and Asian Development Bank struggled to match its ambition.
- Oil major BP Plc set out a plan to cut its total fossil fuel output by 40% by 2030, underscored by a change in its dividend policy. Though its stake in Russian oil producer Rosneft, which is equivalent to nearly a third of BP’s total emissions, was excluded, it is the first decisive test for whether a big, listed fossil fuel company can successfully transition into a diversified, clean energy company.
- Malaysia’s CIMB last week became the first emerging-market bank to set a 2040 net-zero pledge, according to advocacy groups. It was an encouraging sign that developing country institutions and regulators can lead their wealthier peers, just as they did in handling the coronavirus outbreak. For example, central banks have mostly responded to the Covid crisis by supporting the status quo, which amounts to favoring risky legacy industries that damage the world. The Reserve Bank of Fiji was the only central bank that explicitly supported green industries in its Covid response, according to researchers at the LSE Grantham Institute.
Before anyone gets too optimistic... 2020 has also shown us plenty of examples of grand statements on climate change that amounted to little more than greenwashing, or wishful thinking at best. Here are some of the pitfalls to watch out for in 2021:
The “net” in net zero pledges often assumes a vague reliance on carbon offsets on a scale that’s implausible or perhaps even unethical.
Meanwhile, some of the biggest investment firms still aren’t using their proxy votes on climate change when they could, and too few companies are making any effort to quit or reform the industry associations that undermine efforts to halt climate change. Despite those commitments by banks to quit coal, it is still being financed by Chinese and Japanese lenders.
If finance is to really help protect the climate, 2021 will need to have a much better signal to noise ratio.
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.
©2020 Bloomberg L.P.