Why Banks’ Green Plans Include Lots of Oil and Gas

(Bloomberg) -- Just after global talks organized by the United Nations to rein in greenhouse gas emissions stalled this month, Goldman Sachs Group Inc. seized the opportunity to announce a tougher stance on fossil fuel financing. Environmental groups such as the Rainforest Action Network and the Sierra Club lauded the move. But the steps Goldman and other big banks are taking can also be seen as minuscule compared with the $1.9 trillion in financing they’re estimated to have extended to the fossil-fuel industry in the three years following the 2015 signing of the Paris climate accords.

1. What did Goldman Sachs announce?

The company said it would do less to finance some kinds of pollution, and would harness money to support more environmentally friendly businesses. It pledged to stop direct financing of new mines producing thermal coal, the kind burned to generate electricity, and Arctic oil exploration and development, including in the Arctic National Wildlife Refuge in Alaska. They also said they would end financing projects of new coal-fired power plants -- an expansion of an earlier pledge that applied only to the U.S. and other developed countries. The company did say that it will make exceptions for projects that include carbon capture and storage or equivalent emissions reduction technology, though those are seen as years away from being economically viable. It also said it would engage with thermal-coal miners on their plans to diversify away from the fossil fuel, and would phase out financing for companies that don’t have such strategies “within a reasonable time frame.” Most other banks have just reduced coal financing instead of phasing it out.

2. What did Goldman say it would do more of?

It said it was targeting $750 billion for “climate transition and inclusive growth finance” over the next decade. As of July, 23 of the world’s 50 largest private-sector banks had made sustainable finance commitments, according to the World Resources Institute. Goldman’s pledge is among the largest. But it’s far from clear what these figures mean. Ever-shifting definitions and difficult-to-pin-down data is a constant theme throughout sustainable finance. And many banks are keen to tout such headline-grabbing numbers on green financing without detailing their fossil-fuel funding.

3. How does Goldman’s policy compare with other banks?

Environmentalists said its new policy is now the most aggressive among the six largest U.S. banks. But the Wall Street firm still trails European rivals who have taken similar steps years before. Here are some examples:

• France’s Credit Agricole SA and BNP Paribas SA are among the banks that have led the charge in restricting fossil fuel financing. In June, Credit Agricole said it would stop all financing of coal expansion and set timelines to end funding of existing coal projects -- some as early as 2030. Goldman didn’t provide a timeline on its phaseout.
• Two days after Goldman’s announcement, Standard Chartered Plc updated its coal policy, saying that it will only support clients who “actively transition” their business to generate less than 10% of earnings from thermal coal by 2030. The bank has withdrawn financing from three new coal-fired power plants that it had earlier agreed to finance.
• Royal Bank of Scotland Group Plc, ABN Amro NV and Societe Generale SA have restricted financing of Arctic oil projects since at least 2016.
• In the U.S., Bank of America Corp. in April said it would commit $300 billion in investments to low-carbon and sustainable business activities by 2030, adding to the more than $126 billion it has deployed since 2007.

4. Are there banks that have gone further?

Yes, in the public sector. The undisputed leaders in the field are the world’s development banks. The World Bank laid much of the groundwork that made green bonds possible. In November, the European Investment Bank took an unprecedented step to end all its funding for any fossil fuel projects, meaning oil and natural gas as well as coal, except for those that capture or offset their emissions. Granted, the EIB is far smaller than its private-sector peers, but its example was widely noted. In addition, a number of central banks have made clear they will begin pressuring banks to increase green lending. The Bank of England in December said it’s moving to have banks and insurers assess the exposure of the companies they lend to from climate-related damages or a switch to a lower-carbon economy.

5. How much of an impact would policies like Goldman’s have?

Environmentalists see banks’ withdrawal from the coal industry as important, but also as one of the easiest things for them to do -- American coal firms have been suffering for years from falling prices, sending several into bankruptcy. And Arctic drilling has been a source of controversy for decades. What the new guidelines don’t do is set out a path for reshaping the role banks play in the more mainstream parts of the energy markets.

6. How involved are banks in fossil fuel companies?

Financing fossil fuel producers remains big business for the big banks. JPMorgan Chase & Co. topped Rainforest Action Network’s global ranking by providing $196 billion in fossil-fuel financing from 2016 to 2018. Goldman came twelfth with $59 billion. The top 12 global firms earned about $2.9 billion in fees, or about 7% of their investment banking revenue, in 2018 from their relationships with oil, gas, coal and power clients, according to Coalition Development Ltd., a consulting firm that tracks the finance industry. Banks are reluctant to turn away that money after enduring years of stagnant revenue. Goldman Sachs Chief David Solomon said in an op-ed in the Financial Times that the bank won’t be turning its back on its fossil fuel clients: “The world will continue to produce and use fossil-based fuels, aeroplanes, cars and industrial goods, and Goldman Sachs will continue to support clients in transactions that are important to economic activity.”

7. What are they doing for renewables?

Bank issuance of green bonds and loans -- those that are specified for projects or activities focused on environmental benefits -- was $581 billion from 2016 to 2018. That means that green bond issuance would need to more than triple to equal banks’ fossil-fuel financing in the same period.

The Reference Shelf

• A Bloomberg News article on bank financing of fossil fuel companies and a story about the European Investment Bank ending its financing of fossil fuel projects.
• The Rainforest Action Network fossil fuel financing report card.
• BankTrack’s report on banks and climate change.
• A New Yorker piece written by Bill McKibben about how the world of finance is fueling global warming.

--With assistance from Tom Freke and Leslie Kaufman.

To contact the reporter on this story: Saijel Kishan in New York at skishan@bloomberg.net

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net, John O'Neil

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