Yves here. I’m amazed that anyone would be snookered by the proposition that Big Finance would act to halt or limit climate change. Most models (one can argue incorrectly) show the big economic hits to occur 30+ years out. Once you discount cash flows that far out back to the present, the effect is effectively zero.
But ESG (“environmental, social and governance”) investing is the big new scam….when if one were to try to be a fully compliant investor, there would be nothing to buy. But it’s great for enriching consultants and NGOs, as well as giving no-nothing board members like the ones at CalPERS the appearance of being useful.
By Michael Northrop, director of the Sustainable Development Program at the Rockefeller Brothers Fund. Originally published by Environmental Finance
Carbon Tracker, the London Financial Analytics shop, told us about this financing record in 2019. Maybe because Covid-19 intervened, we didn’t fully absorb it.
What does it mean that we have already financed 1.5֯ C of warming? In short, that the cumulative impact of the fossil fuel projects banks and investors have financed will be 1.5֯ C degrees of planetary warming. Said another way, we will have financed our way through our remaining 1.5֯ C carbon budget, if all of those projects are completed and operate through their expected lifetimes.
In fact, according to Carbon Tracker, somewhat more than 1.5֯ C of warming has been financed already. We’re well on the way to 2֯ C and beyond.
This means that if we are serious about keeping planetary warming to 1.5֯ C, we’ll need to close down some of these already-financed projects before their projected operational lifetimes are complete.
Need To Stop Financing New Oil and Gas Projects
It also means we need to stop financing – right away – any additional new oil and gas projects because every bit of it will need to be rolled back too, which obviously becomes harder and harder to do in the real world.
Private sector financial players with assets totaling $130 trillion, who are beginning to acknowledge they are part of the problem and have a role in crafting a solution, came to COP26 en masse to sign a pledge that the former Governor of the Bank of England, Mark Carney, facilitated, called the Glasgow Financial Alliance for Net Zero (GFANZ). It commits banks and investors to decarbonize their portfolios by 2050.
Unfortunately, there are no near-term plans, deadlines, or commitments to do anything real that were announced by the Alliance or any of its banker or investor members.
It seemed to cynical observers that this was an empty vessel designed to take pressure off private financial industry players, and delay any real action to some indeterminate future. Each signatory has two to three years to come up with a plan, and there is no requirement that any members reduce the carbon embodied in their portfolios of loans and investments before 2050.
We know from a report called Banking On Climate Chaos that the world’s 60 largest commercial banks financed $3.8 trillion of fossil fuel development since the Paris Accords were agreed to at the end of 2015. This comes to about $750 billion of fossil fuel finance a year.
Another recent related report says private equity has financed another $1.1 trillion of fossil fuels since 2010.
All of this suggests that an incredible amount of private finance has been racing to build out a massive pile of future carbon emissions with absolutely no attention to the brake pedal.
These are astonishing numbers, given the profile and importance of the Paris agreement to most economic sectors. It points up one of the major flaws of our planetary effort to stabilize atmospheric emissions: Finance is not a party to the Paris Accords. (Neither is the fossil fuel sector.) They are fully outside the UNFCCC Convention and the Paris Climate Agreement, and apparently haven’t taken any of the climate science or the imperative to preserve the planet seriously. It’s a spectacular, tragic gap in the global climate governance system.
At COP this year, Wednesday, November 3, was labeled Finance Day, and the GFANZ Alliance was the featured item of the day.
Given the buildup, you’d have thought it was going to be the most far-reaching international finance agreement since Breton Woods. Before, during, and in the days following, headlines blazed with the message: ‘$130 Trillion of Private Finance Assets Agree to Fix Climate Change’.
In Glasgow, I wasn’t alone as I struggled to see anything at all in the fine print that looked like a contribution to stopping fossil fuel projects from being developed — the very thing the International Energy Agency said last March must happen if we’re to limit warming to 1.5֯ C.
Not One of 60 Major Commercial Banks Has ‘Leadership Position on Decarbonizing’
Yet the trend line of bank finance for fossil fuels is rising not declining, and not a single big commercial bank has released a plan to stop financing new fossil fuels.
It’s striking that unlike any of other sectors implicated in speeding global warming, not a single one of the 60 major commercial banks has staked out a leadership position on decarbonizing.
On the other labelled days of COP, there were all kinds of interesting mash-ups of governments, private sector actors, and think tanks offering a web of creative announcements about their determination to set ambition on one thing or another. By contrast, on Private Finance Day, the one and only announcement was relating to GFANZ. Banks and investors didn’t even try to push out additional good ideas. Everyone covered themselves in the GFANZ penumbra and then went quiet.
It’s reported by insiders that Mark Carney expected specific institutions to announce credible plans in advance of Glasgow and that he was banking on a wave of additional specific plan announcements by banks and investors that would start a cascade of serious commitments in the sector. He didn’t get a single meaningful one.
Irony: Does Financial Group ‘Cocoon’ Deter Banks’ Taking Leadership?
Some in Glasgow speculated that GFANZ is actually a psychological deterrent to bank leadership because these banks and large investors are all safely tucked inside the supportive GFANZ cocoon. There they’re having ongoing really interesting conversations about a variety of very technical issues related to difficult-to-abate economic sectors like steel, cement, shipping, and aviation, and it’s actually making it harder for any individual institution to break away in a leadership role. How ironic.
One observer in Glasgow likened it to a giant mob of bankers in the ballroom of the Titanic, cocktails in hand, band playing, having fascinating conversations, but doing nothing to get up the urgency to get to the life rafts.
More interesting to anyone interested in actually finding ways to cut off financing for fossil fuels were several other commitments that occurred at or just before COP, including China’s decision to stop all overseas public finance for coal; the G20 announcement the weekend before COP that its members would similarly forego public overseas coal finance; the agreement by more than 20 nations at COP to stop all overseas development finance for all fossil fuel projects; and a commitment by 12 governments including Denmark, Costa Rica, France, Sweden, California, Quebec, Ireland, Greenland, Wales, Portugal, New Zealand, and Italy that they will phase out fossil fuels altogether.
These announcements were preceded by the 26 October report that 1,500 investment institutions overseeing a combined $39 trillion of managed assets had undertaken some form of fossil fuel divestment decision for their portfolios.
To their credit, multiple banks participated in a very laudable set of forest conservation commitments by committing to stop financing deforestation. It was unclear how that would happen, but it was striking that these banks agreed to stop doing something specifically bad.
Lots of ‘Chest Beating’ … But Profits over Planet
The GFANZ announcement contained none of that. There was general agreement to be available for increased clean energy finance, and yes there is growing important support for clean energy finance worldwide, but it won’t matter much if these banks continue to extravagantly finance new fossil fuel development that takes us all farther and farther past the 1.5֯ C threshold.
Banks and investors have to do better. The stark separation between their chest beating but surprisingly empty GFANZ announcement and the reality of continuing to pour oceans of new dollars into new carbon budget-busting fossil fuels is immoral and unacceptable.
Just think what it would mean if financial institutions committed to ending finance for new fossil fuel development. It would be one of the most powerful levers anyone on the planet could pull to fix the climate problem.
Finance is uniquely positioned to save the planet. Choosing planet over profits though has not yet become a priority despite the science and the every-day reality showing itself that the climate is already changing in terrifying ways.
As one senior banker said to me not long ago: “it’s not our role to fix climate change; it’s the role of government.”
To the children and grandchildren of bankers and investors, please immediately insist that your fathers and grandfathers – and they are mostly men – immediately take responsibility for their actions and pull out of new fossil fuel exploration and development.
They should do it for you – their children and grandchildren – and for everyone else too.