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Commentary

Business-as-usual no Longer an Option for Banks

Jessye Waxman, Senior Campaign Representative, Fossil-Free Finance Campaign, Sierra Club, says climate-related shareholder resolutions give banks necessary guardrails for transition financing.

As US and Canadian banking majors begin to publish their 2023 proxy statements, there has been a troubling mischaracterization of climate-related shareholder resolutions, misleading investors into thinking these resolutions are something they’re not.

This year, investors filed resolutions at seven major US and Canadian banks — Bank of America, Citibank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, and Royal Bank of Canada — urging these banks to adopt policies to phase-out clients engaging in new fossil fuel exploration and development. Analysis in the banks’ opposition statements would have investors believe these resolutions call for an immediate cessation of business relations with energy sector clients, and for a stymying of activities that would help high-emitting companies decarbonize.

These claims are a misrepresentation of resolutions that simply aim to reduce banks’ exposure to climate-related risks. So let’s set the record straight: these shareholder resolutions call for banks to adopt responsible guardrails for transition financing, and to insure against both greenwashing and over-exposure to risky lending practices. They were intentionally written by investors in a way that gives bank management flexibility in timeline and execution, and allows the provision of transition finance to clients.

The road to transition

Specifically, these guardrails are meant to limit greenwashing and help banks ensure their financing actually helps their high-emitting clients to transition. There is currently a serious mismatch in banks’ rhetoric around climate, and their financing activities. Big US and Canadian banks insist they must engage with energy sector clients in order to support the low-carbon transition. However, without proper guardrails in place, these banks continue to support business-as-usual operations from their highest emitting clients. This means these banks are stalling the transition, piling up climate risk, and making it impossible to meet their own emissions reduction targets.

A 2022 climate report from JPMorgan Chase showed a 0% change in operational emissions (Scope 1 and 2) from energy sector clients, and a 1% increase in Scope 3 emissions compared with a 2019 baseline. In other words, evidence suggests the bank’s current approach to transition financing is doing little to nothing to facilitate the low-carbon transition in energy sector clients.

As global regulators increasingly crack down on greenwashing, and as civil society actors escalate efforts to hold financial institutions accountable on climate commitments, the risks have never been higher for banks. Last year alone, federal regulators in Canada, the US, and Europe charged banks millions of dollars in penalties, undertook investigations into investment fraud, raided banks, banned marketing materials over greenwashing concerns, and began to implement climate risk supervision tools for big banks. In addition, civil society actors sued global bank BNP Paribas for misalignment between its climate goals and investment activities. Adopting the guardrails called for by the climate-related shareholder resolutions proposed at US and Canadian banks would help shield these banks from growing scrutiny.

These shareholder proposals also encourage banks to be mindful of facilitating and upholding business plans that invest in the development of new assets at disproportionate risk of becoming stranded assets. Proponents of the resolutions acknowledge the near-term need for fossil fuels. As such, these resolutions do not call on banks to end relationships with clients producing fossil fuels, but they do call for a phase-out of relationships with clients whose business strategies would lead to an intolerable accumulation of risk.

Such guardrails are consistent with the preferences of shareholders in most of these companies. A 2022 survey by the Federal Reserve Bank of Dallas, as well as research from Bloomberg, showed investors are increasingly pressuring oil and gas majors to exercise capital discipline, calling for prioritization of near-term shareholder returns over new investments in exploration and development of untapped reserves.

Banks must get on board

The latest Intergovernmental Panel on Climate Change report from March 2023 clarified beyond a doubt that existing infrastructure is more than enough to push global warming above the 1.5°C threshold, and that no new fossil fuel sources can be developed if the world hopes to avoid the worst warming scenarios. In other words, investors and scientists understand the looming peak of fossil fuels by 2030 (or sooner) “obviat[es] the need for multibillion-dollar megaprojects that take decades to yield full returns”.

US and Canadian banks need to get on board. Since joining the Net Zero Banking Alliance in 2021, these banks have poured tens of billions of dollars into coal, oil, and gas companies — companies currently developing the equivalent of billions of barrels of oil beyond what is compatible with the International Energy Agency’s net-zero pathway. The banks’ financing activities not only demonstrate a grave mispositioning with their publicly-stated climate commitments, but a fundamental misalignment with the priorities of their shareholders.

Beyond being bad for global climate goals, continued facilitation of business-as-usual expansion by fossil fuel companies enables those companies to undermine shareholder interests, increases credit and greenwashing risk for the banks, and accelerates systematic risks to the portfolios of long-term and diversified investors. If nothing else, the recent collapse of Silicon Valley Bank, and the ongoing Credit Suisse takeover, should make prudent investors mindful of the need for banks to mitigate exposure to risky investments.

Prudent investors should not be misled by claims of banks’ management and should read closely the particulars of the climate-related shareholder resolutions before them. Despite the incorporation of thoughtful amendments compared to last year’s resolutions, the banks are pushing the same misleading opposition statements in an effort to continue business-as-usual practices and excuse themselves from accountability.

For banks to credibly claim involvement in the transition of energy sector clients, they cannot pursue a business-as-usual path. Big US and Canadian banks clearly need specific transition guardrails. This AGM season, investors should welcome the opportunity to communicate their preferences for increased risk management.

 

 

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