DALL·E generated image of a pipeline gushing dollars.

Green Investments Begin To Pay Off For Big Banks

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For the second year in a row, global banks made more money from green investments like underwriting bonds and providing loans for green projects than they earned from financing oil, gas and coal activities. The world’s biggest lenders generated a total of about $3 billion in fees last year from lining up debt for deals marketed as environmentally friendly, according to data compiled by Bloomberg. By comparison, the fossil fuel sector brought in less than $2.7 billion in aggregate earnings from fossil fuel transactions. That’s not a huge disparity, but it an indicator that green investments are beginning to find favor with large banks, which is important because one of the barriers to investments in clean energy is a lack of access to capital.

European banks led the transition, with BNP Paribas leading in the Bloomberg green debt analysis. BNP, the European Union’s largest bank, got close to $130 million last year from its green finance business. Credit Agricole AG was next with $96 million and then HSBC Holdings with $94 million.

Meanwhile, Wall Street dominated fossil finance, with Wells Fargo and JPMorgan Chase generating the biggest earnings from oil and gas deals. Wells Fargo earned fees of $107 million from arranging bonds and loans for the fossil fuel sector, followed closely by JPMorgan and Mitsubishi UFJ Financial Group Inc., both with $106 million. MUFJ was also last year’s top arranger of global green loans.

Regulations are an important factor in the promoting access to green investments. Both the European Central Bank and the EU’s top banking authority have made it clear that they want the finance industry to speed up its green transition. Lenders in Europe now face the threat of fines and higher capital requirements if they mismanage climate exposures. In response, many banks are imposing explicit restrictions on fossil finance.

In the US, the regulatory outlook is quite different. Many Republican states have governments that are in thrall to the fossil fuel industry, which actively supports the election campaigns of those who will protect its interests. Many of those states  have placed hurdles in the way of green investments that will promote a transition to clean energy. Banks suspected of withholding financing from the oil and gas sector increasingly face retaliation, with Texas among states threatening to cut off Wall Street firms that embrace net zero emissions goals.

Many More Green Investments Needed

While the news is good, the global finance industry has fallen well short of where it needs to be if the goals of the Paris climate agreement are to be met. According to an analysis by BloombergNEF, four times as much capital needs to be allocated to green projects as to fossil fuels by 2030 to align with net zero emissions targets. Yet at the end of 2022, that ratio was just 0.7 to 1, largely unchanged from the previous year, BNEF’s latest figures show. Bank financing isn’t “anywhere close” to the transition levels needed, said Trina White, sustainable finance analyst at BNEF.

That conclusion has environmentalists sounding the alarm. “Banks still aren’t keeping pace with the rate of transition that’s required to avoid catastrophic climate change,” said Jason Schwartz, senior communications strategist at the Sunrise Project, a nonprofit focused on the financial sector’s contribution to global warming. The shifting trends of the past year are “more indicative of broader macroeconomic trends than any proactive efforts in the banking sector to reduce financing for carbon-intensive energy,” said Adele Shraiman, senior campaign strategist at Sierra Club. “The reality is that banks aren’t transitioning their energy financing quickly enough to meet their own climate goals.”

Overall, banks extended $583 billion in green bonds and loans last year, compared with $527 billion of fossil fuel debt. In 2022, banks channeled $594 billion into environmental projects, and $558 billion into oil, gas and coal, the Bloomberg data shows.

For several years now, the world’s biggest banks have published reports showing the vast sums of money they say they’re allocating toward a greener, fairer planet. But some of those assertions are now being questioned, amid an absence of regulatory guideposts to help stakeholders make sense of such claims.

Banks including Morgan Stanley, HSBC Holdings, Goldman Sachs, and JPMorgan Chase have announced individual sustainable finance targets for 2030 that range from $750 billion to $2.5 trillion. Yet such statements leave investors with little real insight into the very different ways in which banks are defining what’s sustainable, according to senior bankers familiar with how the figures were compiled but who asked not to be identified because they were discussing private deliberations.

The differences in accounting range from how banks treat mergers and acquisitions and debt underwriting to how they calculate revenue from market making, private equity investing, money-market funds, private banking, mortgages and revolving credit facilities, the people said.

Emily Farrimond, a partner at Baringa Partners in London, said the absence of a consistent methodology “can impact the credibility of the entire market, raising fears of greenwashing.” And Greg Brown, a partner in the banking practice of law firm Allen & Overy, points to the lack of “a law or regulation” to steer the industry. As a result, deciding what to call “sustainable” in bank reports is “kind of up for grabs,” Brown said. It’s currently “impossible to compare `like for like’ between banks,” said Rachel Richardson, head of ESG at law firm Macfarlanes. “Until a standard market methodology or framework emerges, this is unlikely to change.”

A spokesperson for Goldman Sachs, which in April said it was more than halfway toward reaching its $750 billion sustainable finance goal, said banks “differ in their targets, business size and mix.” Goldman, which ranks as the world’s leading mergers and acquisitions adviser, has an approach that reflects its “expertise and capabilities,” and that is “rigorous and thoughtful,” the spokesperson said.

The Takeaway

Boil it all down, and it seems the banking community is putting a lot of information out there they think will please regulators or climate activist while doing what they have have always done — lend money at the highest rate possible to people who have a better than even chance of paying it back. The good news here is that green investments are beginning to establish a history of being wise places for banks to put their money. More than mandates, targets, or goals, that in itself will help the flow of capital to climate friendly ventures get larger over time.

What we want to see is the flow of dollars to fossil fuel investments shrink and the flow of dollars to green investments increase. The news from Bloomberg is that the trend is going in the right direction and picking up speed. That’s good news for the Earth and everyone who lives on it.

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Steve Hanley

Steve writes about the interface between technology and sustainability from his home in Florida or anywhere else The Force may lead him. He is proud to be "woke" and doesn't really give a damn why the glass broke. He believes passionately in what Socrates said 3000 years ago: "The secret to change is to focus all of your energy not on fighting the old but on building the new."

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