Banks’ climate promises are missing something big: capital markets

The six largest Wall Street banks, under fire for being among the world’s biggest funders of fossil fuels, are making commitments to align their financing with the goal of reaching net-zero emissions by 2050.

These banks – JPMorgan Chase, Citi, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs – have all set targets for reducing their financed emissions from high-emitting sectors by 2030, and have adopted modest policies restricting some types of financing for certain high-risk projects and sectors.

These are important signs of potential progress, but there’s one major catch – the big banks’ climate plans mostly overlook their role in financing fossil fuels through capital markets, in which they play a major role.

Acting as underwriters, banks are the gatekeepers for financing of fossil fuel companies: they advise companies issuing bonds and equities, hold vital information on the issuer, and help market the instruments to investors, disclosing only the necessary risk. The buck stops with the banks – without them, big polluters can’t raise money for their polluting projects.

Misleading net-zero claims

Though banks like to focus on lending and downplay their role in capital markets, a new analysis by Sierra Club reveals that 61% of financing by the top US banks for fossil fuel expansion comes from underwriting bonds and equities. Between 2016 and 2022, the six biggest US banks underwrote $266 billion in new bond and equity issuances for 30 companies with some of the most extensive fossil-fuel expansion plans.

Banks are performing a sleight of hand, distracting investors and regulators with net-zero transition plans that are half-finished, while continuing to funnel money to fossil fuel companies via capital markets with limited scrutiny. Banks are focusing their emissions reduction efforts on their financed emissions, those associated with their lending, and ignoring the majority of their facilitated emissions, which come instead from their capital markets activities.

Currently, only three of the six major Wall Street banks include bond and equity underwriting in their sectoral emissions reduction targets — JPMorgan Chase, Goldman Sachs, and Wells Fargo. The remaining three banks have so far chosen to only apply emissions reduction targets to lending activities.

Even among those with emissions reduction targets that include underwriting, insufficient disclosures and lack of standardisation make it difficult to understand how robust their facilitated emissions accounting methodologies are, and what progress they are making towards achieving their emissions reduction targets.

The role of regulators

Without guidance from regulators, the financial sector has become a wild west of voluntary initiatives and splashy climate pledges with minimal scrutiny and oversight. The chaos surrounding bank disclosures and target setting is a perfect illustration of what happens when regulation is deferred to industry-created voluntary standards.

So where are the regulators? True to form, US bodies are late to the party, with federal financial regulators falling far behind the best practices set by their peers around the world.

Back in 2021, the UK announced it would become the “world’s first net zero-aligned financial centre”, and would set up a taskforce to develop a “gold standard” for private sector transition plans. In July, this taskforce announced plans to finalise its sector-neutral guidance in just a few months, and have sectoral guidance finished by February 2024.

In addition, the UK Treasury pledged that it would work towards making the publication of transition plans mandatory for financial institutions and other listed companies.

Likewise, in the European Union, policymakers are discussing plans to introduce prudential transition plans as part of their rulebook for banks. Moreover, regulators from across the financial sector, such as the International Organisation of Securities Commission, the Financial Stability Board, and the Network for the Greening of the Financial System, are all currently studying the utility of transition plans for financial stability surveillance, risk management and other uses.

US Treasury (finally) issues new guidance

After years of delay, the US government finally weighed in on the role of financial institutions in the journey towards net zero, with new guidance from the Department of Treasury on financial institutions’ transition plans. These principles mark the first time a major government agency has provided any guidance to the financial sector on developing and implementing net-zero transition plans. These principles sent a strong message to the biggest financial market in the world and added to the growing chorus of regulators emphasising the importance of financial firms following through on their climate goals.

Still, much remains to be done. Though these principles are a promising step in the right direction, the Treasury unfortunately has yet to provide detailed recommendations that will improve the efficacy, comparability and transparency of financial sector  plans, leaving the sector mostly to its own devices to determine best practices. The department must provide more explicit guidance to financial institutions on the essential elements of such transition plans, including clear direction on the necessity of absolute emissions reduction targets in the energy sector and – critically – including all types of financing and facilitation in their emission reduction efforts.

Voluntary guidance from the Treasury, though a critical step, won’t be enough to protect the financial system from climate-related risks. Other financial regulators, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve, must direct financial institutions to adopt commitments to reach net-zero emissions by 2050 and implement credible transition plans to achieve that goal.

The reality is that, without regulators, financial institutions including major banks have blundered through a deeply underregulated ecosystem, taking advantage of the chaos to push through half-finished climate pledges without scrutiny. It is essential that regulators provide clear guidance to ensure that financial institutions make clear climate commitments and align those with their real-world lending, underwriting and investment decisions.

3 October 2023: This article was updated to include reference to the US Treasury’s transition plan principles.