To avoid impending climate catastrophe, vast investment must be diverted from fossil fuel-based power generation, industrial processes, transport, and land use to carbon-free alternatives. McKinsey recently estimated this figure at $1 trillion per year, on top of an additional $3.5 trillion in new low-carbon investment, highlighting the critical role of private finance in driving decarbonization. Banks have recognized their central role and 102 institutions from 40 countries have signed on to the Net Zero Banking Alliance (NZBA), committed to aligning their lending and investment portfolios with net-zero emissions by 2050. Among the signatories are the six largest U.S. banks. 

Although these banks claim to be embarking on a net-zero path, their current policies belie this pledge. That is because they are financing new fossil fuel expansion beyond projects already approved for development. The International Energy Agency describes its “Net Zero Emissions by 2050 Scenario” as requiring an immediate reduction in fossil fuel demand, precluding any new fossil fuel exploration: “no new oil and natural gas fields are required beyond those that have already been approved for development.” The NZBA’s own sponsor, the United Nations Environment Programme Finance Initiative (UNEP FI), has announced that it isn’t credible for a bank to claim it is on a net-zero path, limiting global warming to 1.5° centigrade above pre-industrial levels by 2050, if it finances fossil fuel expansion: “investment in new fossil fuel development is not aligned with 1.5°C.” 

Yet, banks that claim to be on a net-zero pathway are still financing fossil fuel expansion through lending and underwriting at a breakneck pace. Banking on Climate Chaos estimates that in 2020, the six largest U.S. banks (JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) loaned or underwrote more than $120 billion for fossil energy companies that are developing new projects. This financing entails great risk to shareholders. Loans for unneeded assets that become worthless could reduce the value of banks’ lending portfolios. Accusations of greenwashing can damage reputations and make clients leave. Loading potentially worthless assets onto clients’ balance sheets also can prompt damaging litigation. Regulators around the world could require additional capital reserves for such risky financing. Sanctions are another possibility: The U.S. Office of the Comptroller of the Currency states, “Boards and management should ensure that any public statements about their banks’ climate-related strategies and commitments are consistent with their internal strategies....” 

That is why socially responsible and faith-based investors, along with the Sierra Club Foundation, have filed resolutions with six banks asking for policies to align their lending and underwriting with net-zero commitments to avoid financing new fossil fuel development. Not only is this the way forward for the planet, it also protects shareholders from greenwashing risks and takes soon-to-be-worthless fossil fuel assets off the balance sheets of banks and their clients.

Paul Rissman
Co-founder, Rights Co-Lab