Banks have a long, long way to go on climate change.
That's the takeaway from a BloombergNEF report that looks at the level of financing that banks are pouring into the energy transition. According to BNEF researchers, the ratio of clean-energy lending and equity underwriting relative to fossil fuels needs to hit 4 to 1 by the end of the decade if the planet is to avoid the worst ravages of climate change as laid out in the Paris Agreement of 2015.
That ratio was roughly 0.8 to 1 at the end of 2021, according to the report.
"Like the real economy, and inextricably linked to it, bank financing is a tanker which needs to turn," said William Young, director of strategic partnerships at BNEF and one of the report's authors.
JPMorgan Chase, the world's largest underwriter of energy deals, had an energy-supply banking ratio of 0.7 in 2021. That's slightly worse than Citigroup and Bank of America, but better than Wells Fargo's 0.4. BNP Paribas had the highest ESBR of the 10 largest banks, at 1.7.
"By relating climate scenarios with capital investment in the real economy to the fundamental financial plumbing of our modern economy, we are able to examine bank financing as an indicator of progress," Young said.
The BNEF report shows that the headway made to date isn't enough for the planet to reach the crucial goal of net-zero emissions by mid-century. Since the clinching of the Paris Agreement at the very end of 2015, about $4.6 trillion of bonds and loans have been committed to businesses focused on hydrocarbons, roughly double the $2.3 trillion arranged for renewable projects and other climate-friendly ventures, according to data compiled by Bloomberg.
Banks have faced considerable criticism for their support of the fossil-fuel industry, which is the primary source of planet-warming pollution. The industry has countered that it wants to assist the transition to a low-carbon economy by staying engaged with oil, gas and even coal clients. That transition is happening at a dangerously slow pace.
"We can still limit global warming to 1.5°C, but banks will fail us unless they fundamentally review their lending and underwriting practices," said Lucie Pinson, founder and director of the environmental nonprofit Reclaim Finance.
The BNEF data provide a clear yardstick by which to measure progress, even as much of the finance industry's contribution to greenhouse-gas emissions has yet to be calculated. For example, hardly any major banks and asset managers provide estimates for the emissions of their stock and bond underwriting. That may soon change, though.
The Partnership for Carbon Accounting Financials, whose members include Morgan Stanley and BlackRock, said last week that it's close to publishing standards that mean the industry will soon no longer be able to ignore the carbon footprint of its capital-markets activities.
For its study, BNEF examined the loans, bonds, equity and project finance that were underwritten for the energy sector and other relevant issuers. BNEF then applied what it calls an adjustment factor to each of the more than 2,895 issuing companies to measure the amount of funding raised for low-carbon energy relative to fossil fuels by 1,142 financial institutions.
The analysis found that bank financing for energy supply totaled $1.9 trillion in 2021, with $842 billion going to low-carbon energy projects and companies and $1.04 trillion for fossil fuels. From these figures, BNEF came up with an energy-supply banking ratio of 0.81 for the industry.
Just one of the world's biggest banks has an ESBR of more than 4.0. NatWest's ratio of clean-energy financing relative to hydrocarbons was 5.5 in 2021. Of the largest banks, China Everbright had the lowest ESBR, at 0.3.
Regionally, the US and China are far behind Europe. And while banks in North America accounted for the largest share of energy-supply financing, their average ESRB was roughly 0.6 at the end of 2021, compared with 2.6 for European-based banks. Chinese banks had an average ESRB of 0.6.
The divergence reflects "the relative paucity of oil and gas investment in Europe and the historically favorable regulatory environment for low-carbon energy investment," according to the BNEF report. By contrast, the US, Canada and Mexico play "a major role in the supply of energy for domestic and export use."
In the BNEF survey, 354 of the 1,142 banks underwrote financing for only low-carbon energy. The deals amounted to about $38 billion and tended to involve small, climate-focused banks, national banks or multilateral development banks.
Growing numbers of banks have acknowledged the risks of climate change by increasing their ambitions around green financing. For example, JPMorgan announced emissions-reduction targets in December for airlines, cement manufacturers and iron-ore and steel companies. That added to the bank's first set of goals, which focused on the oil and gas, electric-power and auto-manufacturing sectors.
JPMorgan points out that BNEF's analysis excludes tax equity, which represents a growing share of project finance in the US. The New York-based company said it committed more than $5 billion of tax-equity financing in 2021, which would have raised its ESBR to 0.8.
The use of tax equity will almost certainly increase following last year's passage of the Biden administration's Inflation Reduction Act. IRA breaks new ground with its tax-credits policy and that will lead to more low-carbon projects, JPMorgan said in a statement.
And there were some signs of progress in 2022. It was the first year in which more money was raised through the debt markets for climate-friendly projects than for fossil-fuel companies.
A JPMorgan spokesperson said the bank has set a target of $1 trillion for green initiatives by 2030, while Wells Fargo said the company has committed to reach $500 billion in sustainable finance by the end of the decade.
--With assistance from Saijel Kishan and Alastair Marsh.
