- BNP Paribas facilitates $16.83 of sustainable finance for every $1 of fossil fuel lending, but for Wells Fargo it is just $0.54 for every $1.
- JP Morgan, the world’s biggest backer of fossil fuels, facilitates the third highest amount of funding to sustainable activities.
- Meanwhile, tighter policies on fossil fuel financing correlate positively with a higher portion of fees from green deals for a sample of 18 banks.
Many large banks increased their financing of fossil fuels last year despite the now-explicit advice from the UN-backed Race to Zero campaign that all members of its alliance must “phase down and out all unabated fossil fuels” – but most now lend more for sustainable activities than they do for petroleum.
Capital Monitor undertook analysis of publicly available data and research and has uncovered some correlation between a bank’s approach to fossil fuel lending and the amount of sustainable finance it deploys.
We looked at the sustainable finance deployed in 2021 by the world’s top 10 lenders to the fossil fuel sector, as identified by non-government organisation Rainforest Action Network (RAN).
All banks reported figures for sustainable financing last year, though in many cases it was unclear which activities were covered. As there is no regulatory or standardised definition of sustainable finance, banks are free to deem any activity they see fit as in scope.
However, as each of banks have set targets for sustainable finance, Capital Monitor has reviewed their progress based on this metric. For fossil fuel lending, we used RAN’s analysis to seek to provide consistency of measurement across the banks, as many do not clearly report such exposure.
The analysis shows that the dollars of sustainable capital facilitated or financed by the 10 banks surveyed ranges from highs of $16.83 of sustainable finance for every $1 of fossil fuel lending at BNP Paribas, to $0.54 for every $1 of fossil fuel lending at US group Wells Fargo.
BNP Paribas: little fossil fuel financing
France’s BNP Paribas, which reports at group level, last year said it had contributed €244bn ($251.5bn) to the energy transition and to sectors the bank considers as contributing to the UN Sustainable Development Goals. That was up from €188bn in 2020.
According to RAN, the bank extended $14.75bn of fossil fuel financing that year – the least of the top 10 fossil fuel backers. With $16.83 for every $1 of fossil fuel financing, it was the lender that mobilised the most sustainable capital relative to its petroleum lending.
What’s more, in May this year BNP Paribas set new carbon reduction targets in the power, oil and gas and automotive sectors, and tightened its exclusion policies in respect of petroleum exploration in the Amazon and Arctic. But the bank’s continued support for oil majors remains a point of tension for NGOs and campaign groups.
JP Morgan: Biggest fossil backer
At the other end of the scale, RAN identified JP Morgan as the biggest backer of fossil fuels between 2016 and 2021. Its exposure to the sector increased last year to $61.73bn from $51.75bn in 2020. However, its ratio of sustainable finance to fossil fuel was the third best, at $4.62, behind BNP Paribas and Bank of America ($7.82).
Breaking this down further, JP Morgan said that of the $285bn in sustainable finance it deployed last year – the largest amount of banks in the sample – $106bn went into ‘green’ lending, $61bn into community development and $117bn into development finance.
Hence for every $1 of fossil fuel activity last year, JP Morgan deployed $1.72 of green finance. This puts it below Citi, whose ratio was $3.14.
JP Morgan says it aims to facilitate $2.5trn in financing between 2021 and the end of 2030 to address climate change and contribute to sustainable development.
Climate activists have welcomed the bank’s move to set decarbonisation targets in the auto manufacturing, electric power and oil and gas sectors, but argue that the bank’s use of intensity rather than absolute reduction targets means they are not ambitious enough.
Wells Fargo: A major laggard
Wells Fargo, meanwhile, is the third biggest backer of fossil fuels globally, according to RAN and is also a laggard in sustainable finance. In 2021 it financed fossil fuels to the tune of $46.21bn, while extending $25.1bn of sustainable finance. The US lender therefore only mobilised $0.54 of sustainable finance for every $1 of fossil fuels, making it the worst performer of the 10 firms in the sample by this ratio.
In August 2021, Wells Fargo committed to achieving net-zero greenhouse gas emissions by 2050 while setting a target to deploy $500bn of sustainable finance by 2030. It pledged to set and disclose interim targets for carbon-intensive portfolios, including oil, gas and power, by the end of 2022.
Capital Monitor’s analysis should only be taken as a rough guide, as the scope of what is covered in the banks’ sustainable finance reporting varies. JP Morgan for example breaks sustainable finance into business line, giving examples of the types of sectors and deals that are covered, such as affordable housing and retrofitting.
A lack of clarity in reporting makes it difficult to evaluate how material sustainable finance strategies are to banks, confirms asset manager Federated Hermes, having analysed such strategies for 20 global lenders in the second quarter of this year.
Federated Hermes could only identify four lenders of the 20 that had sustainable finance goals clearly defined enough for the firm’s analysts to be able to draw any firm conclusions about the materiality of the goal to the group’s business.
The inconsistent reporting is likely due to a combination of banks not yet knowing how they are going to reach such targets and in some cases a lack of ambition to “go beyond the regulatory requirements”, says Filippo Alloatti, head of financials in the credit team at Federated Hermes.
Comparing bond fees
Another way to assess banks’ level of sustainable financing ambition is by looking at the portion of fees earned from green bond deals against the portion earned from fossil fuel bond issuance, as Anthropocene, an NGO, has done. The below chart also incorporates Reclaim Finance’s policy scoring methodology, where banks can obtain up to 10 points across a number of indicators focussed on restrictions on new oil and gas projects, restrictions on companies developing new oil and gas projects, and strategies to phase out oil and gas. A higher score denotes a stronger policy.
Anthropocene uses fee data taken from Bloomberg to publish its quarterly green/fossil fuel bond syndication league table. It finds Credit Agricole has the highest ratio of green to fossil fuel bond fees, with 13.8%, while Japan’s MUFG has the lowest (-6.5%).
Capital Monitor compared this data against the combined policy scores assigned to the banks by Reclaim Finance’s coal policy tracker tool, which was last updated on 27 May, and oil and gas policy tracker tool (see chart below).
The banks with the highest green-to-fossil fuel bond fee ratios – Credit Agricole and BNP Paribas – also had the highest policy scores from Reclaim Finance overall. The latter indicates that analysts at Reclaim Finance regards those lenders’ policies restricting funding to the fossil fuel sector to be the strongest. The two banks with the lowest ratios, MUFG and Wells Fargo, also have among the lowest policy scores of the banks.
Nearly half of the banks are clustered around having a low policy score and a low, though still positive, ratio of green to fossil fuel fees.
It appears that banks with more robust approaches to fossil fuel lending tend to practise what they preach – at least according to what they define internally as sustainable finance. But until there are clearer accepted standards around the scope of such lending, banks seem likely to face some scepticism from investors.
Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.