Is the influence on banks from investors regarding fossil fuel financing showing signs of declination?
Headline: Banks Face Challenges in Reducing Fossil Fuel Financing and Transitioning to Renewable Energy
Banks are under increasing pressure to reduce their financing of fossil fuel projects and transition towards renewable energy, as evidenced by recent shareholder resolutions and investor statements.
Amanda Mackenzie, the chair of the responsible business committee at Lloyds Bank, has been at the forefront of these discussions.
The 2024 Banking on Climate Chaos report provides crucial evidence that investors base their thinking on. The report shows that since the Paris Agreement was signed, 60 banks provided over $6tn to the fossil fuel sector, with a third coming from American banks, 15% from Chinese banks, and another 13% from Canadian lenders.
This resurgence in fossil fuel financing despite net-zero pledges is a key challenge that banks are facing. Almost 70% of 65 analyzed banks increased funding for fossil fuel companies in 2024, indicating backsliding on promises to decarbonize their portfolios.
While most banks have imposed financing restrictions on coal, finance for oil and gas projects remains largely unrestricted except for some of the most egregious projects. This uneven approach undermines efforts to align banking activities with a 1.5ºC climate target.
The Science Based Targets initiative (SBTi) released its first net-zero standard, urging banks to end funding for fossil fuel expansion. However, SBTi's guidance differentiates between mandatory exclusions (e.g., new thermal coal projects) and recommended exclusions (e.g., metallurgical coal, some gas projects), leading to inconsistent policy adoption across banks. Only a few banks have policies restricting financing in sectors like metallurgical coal, critical for steel production.
Banks and investors highlight challenges in consistently measuring and disclosing financed greenhouse gas (GHG) emissions (Scope 3), which is crucial for assessing and managing climate risks in lending portfolios. A common reporting framework, like the Energy Supply Financing Ratio, is still emerging, making it harder for investors to compare banks' financed emissions and hold them accountable.
Shareholder resolutions and investor statements increasingly demand stricter climate policies and fossil fuel divestment, but voluntary commitments without binding regulation have proven insufficient to reverse fossil fuel financing increases.
The Church of England Pensions Board, with £3.4bn of funds under management, attended Lloyds Bank's AGM and called for a full exit from fossil fuel financing while acknowledging the bank's progress. Investors are demanding an implementation plan from banks to reduce fossil fuel financing and tilt their loan books to renewables.
The current proxy season is marked by increased pressure on banks regarding their fossil fuel financing. At the Barclays AGM on May 7, investors made their voices heard. Similarly, at Royal Bank of Canada's AGM in April, a proposal asking for a 'say on climate' vote surfaced again, receiving 16% shareholder backing, a marginal gain from 15% the year prior.
However, some resolutions have faced opposition. RBC's 'Say on Climate' vote was opposed by over 80% of shareholders.
In summary, banks face key challenges including the resurgence in fossil fuel financing despite net-zero pledges, uneven application of financing restrictions (especially for oil and gas), difficulties in setting and enforcing robust transition policies, and lack of standardized, transparent reporting on financed emissions. These obstacles highlight the limitations of voluntary approaches and the critical need for stronger regulatory frameworks and coordinated investor engagement to advance the transition from fossil fuels to renewable energy.
- Environmental science, climate-change, and business are intertwined issues that banks acknowledge, as evidenced by their increasing recognition of the need to reduce fossil fuel financing and transition towards renewable energy.
- Despite some banks' net-zero pledges, the substantial amount of financing for fossil fuel companies they provide, as indicated in the 2024 Banking on Climate Chaos report, remains a significant concern in the realm of environmental-science and investments.
- The Science Based Targets initiative (SBTi) encourages banks to end funding for fossil fuel expansion, but inconsistencies in policy adoption across banks persist, causing challenges in the business world for sustainable investing.
