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Banks’ green pledges under scrutiny

As global leaders gather in Glasgow to hammer out a new climate deal, the financial sector faces growing calls to scale back its business with carbon-intensive sectors and live up to some of the promises it has already made to tackle global warming.

Scrutiny of banks’ lending has intensified in the run-up to COP26 in Scotland, the biggest meeting of its kind since the Paris climate deal was agreed. The financing of highly polluting fossil fuel industries has been one of the most contentious topics, leaving banks such as Barclays, Deutsche and BNY Mellon open to accusations of double standards.

Across the global banking sector “too many fossil fuel restriction policies currently contain too much wiggle room, discretion or hazy definitions”, said analysts at Autonomous Research.

High-profile investors including hedge fund manager Chris Hohn have also lambasted banks for continuing to service the fossil fuel industry, which he said was allowing “systemic risk” to build in the global financial system.

The ties between financial institutions and fossil fuel companies stretch from funding coal mines, backstopping debt issuance and lending directly to power producers.

BNY Mellon has found itself embroiled in controversy in the build-up to COP26. The US bank was in talks to sign up to the Net Zero Banking Alliance (NZBA), an industry initiative spearheaded by former Bank of England governor Mark Carney, according to people familiar with the matter.

Yet at the same time, BNY’s Australian subsidiary, BTA Institutional Services, was preparing to finance Adani Group’s Carmichael coal mine in Queensland, one of the world’s most controversial new fossil fuel projects, according to emails seen by the FT. 

The bank, which did not respond to requests for comment on its lending to Adani, has yet to sign up to the NZBA.

Numerous banks have altered the wording of climate commitments to make them less restrictive © Justin Merriman/Bloomberg

A key concern among analysts is that bank policies often apply only to certain asset classes and exclude off-balance sheet activity such as share issuance and bond underwriting. Policies can talk about a lender’s “exposure”, which may be measured cumulatively, by sector, rather than company by company.

In a report into fossil fuel financing this year, the Rainforest Action Network said it was “crucial” that banks’ climate policies covered underwriting as well as lending. “In 2020, 65 per cent of bank financing for fossil fuels was through the underwriting of bond and equity issuances,” it found.

In April, Barclays appears to have breached its own climate policy when it acted as a lead underwriter for a $216m bond deal for US-based utility Monongahela Power.

Barclays’ climate policy stated last year that from 2020 it would “not provide any financing to clients that generate more than 50 per cent of revenue from thermal coal activities”, a commitment that included capital markets underwriting. However, 86 per cent of Monongahela’s generation fleet is coal-fired, its parent company FirstEnergy has disclosed.

Other banks simply do not include short-term targets, with some not setting any deadlines at all. Five years ago HSBC said it would fully disclose the details of its exposure to the coal mining sector but has to date provided only partial transparency.

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Barclays declined to comment. HSBC said the bank would report its exposures to coal-fired power and thermal coal mining on an annual basis from the 2021 financial year.

The Financial Times also found that numerous banks have altered the wording of climate commitments to make them less restrictive.

This year, Intesa Sanpaolo, Italy’s biggest bank, which also declined to comment, increased its threshold for lending to OECD power companies with coal plants, from a limit of 30 per cent of installed capacity to 35 per cent.

Germany’s biggest lender Deutsche Bank — whose asset management arm DWS is already facing investigations in the US and its home country over alleged greenwashing — said in 2020 that it would perform a “systematic review of all its global business activities in the oil and gas sector by the end of 2020 with the aim of subsequently setting limits for its overall business activities in the coming years”.

While Deutsche in May 2021 did for the first time disclose that oil and gas companies have borrowed €7bn from the lender — a mere 2 per cent less than in 2016 — it has not yet published any lending limits.

The lender has also weakened the language of its pledge to “developing and introducing mutually accepted methods of measuring climate impact and to start reporting on our targets and our progress toward them starting in 2023”. 

“Deutsche Bank’s announcement in May 2020 raised some hope of reduction targets [for oil and gas financing],” Regine Richter, a campaigner at German NGO Urgewald, told the FT. She added that the lender’s new approach was a “waste of valuable time”. 

A person familiar with the matter acknowledged that Deutsche ditched the initial idea to impose strict limits for loans to the oil and gas industry.

“As a founding member of the NZBA we have made significant progress in calculating the carbon footprint of our loan portfolio and are confident to report our pathway in alignment with the Paris targets well before the end of 2022,” Deutsche told the FT, adding that its own net zero target implied that its clients also need to have “credible transition strategies” in line with the bank’s goals.

Some in the banking industry have argued that hard limits against financing fossil fuels are not realistic, since oil and gas will remain necessary for years, and could be counterproductive if carbon-heavy clients cannot access funding for green projects.

However, for activists, bank rhetoric is wearing thin.

“The financial sector talks a big game on climate” but is “failing to address the urgency of the climate crisis”, said Patrick McCully, senior analyst for non-governmental organisation Reclaim Finance this week. “COP26 must signal a turning point . . . away from foot-dragging and towards an end to financial support for fossil fuel expansion.”

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