How Banks Invest in Dirty Energy

The 2018 edition of Rainforest Action Network's fossil fuel finance report card looks at the global banking system, its policy commitments regarding the provision of bank lending for fossil fuel projects around the world and how the banks treat this issue in the real world of financing and underwriting.

Let's open by looking at a selection of commitments from some of the world's larger banks:

1.) Royal Bank of Canada:

"Environmental Footprint Reduction: RBC will pro-actively apply sound environmental practices to internal operations and purchasing decisions. We will seek ways to minimize our consumption of resources, including energy, paper and water, and our generation of waste and emissions. We will help create opportunities for our suppliers and employees to do the same.

Responsible Business: RBC will develop, maintain, and communicate effective policies, procedures, standards and guidelines for our business activities, to address environmental issues and risks material to RBC, its clients and its other stakeholders.

Promote Sustainability: RBC will establish and maintain productive partnerships with experts and stakeholders to ensure that we remain informed about relevant concerns and issues and are well-positioned to manage environmental risks and opportunities. We will provide support for selected non-protest  groups working to address environmental issues of importance to RBC and our stakeholders.

2.) JPMorgan Chase:

"The carbon markets have experienced tremendous growth in recent years, and as the world transitions to a low carbon economy, that growth is expected to accelerate. As a result, environmental sustainability has become increasingly important to the success and longevity of our clients. At J.P. Morgan, we bring together our advice, market knowledge and execution capabilities to help clients mitigate risks associated with climate change and cost-effectively reduce greenhouse gas emissions.

Whether supporting the development of the markets, or expanding our capabilities to meet client demand, J.P. Morgan has taken a leadership role in addressing the challenges and opportunities of a carbon-constrained environment. The firm helped found the New York Mercantile Exchange’s Green Exchange. The exchange offers a range of environmental futures, options and swap contracts for markets focused on solutions to climate change, renewable energy and other environmental challenges.

J.P. Morgan provides end-to-end carbon solutions across origination, sales, trading and risk management. We work with individuals and corporations to originate high quality emission certificates, across a range of technologies, geographies and standards and provide full transactional trading support services, as well as a global distribution platform."

3.) Citibank:

"Citi announced today a landmark commitment to lend, invest and facilitate a total of $100 billion within the next 10 years to finance activities that reduce the impacts of climate change and create environmental solutions that benefit people and communities. Citi's previous $50 billion goal was announced in 2007 and was met three years early in 2013.

With this $100 billion initiative, Citi will build on its leadership in renewable energy and energy efficiency financing to engage with clients to identify opportunities to finance greenhouse gas (GHG) reductions and resource efficiency in other sectors, such as sustainable transportation. As part of a commitment to helping cities thrive during this period of unprecedented urban transformation, Citi will seek to finance and support activities that enable communities to adapt to climate change impacts and directly finance infrastructure improvements that increase access to clean water and manage waste, while also supporting green, affordable housing for clients, including in low- and moderate-income communities."

4.) HSBC: 

"Governments will be crucial in setting long-term, stable policies which support the investment decisions needed in the transition to a low-carbon economy. HSBC therefore welcomes the Paris Agreement. We will support the Agreement and supplement it with voluntary actions, building on the voluntary actions we have already taken over the last decade.

HSBC supports, and is building into its business, the aims of the Paris Agreement:

1. Mitigation: holding the increase in average temperatures to well below 2°C above pre-industrial levels, with efforts to limit the increase to 1.5°C.

2. Adaptation: increasing the ability to adapt to the adverse impacts of climate change.

3. Finance: making financial  flows consistent with a pathway to low greenhouse gas emissions.

Interestingly, when you look through many of the websites of the world's largest banks, you will find commitments (i.e. motherhood statements) that they will strive for carbon neutrality in their operations by reducing waste and energy use through the implementation of green energy etcetera.  In fact, companies like HSBC have recently committed to combat climate change with a substantial investment in sustainable financing (in HSBC's case, $100 billion) as follows:

"Source 100 per cent of its electricity from renewable sources by 2030, with an interim target of 90 per cent by 2025. By signing long-term agreements with suppliers, HSBC aims to support the development of new renewable power facilities.

Reduce its exposure to thermal coal and actively manage the transition path for other high-carbon sectors. This includes discontinuing financing of new coal-fired power plants in developed markets and of thermal coal mines worldwide.

Adopt the recommendations of the Task Force on Climate-related Financial Disclosures to improve transparency. In its next two Group annual reports, HSBC will give more details on its approach to climate-related risks and opportunities.

Lead and shape the debate about sustainable finance and investment. This includes promoting the development of industry-wide definitions and standards."

Now, let's look at the findings of the authors of the report entitled "Banking on Climate Change".  The authors assessed 36 private banks from Australia, Canada, China, Europe, Japan and the United States looking at lending and underwriting for what is termed "extreme fossil fuels" which includes tar sands, Arctic and ultra-deepwater oil, liquified natural gas (LNG), coal mining and coal power.  The report calculates the total lending and underwriting of the top 30 companies in each of these subsections over the years between 2015 and 2017 and the amounts are then weighted based on the fossil fuel company's activities in a given subsector.  

Here is a table showing, in order of bank financing for extreme fossil fuels from greatest to least for the 36 banks in the study:

In total, over the three year period, these 36 banks provided a total of $345.271 billion in financing for projects that are defined as extreme fossil fuels.  The biggest driver in the overall growth from a total of $104 billion in 2016 to $115 billion in 2017 was funding for the tar sands sector which grew by 111 percent over the two years as shown here:

This is particularly interesting given that the Paris Climate Accord, often touted as an important development in the banks' statements on mitigation of climate change, was signed on April 22, 2016.

It is largely Canada's banks that are responsible for the significant increase in financing for extreme fossil fuel projects between 2015 and 2017 as we can see on this graphic:

...and this graphic which shows the top ten largest lenders to the extreme fossil fuel sector in 2017:

According to the author's analysis, bank financing of extreme fossil fuel projects grew substantially from 2016 to 2017 as follows (in order from first to tenth position on a year-over-year basis):

1.) Royal Bank of Canada - $8.8 billion increase

2.) Toronto Dominion Bank (Canada) - $4.7 billion increase

3.) JPMorgan Chase - $4.0 billion increase

4.) HSBC - $2.6 billion increase

5.) Canadian Imperial Bank of Commerce - $2.0 billion increase

6.) Scotiabank (Canada) - $1.6 billion increase

7.) Goldman Sachs - $1.2 billion increase

8.) Credit Suisse - $1.1 billion increase

9.) Bank of Montreal (Canada) - $778 million increase

10.) Standard Chartered - $643 million increase 

As I noted above, lending to companies in Canada's tar sands operations grew by a whopping 111 percent on a year-over-year basis between 2016 and 2017.  A total of $47 billion in funding for tar sands players in 2017 resulted in this sector overtaking coal as the best funded of the extreme fossil fuel sectors.  On the other hand, the banking sector support for coal as remained stagnant over the past three years with Chinese banks being the coal sector's biggest backers; coal sector financing was up by only 5 percent on a year-over-year basis in 2017.  Banking sector support for liquified natural gas has fallen dramatically, plunging by 62 percent since 2015, largely because of a world surplus of LNG production facilities thanks to investments in the United States, Australia and Qatar.

While many still debate the existence of anthropogenic climate change, it is interesting to see that, despite their protestations and promises to the contrary, the global banking sector, particularly in Canada, has not shied away from lending to projects that will increase the global output of extreme fossil fuels.