Green Finance

Wall Street is running out of time for bold climate action

  • Big banks are making climate pledges, but more bold actions are needed in order to avoid the worst global warming scenarios, according to a new report by the IPCC.
  • The relationship between financial firms and the fossil fuel industry is coming under increased scrutiny as pressure mounts to create clean energy alternatives.

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Wall Street is running out of time for bold climate action

Financial institutions have been slow to take climate action, and there is not enough time for incremental changes as the world continues to warm at an alarming rate.

The slow implementation of climate commitments by stakeholders in the financial system reflects neither the urgent need nor the economic rationale for ambitious climate action, the UN’s Intergovernmental Panel on Climate Change (IPCC) said in its latest research.

The report outlines the imminent danger of climate change – even if governments implemented all the policies established by the end of 2020 to reduce carbon emissions, the world will still warm by 3.2°C this century.

In order to avoid the worst outcomes, global CO2 emissions would need to peak by 2025 and then drop rapidly – an increasingly unlikely scenario.

“Some government and business leaders are saying one thing - but doing another. Simply put, they are lying. And the results will be catastrophic,” said UN Secretary General Antonio Guterres.

The actions taken in the next few years will be critical, with energy sourcing being the short-term key given the current geopolitical situation coupled with the attractive economics of clean energy alternatives.

In order to hold global warming within 1.5°C, emissions would need to halve by 2030, and the world would need to use about 95% less coal, 60% less oil, and 45% less gas in 2050, said the IPCC.

The energy sector is an area where major global banks have a key role to play. The world’s 60 largest banks have directed $4.6 trillion in the six years since the adoption of the Paris agreement, with $742 billion in fossil fuel financing in 2021 alone, according to the latest Banking on Climate Chaos report.

US banks remain the world’s largest financiers of fossil fuels, with JPMorgan Chase, Citi, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs providing nearly 30% of the total global fossil fuel financing in 2021 and since the Paris agreement.

Source: Banking on Climate Chaos

Moreover, Bloomberg recently reported that Wells Fargo lent $28 billion to the oil and gas industry in 2021, and $188 billion since the Paris agreement. And the company will continue to support its clients in this industry “as they provide the fuel that powers society today, and as they respond to the evolving market,” the bank said.

InfluenceMap also found it likely for the financial sector to continue to enable economic activities misaligned with net zero targets, as long as they remain legal and economically viable over the short-term.

This shows how Wall Street continues to hold significant power over the energy industry, which is highly dependent on access to capital, and this economic relationship spans decades.

These persistent high levels of both public and private fossil fuel financing continue to be a major concern despite the recent climate commitments made by banks. This reflects policy misalignment, the current perceived risk-return profile of fossil fuel-related investments, and political economy constraints, the IPCC said.

Meanwhile, banks' relationship with sustainability is so far only good on paper – behind the scenes, it’s a muddier picture.

There’s been a wave of climate pledges from banks following last year’s COP26 summit, where financial groups set 2050 climate goals under the Glasgow Financial Alliance for Net Zero. In the US, Wells Fargo pledged to invest $500 billion in sustainable finance, and JPMorgan’s promise is of $1 trillion this decade.

However, most banks remain members of financial industry associations opposing sustainable finance policy, and half are members of associations that lobby fossil fuel interests, including the US Chamber of Commerce and the American Gas Association, according to InfluenceMap.

The think tank also found that the world’s 30 largest financial institutions continue to show a lack of meaningful short-term action in the face of the climate crisis – in direct contrast to the long-term climate targets and voluntary climate-related reporting. And it’s likely that this will continue thanks to the absence of binding climate policy and regulations.

But there are reasons to remain hopeful, according to James Vaccaro, executive director of the Climate Safe Lending Network.

Vaccaro said that there are consequential conversations taking place within banks, at senior and board levels, with advocates for urgent action being placed in much better positions to influence decision making.

He observed a shift in the core beliefs of banks’ senior management. If only a few years ago many bank executives thought that universal banks can’t exclude fossil fuels or that Scope 3 reporting won’t catch on, these “don’t appear to be truths anymore in the majority of banks.”

“I think that there is a finely balanced battle for the soul and purpose of banks which is very close to its tipping point. That doesn’t deny the fact that there are real commercial pressures, legacy vested interests and significant proportions of leadership who are not fully bought into a societal purpose. I am genuinely curious about what will be ‘enough’ to trigger the inevitable wave of action,” Vaccaro said.

And banks appear to be ready for change. An Accenture study conducted last year showed that 71% of US banks could monitor and assess their carbon emissions, and that 67% were prepared to transition to a sustainable economy by directing capital away from the energy sector.

The IPCC acknowledged the increased awareness of climate risks from investors, central banks, and financial regulators, which are supporting climate policy development and implementation with regulatory and voluntary initiatives.

But despite these initiatives, climate-related financial risks remain “greatly underestimated by financial institutions and markets, limiting the capital reallocation needed for the low-carbon transition,” the IPCC said.

Bottom line: tangible climate action continues to lag in the financial sector. Despite the increasing attention of investors to climate change, there is limited evidence that this attention has directly impacted emission reductions.

As the 2030 deadline approaches, pressure will continue to mount on Wall Street to clean up its act and use its power to do good. Scientists say there’s not a lot of time left to make the bold changes we need – and the clock is ticking.

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