What happened at COP26? Follow the money.
- The COP26 summit ended with commitments to halt deforestation, “phase down” coal power plants, and $130 trillion in private capital funding.
- Banks pledged to focus more on sustainable investments, but some remain skeptical on the progress actually achieved.
COP26 is now over, and it concluded with a few agreements and a lot of hopes for the following COP next year.
The main outcome was the Glasgow Climate Pact, which calls on 197 countries to accelerate climate-friendly actions and report their progress on the green agenda at COP27, which is set to take place in Egypt in November 2022.
Over 120 countries, representing about 90% of the world’s forests, pledged to halt and reverse deforestation by 2030. More than 40 countries, including major coal-users such as Poland, Vietnam and Chile, agreed to shift away from coal.
However, there were also some disappointments. In a last-minute change to the pact, China and India softened the language in an earlier draft regarding “the phase-out of unabated coal power and of inefficient subsidies for fossil fuels”, editing “phase-out” to “phase down”. COP26 President Alok Sharma noted that the two countries would have to explain themselves and what they did to the most climate-vulnerable countries in the world.
The financial sector was also a key focus at the summit.
Mark Carney, former Governor of the Bank of England, was the UN Special Envoy for Climate Action and Finance at COP26. Carney assembled the Glasgow Financial Alliance for Net Zero, a group of bankers, insurers and investors committed to making climate change a top priority.
The Alliance agreed to devote $130 trillion in private capital funding - around 40% of the world’s financial assets - to hit net zero emission targets by 2050. Its members represent over 450 financial institutions from 45 countries. From the US, banks that participated included Bank of America, Citi, JPMorgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo.
Members of the alliance pledged to report every year on their lending practices, disclosing the carbon emissions linked to where their capital is going. However, these promises were taken with a pinch of salt by many activists who argued that the pledges were insufficient and demanded more immediate climate action.
“It is not green finance, nor is it all dedicated in the slightest to tackling climate change as long as financiers have large interests in fossil fuel expansion,” said Becky Jarvis, a strategist for the Bank on our Future campaign network.
Lending practices: a closer look
When talking about the climate crisis or any other wide-ranging issue, banks typically have two main levers they can pull: lending and investments. And these are the two practices that are coming under increased scrutiny.
In investment banking, one major milestone was when BlackRock, the world’s largest asset manager, announced in 2020 that it will focus its investments on sustainability-oriented securities.
Lending is beginning to adopt this kind of mentality, and some progress was made at COP26 to further the green transition and increase transparency on where the money is going. And as it represents a big portion of corporate finance, lending is crucial for decarbonizing the industry.
Moreover, the current picture the financial industry is painting isn’t a pretty one. Especially for the US.
According to a study by Banking on Climate Chaos, the world’s 60 largest commercial and investment banks invested a total of $3.8 trillion in fossil fuels from 2016 - 2020. In order to assess the impact on the fossil fuel industry, the study aggregates the banks’ leading roles in lending and underwriting of debt and equity issuances.
JPMorgan Chase headed the charts as the world’s top banker of fossil fuels, lending $317 billion in the five-year period. The next three top fossil fuel financiers were also US banks, namely Citi, Wells Fargo and Bank of America.
Top 12 banks financing fossil fuels globally, 2016 - 2020
Source: Banking on Climate Chaos
The study noted how the most important task for banks in fighting climate change is to stop financing the expansion of fossil fuels, arguing that current policies are insufficient.
“The current wave of “net zero by 2050” commitments represents a tacit acknowledgement by banks that they too are major emitters. This is long overdue. In fact, for years banks have resisted acknowledging their harmful climate impact at all, preferring to instead focus almost entirely on their vulnerability to climate change,” the report said.
This reputation will be a difficult one for banks to overcome. They will need to shift their investment strategy and look for profitable opportunities in sustainable industries, which hasn’t been happening in recent history. If the pandemic put regular life on hold, and therefore lowered carbon emissions from daily activities, the opposite was happening in the financial sector.
The first half of 2020 saw the most fossil fuel financing of any six-month period since the adoption of the Paris Agreement in 2015, the report found. This happened as big banks around the world took advantage of low interest rates and central bank bond buying programs to purchase cheap debt preparing for more difficult times ahead.
This fueled concerns regarding the banking industry’s attitude towards the climate crisis versus the opportunity for short-term profit.
Even if COP26 didn’t provide the solutions that green finance enthusiasts hoped for, it did push forward the climate agenda in the financial space. The need for more transparent banking and enhanced disclosures is now being addressed, even if through new alliances or promises.
As the UN chief Antonio Guterres concluded: “It is an important step but is not enough.”