The world’s largest banks are facing calls from investors and activists to publish ratios that compare their spending on renewable energy with the amount they continue to invest in fossil fuels.
Non-profits Reclaim Finance, BankTrack and Beyond Fossil Fuels are campaigning for banks to set a target ratio of 6:1 for their clean energy compared with fossil fuel financing by 2030. This would mean for every €1 spent on financing fossil fuels, €6 should be spent on cleaner energy sources such as wind and solar power.
“Committing to a finance ratio in favour of sustainable power is the best way for banks to demonstrate that their professed support for the energy transition is credible,” says Beyond Fossil Fuels campaigner Brigitte Alarcon.
Investors are also raising the heat on banks. In January, New York City comptroller Brad Lander and trustees of three US pension funds, the New York City Employees’ Retirement System, the New York State Teachers’ Retirement System, and the NYC Board of Education Retirement System, filed shareholder resolutions at some of the world’s biggest banks, calling on them to publish these ratios.
“Despite all their talk, the big banks have made little progress in the energy finance transition over the past couple of years,” Lander said in a January statement.
Shareholder proposals were received by JPMorgan Chase, Morgan Stanley, Bank of America, Citi, Goldman Sachs and Royal Bank of Canada.
The action has already secured a commitment from JPMorgan to publish a “clean energy supply financing ratio” in 2024. The bank will need to decide on the methodologies that underpin this ratio, including what constitutes “low-carbon” energy and “fossil fuels”.
“We found common ground with the NYC comptroller on disclosing a clean energy financing ratio with an understanding that it is going to take us some time and resources to develop a decision-useful approach,” a JPMorgan spokesperson says. “We will engage with NYC and our shareholders to provide the market more clarity and transparency about our activities and what financing the transition truly looks like.”
Reclaim Finance analyst Rémi Hermant welcomes JPMorgan’s commitment, but emphasises the importance of understanding the data that informs these ratios. “It’s easy for them to manipulate numbers,” he says. “We need to make sure that on the fossil fuel part, they effectively include all the supply chain and all the financing.”
Hannah Saggau, senior climate finance campaigner at non-profit Stand.earth, says in a statement: “What we want to see now is Citi not just revealing information on its energy financing ratios, but rapidly phasing down financing, year over year, of coal, oil and gas companies and projects and a big leap in financing of renewables and real energy-related climate solutions.
“We would also urge Citi to track actual sustainable power financing and not low-carbon energy that includes false solutions, such as unproven carbon capture and storage, and energy such as nuclear and biomass,” she adds.
Citi declined to comment.
Easy metric for investors
BloombergNEF sustainable finance associate Katrina White says the NYC comptroller’s and investor groups’ demands were inspired by a December 2023 BNEF report, which set out an “energy supply banking ratio” comparing banks’ financing of low-carbon energy supply with their backing of fossil fuel energy supply.
According to the BNEF report, for every $1 in fossil fuel financing facilitated by banks in 2022, $0.73 backed low-carbon energy — a slight decrease from $0.75 in 2021.
“Despite improvements in the ratio of real-economy investment, neither this nor bank financing is changing at the pace or scale required to hit the minimum 4:1 ratio needed this decade, as implied by commonly referenced climate scenarios that limit global warming to 1.5C,” it said.
In BNEF’s assessment of 10 large banks — which it defines as having conducted more than $10bn of energy supply financing in 2022 — Banco Santander ranked first, with its financing of low-carbon energy supply almost double its financing of fossil fuels.
While UK bank NatWest topped BNEF’s 2021 rankings, it did not feature in 2022’s top 10 list as its energy financing volumes of $7bn were below BNEF’s $10bn threshold. But the report noted that NatWest had “a leading ESBR [energy supply banking ratio] of 8.9:1” in 2022, meaning that for every $1 spent on fossil fuels, $8.90 went towards low-carbon energy. NatWest did not respond to a request for comment.
“Many in the market are adjusting to embracing this concept,” White says. “From our conversations with many banks, we have generally found that folks find it a useful addition to the conversation, particularly in how it expands the narrative from a focus on fossil fuels to a focus on the evolution of the energy sector as a whole.”
The ratio can be challenging to compile because “banks serve their energy clients in many different ways and through numerous deal structures, some of which are complicated to quantify or often poorly disclosed”, she notes. “If a bank is to calculate this themselves, they will have to decide which types of deals that they do will be included, and gather all of that data from a wide set of teams.”
Quentin Aubineau, a policy analyst at non-profit BankTrack, says that “publishing and then increasing your ratio of financing of sustainable power like wind and solar versus fossil fuels is an ideal metric for a bank committed to transition planning”.
“It’s also an easy comparable metric for investors looking to track progress of investee banks,” he adds.
Easy to manipulate
While JPMorgan and Citi’s disclosure commitments are voluntary, banks in the EU face stricter reporting requirements. Under the EU taxonomy, from this year banks must disclose a “green asset ratio” that compares “green” with total assets on their balance sheets.
Corporate loans, equities and some mortgages are included within this framework, although banks’ underwriting activities are not included. In 2021, the European Banking Authority estimated an average green asset ratio across the EU of 7.9 per cent.
“Regulation is great where it provides standardisation,” says White, and “standardised disclosure is helpful to everyone”. But she suggests it would be hard to enact rules compelling banks to disclose ratios in the US, citing the significant opposition to the Securities and Exchange Commission’s recently adopted disclosure rules.
Global Solar Council chief executive Sonia Dunlop says that when constructing these ratios, banks need to be scrutinised over how they categorise investments in electricity grid infrastructure. These are “absolutely critical to the renewables transition and, I firmly believe, should be counted as clean energy … the lack of grid capacity is the absolute number one challenge for renewables investment”, she says.
Gas should not be included under the renewable energy component of the ratio, Dunlop says. “There is a risk [that] if they use the EU sustainable finance taxonomy, then gas is actually counted as green finance. That is highly misleading,” she says.
The European Commission claims the controversial inclusion of natural gas in its taxonomy is “under strict conditions” and “will help accelerate the shift from solid or liquid fossil fuels, including coal, towards a climate-neutral future”.
Other banks reject proposals
The NYC comptroller and investor groups are engaging on the issue of a fossil fuel/clean energy ratio with the other banks it targeted with resolutions ahead of their annual meetings, a spokesperson for Lander said. Some banks have urged their shareholders to vote against these resolutions.
“Asking banks to calculate their own ratios could result in different data sources and methodologies and reduce comparability,” Bank of America’s board told its shareholders in its proxy document. “In light of the existing disclosure of an estimated energy supply finance ratio in the 2023 BloombergNEF report, we do not believe it is necessary to undertake the independent reporting requested in this proposal.
“If all participants in the Bloomberg survey also produced their own ratios as requested in the proposal, there would likely be much less uniformity in methodology and comparability among ratios, which would undermine the utility of such disclosures,” the board added.
Royal Bank of Canada, meanwhile, told shareholders: “Given the lack of industry standards around the clean energy supply financing ratio, we believe that disclosing this metric is premature and would not provide meaningful additional insights to our stakeholders.”
Morgan Stanley declined to comment, while Goldman Sachs did not respond to a request for comment.
This article first appeared in The Banker's sister title Sustainable Views. Click here for more on ESG policy and regulation.
Alex Janiaud is senior investment correspondent at Sustainable Views. Read more articles by Alex Janiaud here.
