Less fudge, more clarity needed on banks' ESG commitments - Comment & Profiles -

Banks may have signed up to ESG commitments but are they acting? Increasing financing of fossil fuels suggests otherwise. Silvia Pavoni reports. 

I recently had a somewhat confounding conversation with a senior banker at a big US lender. Overseeing a group of highly polluting clients, the banker said that he was keen, nonetheless, to raise his profile as an environmental, social and governance (ESG) “expert”. He said: “It is all about ESG now [at the bank]” – to the extent it might yield him a second career as a consultant on the subject, he thinks, even if he has little idea on how to go about it, as ESG is still all a bit of a “fudge”.

The issue here is not so much the banker’s opportunistic grab in a growing space – if anything this signals that ESG is not a short-term trend. The surprising part is to discover that while sustainability grants C-suite attention and higher professional status, this bank is in doubt on how to treat some of its most environmentally and socially risky clients. It is not alone.

Banks are all too familiar with the embarrassment and the business risks related to ESG scandals – the Dakota Access Pipeline is one example that springs to mind. The 2016 $3.8bn oil pipeline, running 1886 kilometres between North Dakota and Illinois in the US, became a high-profile target for environmental activists and the Standing Rock Sioux Tribe, which was concerned about oil spills polluting their water supply. Former US president Barack Obama froze the project; his successor, Donald Trump, restarted it. The project is now back in full swing.

Named but not shamed

Still, the 17 banks involved in the original deal that were named and shamed in a letter by investors must still feel the sting. Others were involved and some subsequently backed away. Many on that list have signed up to the Equator Principles, which should guarantee environmental and social checks on infrastructure financing. The scandal made a mockery of the principles, of which a fourth, tighter revision has just been published.

Loose commitment and lack of detail have been an issue for banking as a sector, not just for individual players. While banks have become more vocal about their commitment to ESG and the management of related risks, their actual support of high polluters has not diminished overall.

For example, in a November report, Boston Common Asset Management found growing take-up of the recommendations by the Financial Taskforce on Climate-related Disclosures – out of the 58 banks it surveyed, 40 had committed to the disclosures, eight more than in 2018. But as Boston Common requested more granular information on governance, the numbers of banks that complied slipped to 71% from nearly all in the 2018 survey, when the metric was more broadly described. The asset manager also noted “a reluctance to expand and deepen client engagement and requirements in high-carbon sectors on both transition and physical risk; and [that] risk assessment is not necessarily leading banks to restrict or end financing or investing”.

Indeed, fossil fuel financing has not decreased since the Paris Agreement on climate change of late 2015. According to the Rainforest Action Network, an environmentalist taskforce, total fossil fuel financing by the world’s largest 33 lenders to the sector between 2016 and 2018 has been steadily increasing, to $1900bn – a figure nearly double the issuance of green bonds since 2007, at $1000bn. The world’s biggest fossil fuel financier is JPMorgan, followed by Wells Fargo, Citi and Bank of America. 

Regulators wade in

Talking about ESG is easier than acting on ESG. The senior banker I spoke to conceded that a good deal of pressure came from investors and regulators across the markets in which his clients operate. In the ESG sector, European regulators have already begun requesting clarity of terms and transparency on sustainable finance strategies. In its Banking on Climate Change 2019 report, the Rainforest Action Network does note how Europe-based Royal Bank of Scotland, HSBC, Santander and Standard Chartered, as well as Japan’s Sumitomo Mitsui Banking Corporation, were the most improved in terms of restricting project financing or clients altogether in the worst polluting sectors such as tar sands oil, arctic oil and gas, coal mining and coal power. 

And the European Investment Bank has recently announced it will phase out lending to all fossil fuel projects by the end of 2021, after it had ceased coal lending. This is set to have a multiplier effect and reverberate across other jurisdictions.

Pressure from investors, policy-makers and the wider public will only intensify. Transitioning to a lower carbon economy and financing is a complex issue, but surely it is one that banks’ brainpower should be able to solve. If sustainability really is a top management concern, then more banks better get a grip on their ‘fudgy’ ESG strategies – and advise their clients accordingly.  

This is a monthly column focusing on ESG principles and how they are reshaping banking, markets and investment. We would like to hear your views on sustainable finance, how it is changing your organisation, your work and your incentives structure. Contact silvia.pavoni@ft.com and, on Twitter, @Silvia_Pavoni

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