Temperature records on land and at sea are being broken at an alarming pace, shows research from the World Meteorological Organisation, a UN agency, as the impacts of climate change are increasingly felt. The international political will needed to slash emissions in line with science and slow global warming is, however, sorely lacking.
In the face of this inertia, divesting from fossil fuel companies may be the strongest net-zero tool banks have at their disposal, argues Hans Stegeman, chief economist at Triodos, a sustainable bank headquartered in the Netherlands.
COP26, the international climate summit that took place in Glasgow in 2021, seemed to herald a brave new world for the banking sector with the creation of the Glasgow Financial Alliance for Net Zero (Gfanz) and the Net-Zero Banking Alliance.
In the intervening 18 months “nothing really has happened and things have even got a little bit worse in terms of pledges and promises”, Mr Stegeman tells The Banker. “There isn’t much progress from an international angle. We see some investors and pension funds divesting from fossil fuels, but it is still very limited.”
The reasons for this lack of action are “complex”, says Mr Stegeman. Any attempt at international coordination across the financial sector is made “even more difficult” by the backlash against environmental, social and corporate governance (ESG) investing in the US, led by certain Republican states, he adds.
The “step back from sustainability” by asset managers in the US is “extremely dangerous”, says Mr Stegeman. “These are big capital flows” and “there is no easy way to see how we can resolve this.”
these are material risks to your portfolio and you can see them if you look out of the window
He admits he cannot understand how US politicians and bankers can see the smoke from the wildfires in Canada and not question the physical risks of investment decisions. ESG “has nothing to do with being woke”, he comments. “These are material risks to your portfolio and you can see them if you look out of the window.”
“The hope is that EU financial standards become the standards for all capital flows,” says Mr Stegeman, while expressing concerns about what EU regulations are really trying to achieve. “Even with all the new regulations in Europe, it is not clear they will lead to more sustainable outcomes.”
He continues: “I think regulations are more concentrated on combatting greenwashing, when the original objective was on redirecting capital flows. Let’s concentrate on what is really bad and not what is light green and dark green. Let’s mobilise public opinion to show the damage your money can do.”
The US situation is far from being the only reason why banks and other financial institutions are not moving to net zero as fast as science shows is necessary to limit global warming to 1.5C above pre-industrial levels, says Mr Stegeman.
“Moving from pledges to implementation is not easy,” he says. “The financial sector finances the real economy. If governments don’t follow up on their plans, the economy doesn’t decarbonise” and banks are left largely stuck between a rock and a hard place, he suggests. “Why do we think the finance sector can do more, when policy-makers don’t do anything?”
A lack of action from governments does not let banks off the hook, insists Mr Stegeman. “There is a huge responsibility for the financial sector to work on this and implement change, but we should be honest that it is difficult,” he says.
One problem is a lack of data, says Mr Stegeman. Banks have the most detailed data for the biggest companies, but often less agency with them, while “with smaller companies, you have the most agency, but you only have proxy data”, he comments.
Why do we think the finance sector can do more, when policy-makers don’t do anything?
“You have an idea on a portfolio level about their emissions, but you can’t follow up on a granular level or have a meaningful conversation.” Information gaps “which will be worse for biodiversity” are, however, “not an excuse to do nothing, it just makes it harder”, he says.
“We need data and regulation, but we also have our own responsibility to do something,” he says. This “something”, in his view, is divesting.
Mr Stegeman cites the announcement by energy major Shell last week that it is shelving plans to reduce oil production each year for the rest of the decade and will continue to invest heavily in oil and gas. Trying to engage as a bank with Shell on net zero, given the company’s stance, is not really credible, says Mr Stegeman. “If you take it [net zero] seriously, divest,” he advises. “Divesting is the first step, unless you have real agency to help clients decarbonise.”
The best outcome at COP28 to advance the pledges made at COP26 would be for the financial sector to agree “very concrete targets, in line with the Paris Agreement, showing fossil fuel companies there will be less capital from us in the next five years”. In the current climate, however, “that is not happening”, he adds.
Paddy McCully from Reclaim Finance, a campaign group, says Gfanz and its chair, Mark Carney, need to be stronger in the face of the US pushback if COP28 is to deliver.
“Since late last year, the previously seemingly ubiquitous Mark Carney has gone radio silent,” Mr McCully told The Banker. “As chair of Gfanz he needs to stand up for the concept of individual and joint financial sector action on climate.”
“Gfanz was supposed to come out late last year with papers on decarbonising the oil, gas and steel sectors, but has not done so because of resistance from its US members,” says Mr McCully. “It is important Gfanz comes out clearly against US climate deniers.”
