85% of banks still willing to finance new coal, TPI report finds.

North American banks came under heavy scrutiny this proxy season. From JP Morgan Chase and Morgan Stanley to Bank of America and Citigroup, climate-related shareholder resolutions flowed into 2024 annual general meetings amidst rising investor concerns over fossil fuel financing.

Three of New York City’s pension funds in particular, led the charge. The New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System (TRS), and Board of Education Retirement System (BERS) filed resolutions at six of North America’s largest banks seeking more transparency on their financed emissions.

As components of an asset owner portfolio and co-habitants of a financial sector looking to rein in fossil fuel financing, banks’ decarbonisation matters to their institutional shareholders. “Our planet, our economy, and our investment portfolios are all at stake”, said Brad Lander, the New York City Comptroller.

New research from the Transition Pathway Initiative, an asset owner-led initiative, validates the Comptroller’s concerns. The report, which analyses climate ambitions at 26 major international banks, paints a grim picture of decarbonisation in the banking sector.

Financing fossil fuels

Asset owner expectations from banks are summarised in three key pillars of the NYC pension fund resolutions: fossil fuel exposure, credible disclosures and climate solutions financing.

It is hardly the case that climate ambition in the banking world is rare. 22 of the 26 surveyed banks have a commitment in place to phase out new coal capacity. However, it is what comes next that asset owners seem concerned about. “Despite all their talk, the big banks have made little progress in the energy finance transition over the past couple of years”, says Lander.

Walking the talk, in other words, is a critical investor demand. Here, the report finds worrying trends. For one, commitments lack depth in that they only cover a portion of the bank’s financing activities such as project finance or corporate loans. As a result, activities such as asset management, are often excluded from a bank’s climate ambition. On average, targets cover less than 22% of total revenues.

Consequently, ability and willingness to finance new fossil fuel capacity remains high.

Second, decarbonisation targets for the banking sector are facing a crisis of credibility. Bank of America and Bank of Montreal have gone back on their word in the past; the former removed lending exclusions for new thermal coal mines and the latter did away with its policy to restrict loans to the coal industry.

Measure progress

Investors are equally concerned about disclosures. At the heart of the NYC pension fund resolutions was a demand to measure and disclosure a new metric: the clean energy financing ratio.

“As long-term investors exposed to climate risk, we can’t just take their word for it. Reporting transparently on their ratios of clean energy to fossil fuel finance is key to seeing whether or not they are living up to their net-zero commitments”, Lander adds.

TPI’s research highlights key gaps in bank disclosures. Just 14 banks disclose their credit exposure to high emission sectors. An even lower share - five banks - disclosed information about client-purchased offsets. None of the surveyed banks disclosed what percentage of their revenue was at stake.

“Investors need disclosures of both credit and revenue exposure to identify concentrations of transition risk across banks; the omissions impede their ability to do so”, the report finds.

Financing solutions

The final piece of the puzzle has to do with the flip side – financing climate solutions. For the most part, banks have pledged to increase their financing of climate solutions. 42% of surveyed banks said so.

Here too, the mere presence of ambition is unlikely to sway investors. Bank of America’s $1 tn by 2030 transition finance commitment, for instance, did not impress the three New York based pension funds. They pushed for more information.

The TPI report finds that banks often consider a broad definition of climate solution financing while setting targets. In addition, targets tend to cover not only loans but also advisory services, trade finance and capital market activities.

“This is in stark contrast to net zero commitments and sectoral decarbonisation targets, which are typically limited to lending and investment activities”, the report reads.

It is noteworthy that when the NYC pension funds pressed North American banks for a metric, they asked for a ratio of clean financing to fossil fuel lending. In other words, investors are likely to assess a bank’s climate solutions target in the broader context of its fossil fuel financing.

As Lander put it, “North American banks appear to believe that they can just scale up financing of clean energy, without phasing out fossil fuel finance. But press releases about great new projects won’t protect our portfolios or our planet if overall emissions keep rising.”

The 2024 proxy season made it clear that stewards of long-term capital such as the NYC Comptroller are increasingly concerned about fossil fuel lending. Armed with fresh evidence from TPI and new tools to assess the pace of a bank’s decarbonisation, investor pressure on North American banks seems here to stay.