The biggest financiers of fossil fuels face some tough questions this shareholder season.
For any company, being seen as trustworthy is critical to success. This is even more true for banks, whose core business is based on being entrusted with funds from customers and investors to manage responsibly and reliably. To be trustworthy means that you make good on your promises and that, if you make a commitment, you then follow through on it. That’s why it’s so troubling that every major US bank has failed to take meaningful steps to follow through on their commitments to spur climate action.
During the last year, the largest American banks—Wells Fargo, JPMorgan Chase, Morgan Stanley, Goldman Sachs, Bank of America, and Citi—all made public pledges to achieve net zero financed emissions by 2050. Despite their commitments, all of these banks have continued to fund the top 20 companies that are responsible for most fossil fuel development—to the tune of more than $445 billion combined in the six years since the Paris Agreement was signed. This is recipe for disaster: The scientific consensus is clear that in order to achieve global net zero emissions by 2050 and avert the worst of the climate crisis, the expansion of new fossil fuel development must stop immediately.
The continued funding for fossil fuel expansion is completely incompatible with any net zero commitment. It also exposes banks’ shareholders to material financial, regulatory, and litigation risks. That’s why concerned shareholders have filed resolutions at the six biggest US banks asking them to adopt policies by the end of 2022 committing to proactive measures to ensure that their lending and underwriting do not contribute to new fossil fuel development.
This request is far from extreme. The proposed policy on new fossil fuel development is not asking for divestment and does not prevent banks from working with their current fossil fuel clients to engage in the necessary and inevitable clean energy transition. It is consistent with guidelines and recommendations from the Net-Zero Banking Alliance, United Nations Environment Program Finance Initiative, the International Energy Agency, and the Intergovernmental Panel on Climate Change.
The policy proposed by some shareholders would also protect investors from the significant risks associated with new fossil fuel development and climate change. These risks include: the stranding of fossil fuel assets as global energy policy moves toward favoring clean energy,; higher capital requirements as financial regulators adopt new climate-related rules ; possible litigation from clients who were sold securities that the company should know are at a high risk of failure; and reputational damage from greenwashing as the continued financing of new fossil fuel development contradicts the banks’ climate commitments.
Much has been made in recent weeks of energy shortfalls caused by Russia’s invasion of Ukraine, and the fossil fuel industry’s attempts to exploit this crisis by framing it as a justification for continued reliance on their product and expansion of oil and gas development. But the reality is that the invasion and the resulting market turmoil make a compelling case for focusing on long-term solutions that contribute to secure, affordable, and clean energy supplies across the globe. The last thing we should be doing is doubling down on our dependence on risky fossil fuels that have proven to be unreliable and unsustainable.
Big US banks have utterly failed to protect their shareholders’ long-term interests as they renege on their net zero commitments and fumble on adequately managing the risks associated with financing new fossil fuel development. Investors are increasingly fed up with this yawning gap between the big banks’ pledges and their actual plans. Already, the New York State Common Retirement Fund, the third largest pension fund in the country, announced it will be voting for the climate-related resolutions at all six of the largest US banks. Now shareholder advocacy groups are waiting to see if the banks’ largest shareholders — powerful asset managers like BlackRock, Vanguard, Fidelity, and State Street — will l vote in favor of these resolutions to hold banks to their word and to protect their customers and our economy from the risks of funding reckless fossil fuel expansion.
The smart money is already making an exit from fossil fuels. The question is how long it will take the big money to follow.