A recent spike in environmental commitments in the Banking sector draws our attention to explore these pledges from a materiality perspective. What key players are behind these commitments, and more importantly, what specific investments are behind the latest headlines that can drive significant change?
We have been monitoring banks on our ESG Safeguard platform for quite some time now and it is clear that there is no transparent plan in place from the financial sector to address limiting financed emissions. Our materiality model shows us that Commitments and Investments in the banking sector on environmental issues have been erratic and unsustained, unlike other sectors we have covered like the automotive industry where there is a cohesive movement towards electric vehicles by all major players. However, a recent spike in Commitments in the month of March shows us that there is room for optimism.
As a society we have had a complex relationship with fossil fuels. It moved the economy, and indeed the world, into the future but at the cost of conceivably irreversible climate damage that we are now contending with. The complex relationship has been further highlighted by the Russian invasion of Ukraine; the world was unprepared for such a supply shock caused by sanctions against Russian oil and natural gas, giving us a real-time glimpse into the effects of suddenly pulling the plug on fossil fuels. Transitioning away from fossil fuels was never going to happen overnight, but it is time for a more concrete action plan to take form that goes beyond lofty commitments and empty promises.
Wind and solar generation provided 10% of global power in 2021, but that is still a far cry away from where it needs to be for humanity to keep global warming at bay. A recent report from Banking on Climate Chaos shows us that fossil fuels and banks still have a strong relationship, with every major bank making an appearance. It is easy to point fingers at the banks and say that they should shoulder the blame through financed emissions, but the truth is not that simple. The real problem is a failure to communicate between the policymakers, scientists, thought leaders, and financiers on alignment of goals and incentives.
For instance, JP Morgan CEO Jamie Dimon has repeatedly supported a carbon tax, as it would give banks clearer financial incentives to limit their exposures to fossil fuels. In the U.S., regulatory approval for offshore-wind has been lethargic and was only approved for utility scale projects this past summer.
Yet it’s not just in the U.S. that banks are facing a reckoning on fossil fuels. In Britain, studies showed that if the British banking sector was its own country it would be the world's ninth largest emitter of carbon. Yes the banks shoulder some blame for continuing to support fossil fuels, but that blame spills over to the public sector who have not been able to come up with clear frameworks and solutions that require and incentivize the phasing out of fossil fuels. Also shareholders play a crucial role in the conversation going forward and it wouldn’t be a shock to see more activist investors like Engine One who shook up Exxon’s board last year pushing for more action from banks. With more access to markets for retail investors through technology the voice of the shareholder is more diverse and powerful than it has ever been.
Conversely, financial institutions are also under fire from other points of view. The State of Texas has begun blacklisting companies that they deem are threats to divest from fossil fuels. So instead of cohesion and dialogue, banks are being forced to walk a high-wire tightrope, trying to please differing ideologies from shareholders and politicians alike.
In March there was a marked increase in the amount of Commitment statements for the banking industry and positive developments in clean technology investment. This perhaps is the precursor to an emerging wave of green financing. Engie North America completed financing for its three wind and solar projects in the U.S. this week. The three projects financed by Bank of America (BAC:US) and Wells Fargo (WFC:US) will add 665 MW of clean energy to the grid. The two wind projects are located in Kansas and Texas while the solar project is located in North Carolina. Last month, Bank of America committed more resources towards green bonds and underwriting of green assets.
Aside from the large U.S. banks, other financial institutions have also been making waves with green investment plans. Late last month, Banco Santander (SAN:ES) launched a new platform for clean investments called Santander Green Investments. The Spanish bank has already started to emerge as a leader in green financing and this latest initiative will further their leadership in the space. Also, Standard Bank in South Africa (SBK:ZA) is raising funds to the tune of $17B for green financing by 2026. The flurry of activity this month is certainly encouraging but needs to see a more concerted effort and cooperation between governments and financial institutions to align goals and incentives. This will help deploy capital more efficiently and effectively on climate change going forward.
Can investors utilize ESG news sentiment to maximize alpha in the short and medium term between the intervals that are covered by ESG advisory firms, ratings agencies, and other peers? We investigated the relationship between short-term (weekly, monthly) and medium-term (quarterly) ESG news sentiment and stock returns. As the title suggests, our results indicate there is alpha, and we walked through the analysis. Watch it here.
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This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
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