Banks lagging behind net zero energy goals

Only 7% of energy-related financing extended by banks between 2016 to 2022 went to green energy projects.

Net zero and sustainability are amongst the key factors often named by experts as likely to shape the future of banking. On the surface, it seems to be the case: lenders have been quick to outline ESG goals.

The biggest banks globally notably made pledges under the Glasgow Financial Alliance for Net Zero (GFANZ), whose commissioned research shows low carbon energy investments need to account for at least 80% of energy investments compared to fossil fuels by 2030 to reach climate goals.

But the pledge may be for nought. As of mid-2022, no bank is set to reach the minimum requirement needed to achieve the climate goals, according to a report released by Sierra Club, Fair Finance International, BankTrack, and Rainforest Action Network.

“We did see that over the period [2016-2022], there is an increase in the value of financing that's going to renewable energy. But at the same time, there's also an increase in the value of financing that's going to companies engaged in fossil fuels,” Ward Warmerdam, Senior Financial Researcher for Profundo, told Asian Banking & Finance in an interview.

The study, which made use of data gathered by the Profundo organization, found that only 7% of energy financing extended by 60 banks globally went to renewables. Meaning, of the US$2.5t loans and bond underwriting provided by 60 banks to energy companies between January 2016 to July 2022, US$2.3t were loaned for fossil fuel energy production—and just $178b were used for clean energy activities such as wind and solar.

Warmerdam’s team found that the percentage of energy funding going to renewable energy never went above 12%, and only hit double digits in 2021 before going back down to 9% of total energy funding in 2022.

Expectation vs Reality
Warmerdam—whose teamwork in mapping out the financial flows of fossil fuels–said that the study’s findings, whilst alarming, were in line with their expectations. 

“There's a difference between what I was expecting and what I was hoping. I was hoping that the proportions of financing would be shifting the other way and that we really would see a rapid decrease in financing going to fossil fuels, at least in the proportions,” Warmerdam said. “But [the result] is pretty much in line with what I was expecting.”

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There is an increase in the value of financing glowing to renewable energy projects. The problem is that financing for fossil fuels has also increased, if not more so than for green energy projects.

“We see an increasing trend in the extraction of fossil fuel companies, they're extracting more than they were before 2016. So then it shouldn't be surprising that the value of financing going to those companies is increasing, because they need more money to extract, explore, and increase their production,” he said.

Banks remained mum
So what did the banks have to say for themselves regarding the study’s results?

“We sent the data to them for verification, to ask them if they could verify the data that we had extracted from the financing databases,” Warmerdam said. “Most financial institutions didn't respond.” 

Of the 60 financial institutions Profundo contacted, Warmerdam said only five responded. 

“And of those five, pretty much all of them said, "we cannot comment on the data. We cannot verify whether this data is correct or not.’”

More ambition
When asked whether banks could still attain the commitments outlined under GFANZ in order to achieve net zero, Warmerdam took a different approach—noting that the commitments, which banks already struggle to attain based on the study’s data, should actually be more ambitious.

“The 2050 net zero targets is far too far away. We should have been transitioning much earlier and we're already too late,” he said. “They should be much more ambitious, much sooner.” 

He recommended setting more punitive measures that can be monitored by external parties.

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“Additionally, this reliance on false solutions such as gas-fired power, carbon capture and storage–these are ways the financial industry and the fossil fuel industry are maintaining this continued dependence and reliance on fossil fuels,” Warmerdam warned. 

“We shouldn't be looking at gas-fired power plants, or carbon capture and storage. We should really be transitioning to renewable zero-emission technologies such as solar and wind and even geothermal and other similar solutions, which don't have such a huge impact on the environment and drive climate change,” he concluded.