Are Banks Finally Walking the Talk On Renewables?

Many of the world’s leading banks have long been talking up their climate action credentials, including their financing of renewables. That obviously makes sense, as banks hold trillions in assets that are at risk if the effects of climate change can’t be mitigated in the coming years. The problem, however, is that while banks talk up their climate-friendly investments, critics of the sector point out that their efforts won’t amount to much if they keep financing massive fossil fuel projects.

Well, it turns out that banks may finally be putting their money where their mouths are — or, should we say, where their vaults are.

According to a recent Bloomberg report, banks are beginning to align their investments with the overarching goals of the Paris climate agreement. Here’s the deal: After plunking at least $3.6 trillion into fossil fuel investments since the Paris agreement was signed in late 2015 — a rate that outpaced investments in renewables and other clean technologies by a rate of nearly 3 to 1 — that stark trend has reversed itself, albeit mildly.

Bloomberg’s analysis of data from about 140 financial companies across the globe found that, so far this year, they have issued $203 billion in bonds and loans for clean power projects. That’s about 7 percent more than the amount they invested in fossil fuel projects. We’re not talking a huge turnaround, but banks may be turning a small corner.

Still, their investments in renewables are dwarfed by the fees that banks receive from underwriting financial packages for fossil fuel companies. “Banks have pocketed an estimated $16.6 billion from arranging bonds and loans for energy companies since the Paris announcement,” write Bloomberg’s Tim Quinson and Mathieu Benhamou, “more than double the $7.4 billion garnered from green bonds and loans.”

So, while a corner may have been turned, there is still quite a steep mountain to climb. Quinson and Benhamou pointed to a recent analysis from S&P Global that suggests if the world is to limit global warming to 2 degrees Celsius by 2050, banks have to lead the way. “Banks need to take climate change seriously,” said S&P’s Jennifer Laidlaw. “Their exposure to the wider economy through lending portfolios across industries means that they could be at a higher risk than other sectors.”

To avoid those risks, banks will need to cut a copious amount of checks. According to the Intergovernmental Panel on Climate Change (IPCC), the world will require about $3 trillion a year in climate-friendly investments to reach the goals of the Paris agreement. Yes, that’s trillion with a “T” and that figure is annual, not a total to reach by mid-century. And the amount needed to scale up renewables and energy-efficient technologies will have to surge by a factor of five if these climate goals will be met.

While it’s clear that government subsidies for fossil fuels must end — a tactic long deployed by even small countries like Belgium — it’s clear that the financial industry needs to drive change as well. In the words of Quinson and Benhamou, such change must be “lopsided” in favor of clean technologies over the harvesting of hydrocarbons, the latter of which has attracted a vast amount of government and banking largess over the past several decades.

Image credit: Zbynek Burival/Unsplash