Investigating the effectiveness of investor pressure on financial institutions funding fossil fuel projects: Are efforts not meeting targets?
Banks Face Challenges in Transitioning Away from Fossil Fuels
Investors are increasingly demanding that banks reduce their financing of fossil fuels and shift towards renewable energy. This trend was evident at recent annual general meetings (AGMs) of banks such as Barclays and Lloyds, where investors raised concerns about the structure of financing, particularly fossil fuel financing.
The Science Based Targets Initiative (SBTi) has set a new net zero standard for banks, requiring them to immediately end financing for companies expanding coal projects, while allowing fossil fuel financing for oil and gas expansion only until 2030. However, many experts argue that this timeline is too lenient and that an immediate cessation is necessary for credible net zero alignment.
Another challenge banks face is the distinction between general-purpose and project-specific finance. Almost 95% of bank fossil fuel financing is general-purpose, not tied to specific fossil projects. The SBTi standard requires an immediate stop on financing growth of fossil fuel infrastructure, but permits limited general financing until 2030. This ambiguity complicates banks' ability to fully cut fossil fuel exposure immediately and align with investor demands in a straightforward manner.
Reputational and regulatory pressures also pose a challenge for banks. While the new standards boost reputational value for banks adopting them, there is hesitation among major banks like HSBC and Standard Chartered about the practicality and strictness of these standards. This divergence indicates challenges in balancing investor climate demands with operational and risk considerations.
Banks and development institutions like the World Bank face debates over supporting gas projects as transition fuel, especially in regions like Sub-Saharan Africa, where energy access is a major developmental priority. This creates conflicting priorities between fossil fuel phase-out demands from investors and development-driven energy needs, complicating financing decisions.
Demand for high-quality carbon offsets and emission accounting also adds complexity to banks' transition strategies. Stricter rules on financed emissions lead banks to seek high-quality carbon removals and verified carbon credits to meet climate targets. However, SBTi guidelines limit reliance on offsets, particularly emphasizing the permanence and verification of such credits.
Despite these challenges, some banks have walked away from their earlier targets. For example, Royal Bank of Canada has departed from its earlier target of funding C$500bn in sustainable projects by 2025. The 'Say on Climate' vote at Royal Bank of Canada was opposed by over 80% of shareholders.
In conclusion, banks are faced with significant challenges in reducing fossil fuel financing and transitioning to renewable energy under investor pressure. These challenges include conflicting timelines, practical feasibility, and ongoing market demands, which slow the transition to renewables despite growing investor and regulatory demands.
[1] Science Based Targets Initiative (SBTi) Net Zero Standard for Financial Institutions [2] Banking on Climate Chaos 2024 Report [3] Reclaim Finance Report on European Banks and Coal Financing [4] World Bank Energy Access in Sub-Saharan Africa
- The Science Based Targets Initiative (SBTi) has set a challenging net zero standard for banks, requiring an immediate end to financing companies expanding coal projects and limiting fossil fuel financing for oil and gas only until 2030, but many argue that this timeline is too lenient for credible net zero alignment.
- For banks, the demand for high-quality carbon offsets and emission accounting adds complexity to their transition strategies, as stricter rules on financed emissions lead them to seek verified carbon credits to meet climate targets, but SBTi guidelines limit reliance on offsets.
- Banks and development institutions face debates over supporting gas projects as transition fuel, especially in regions like Sub-Saharan Africa, where energy access is a major developmental priority, creating conflicting priorities between fossil fuel phase-out demands from investors and development-driven energy needs, complicating financing decisions.
