RBC is Largest Fossil Fuel Financier, EU Clarifies Sustainable Fund Definitions, And More

April 14, 2023

The top five climate risk and disclosure stories this week.

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Canada’s RBC largest fossil fuel financier in 2022 — report

The world’s largest banks have provided USD$5.5trn in financing to oil, gas, and coal activities since the Paris Agreement was signed, with top lenders extending USD$643bn to fossil fuel companies in 2022 alone, data from climate advocacy groups show. 

‘Banking on Climate Chaos’ — an annual scorecard of fossil fuel lending and debt and equity underwriting by the world’s 60 largest lenders — found JP Morgan was the single-largest fossil fuel financier over the last seven years, having extended USD$434.1bn in total. However, in 2022, the Royal Bank of Canada (RBC) provided more financing than its US rival at USD$42.1bn, compared with USD$39.2bn. Among European banks, France’s BNP Paribas was the largest bankroller of fossil fuels last year, having advanced USD$20.8bn, while Mitsubishi UFJ Financial Group provided the most financing among Asian banks at USD$29.5bn.

Twelve banks provided USD$2.9trn of the grand total over the last seven years. All 12 are currently members of the Net-Zero Banking Alliance, a United Nations-backed climate coalition founded to encourage lenders to decarbonize their portfolios. Of the 60 banks profiled, 49 have made net-zero promises, though most are yet to implement strict policies that prohibit financing for fossil fuel expansion. The banks’ investments in fossil fuels are elevating their exposure to transition risks since the projects and companies they are financing could collapse in value as the world shifts to a low-carbon economy, climate advocates say.

Total fossil fuel financing extended last year was 16% less than what was provided in 2021. However, this was partly because major fossil fuel companies, including Exxon and Shell, did not seek bank funding last year. Russia’s invasion of Ukraine led to an energy price surge that helped fossil companies make a collective USD$4trn in profits in 2022, reducing their need for outside funds.

“It is past time for banks to stop funding fossils,” said David Tong, global industry campaign manager at Oil Change International, one of the advocacy groups behind ‘Banking on Climate Chaos.’ “Peer reviewed research confirms that we cannot burn all the oil and gas in fields and mines operating now if we are to limit warming to 1.5°C or even 2°C – and yet banks keep fueling the climate crisis by pouring billions into the fossil fuel industry.”

UK asset manager backs stricter bank fossil fuel policies

Legal and General Investment Management (LGIM), a USD$1.5trn institutional investor, is backing shareholder resolutions targeting North America’s largest banks.

In a statement, the UK-based fund manager said it would vote in support of climate proposals that have been filed with RBC, TD Bank, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, JP Morgan, and Morgan Stanley. The proposals request the banks adopt “time-bound” policies to zero out lending and underwriting of fossil fuel exploration and development. They also call on the banks to publish reports with 2030 science-based absolute emissions targets for high-emitting sectors and to release information on how they plan to align their financing activities with these targets.

“We continue to consider that decarbonisation of the banking sector and its clients is key to ensuring that the goals of the Paris Agreement are met,” LGIM wrote. “Accordingly, we believe our support of many of these resolutions – depending always on the specifics of their drafting language and advisory or binding nature – is warranted.”

LGIM also said it would vote against company directors at Woodside Energy Group due to concerns over the company’s misalignment with the objectives of the Paris Climate Agreement.

EU clarifies sustainable fund definitions

The European Commission (EC) published additional guidance on its flagship green investing framework in response to widespread industry confusion over what constitutes a sustainable investment fund. 

The Sustainable Finance Disclosure Regulation (SFDR), which began rolling out in 2021, introduced a classification system for different kinds of environmentally friendly investment funds. Under the rule, “Article 8” (light green) funds promote sustainability objectives, while “Article 9” (dark green) funds explicitly pursue measurable environment, social, and governance targets. 

Financial institutions claimed that European authorities did not provide sufficient technical guidance to help them determine which of their products could qualify for the dark green label. This led many to re-badge dark green funds to light green earlier this year ahead of more stringent reporting requirements. 

The EC’s publication of amendments to its SFDR guidance is intended “to offer guidance to facilitate the proper implementation of the rules,” said Commissioner Mairead McGuinness, who heads the EC’s financial services efforts. 

The three European Supervisory Authorities, which share oversight of the European financial sector, also launched a public consultation on proposed revisions to the SFDR’s technical rules to improve compliance and disclosure. The consultation is open until July 4.

Banks’ transition risks ‘meaningful’ — NY Fed

US banks have “meaningful” but manageable exposures to climate transition risks, an investigation by researchers at the Federal Reserve Bank of New York (FRBNY) shows.

In a new paper, the researchers tested how banks’ loan portfolios would respond to different policy pathways to a net-zero future. The analysis found the average lender’s potential loan losses vary depending on the transition scenarios and models used. Under the most impactful disorderly transition scenario, loan losses for the average bank could reach 9%, assuming that loan values move in sync with changes in the economic outputs of the banks’ borrowers. Assuming all loans to the top 20% of industries most vulnerable to transition risks lose their entire value, bank exposures are estimated to be 12% to 14%. The estimates are based on banks’ balance sheets as of 2022.

The researchers also uncovered evidence that since the signing of the Paris Climate Agreement, US banks overall have tilted their portfolios away from industries most exposed to transition risks and are charging them higher interest rates. However, the researchers did not find evidence that banks in the Net-Zero Banking Alliance are charging higher interest rates or extending smaller loans to these high-risk industries relative to non-alliance members. The researchers admitted that they have only one year of sample data since the alliance was founded in 2021, which may explain this finding.

TCFD-aligned FIs better prepared for nature disclosure

Financial institutions that are already assessing and disclosing their climate-related risks may find it easier to start nature-related risk processes than those that aren’t, a report out of the United Nations Environment Programme Finance Initiative (UNEP FI) says.

The paper describes the results of a test in which 42 financial institutions piloted two versions of the Taskforce on Nature-related Financial Disclosures’ (TNFD) framework between July 2022 and February 2023. The exercise was intended to support banks, asset managers, and institutional investors when it comes to understanding their nature-related dependencies, impacts, risks, and opportunities. The final TNFD draft, version four, was released in March.

The paper says institutions’ level of readiness for testing the TNFD was “many times directly linked to the level of familiarity that institutions had with the Task Force on Climate-related Disclosures (TCFD),” the world’s premier climate reporting framework.  

The paper also says many institutions, especially banks, have admitted they need to enhance their IT systems “to sustain robust nature-related assessments” and that biodiversity risk and opportunity analyses may require additional processing power. Furthermore, it says the interaction of climate and nature issues — and the resulting financial risks — “are still not fully understood internally.” Exercise participants admitted they’ll need to improve their technical expertise to properly understand these interactions. 

The report relayed the need for standardized data and metrics to describe and measure nature-related risks and opportunities. “Financial institutions can leverage emerging technologies, such as artificial intelligence and machine learning, to automate the collection, analysis, and verification of data related to ESG factors, including nature-related risks and dependencies,” the report said.