Big Banks Are "Quiet Quitting" Their Climate Promises
bloomberg.com
bloomberg.com
1. Banks have enormous power to determine what the future looks like. This is exercised via licence to make loans (and issue money) from nothing more than a ledger entry. That loan or ledger entry often dictates the future as without credit projects don’t happen and business operations aren’t viable.
2. On a neutral reading, asking banks to change their practices is a bit like asking Kodak to make digital cameras. Banks are wired for issue of loans using their existing risk analysis tools. Adopting to a new world in which they must onboard new tools to assess climate risk is like asking Nokia to make a good smartphone.
3. On a less neutral reading, banks have a fiduciary duty to their shareholders over and above the well-being of a wider group of stakeholders. Add in that banks are staffed with employees very focused on material and financial gain, so the legal obligations are reinforced with internal cultural expectations. Banks are filled with people who don’t really want to undermine their very lucrative hustle.
4. Banks claim that they need government support and regulatory change to help them make an adjustment and level the playing field to make climate action viable. But they lobby against precisely those statutory changes that are needed. A climate catch 22.
I don't understand this whole thing. Kodak pioneered digital cameras. Nokia made several good smartphones.
On 1, private action won’t work unless the govt somehow pays the private actor. So, blaming banks is less effective.
Most of my career has been spent building mechanisms to pay the private actor as you suggest. It works well at one level. But the problem is that there isn’t enough government money in the world to pay off all private actors needed to get to sustainability. The other thing to recognize is that banks create money far more than governments do, and they create it to finance projects which likely destroy more wealth than they create: just not wealth in a strict financial sense. Is blaming banks ineffective? The blame probably lies with the system which allows banks to determine the future, and to make that determination on the basis of what creates narrow financial value to a small group of insiders to the exclusion of other values such as environmental, good relations between people etc.
I don’t have any beef with the bank mandate per se, their social utility is the allocation of resources to what society finds most useful. But that valuable mechanism breaks down if non-financial values are excluded from credit-scoring systems.
That’s where governments can partner with banks. Take a hypothetical startup that aims to manufacture green hydrogen. A lender will ask to look at the cashflows, preferably under a base scenario and a few stress scenarios. Will the borrower turn a profit? Let’s assume it won’t because fossil fuels don’t pay a carbon tax. The government can offer to pay a green subsidy, let’s say of $2 per kg of hydrogen. Is the company now profitable? If yes, the banks will advance the loan, roughly speaking. Maybe the base scenario looks good now, but the tail risk is still too high. Then the government can write a loan guarantee, either for the entire borrowed amount, or for half of that, for example.
No comment.
> That’s great, but does not disincentivize public bads which I mentioned above.
It’s simple. Tax the externality. In this case institute a carbon tax.
It appears to me you are saying we can’t figure out how to be a functional democracy. That’s a shame. One solution could be to try and identify what tools we have in our collective toolbox to taclke the problem at hand. Another solution is to blame the banks that they don’t have enough civic virtue. To me it looks like one of these two solutions is more likely to work than the other.
A currently popular idea is “a revenue neutral carbon tax” in which funds raised are paid back out to low emitters.
Maybe the progress of this idea will be a good benchmark for whether we’re a well functioning democracy. I appreciate this sounds cynical, but I mean it sincerely.
> One solution could be to try and identify what tools we have in our collective toolbox to taclke the problem at hand. Another solution is to blame the banks that they don’t have enough civic virtue. To me it looks like one of these two solutions is more likely to work than the other.
You’re layering in a value judgement here about the civic virtue of banks into a problem statement which I hope can be evaluated on factual accuracy rather than values. If the problem statement holds, the solutions can then be debated and the toolkit of solutions evaluated for the job.
1. Banks have a powerful ability to determine which projects happen and which don’t through the credit mechanism. Because often times no credit = no project.
2. When projects are evaluated on narrow financial criteria, wealth can be destroyed rather than made. The project will create free cashflow and the loan will be repaid, but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath.
3. Banks lobby to prevent the credit issuance mechanism being broadened to exclude projects which move costs onto third party balance sheets.
You’ve pointed out a possible problem with the democratic process, so maybe the above is really a symptom and not a true root cause, which in fact would be something along the lines of:
Powerful economic actors stymy reform of the economic system to favour financial profit at the expense of sustainability.
[Edit: for inclusion of final two paras]
I think I see another way to parse your statement. Banks lobby to prevent X in order to exclude Y. Where X is the broadening and Y is some projects. But I don't understand your point. If the bank lobbying on this matter is bad, it follows that you are in favor of including Y, vs excluding Y. So you want to include projects that move costs onto third party balance sheets? What does that even mean? What projects do you have in mind, and how would these projects help with climate change?
Anyway, back to your central point, which I believe is this:
> no credit = no project
> projects are evaluated on narrow financial criteria
The problem is that the loan continues to exist after its origination too. And at that point the financial criteria revert to being narrow. Let's say JP Morgan announces during the quarterly earnings call that they increased the loan loss reserve by $20 billion because of non-performing ESG loans. And Jamie Dimon hops on the call and explains to the analysts that those loans were made with the full consideration of the societal benefit they entail. Do you think people will say, "Ah, ok, then we're all set. Good job Jamie, keep it up". Well, there's actually quite a good chance that this is exactly what they'll say, but millions people will vote with their wallet, and the share price of JPM will tank.
I see how you can perceive this as being short-sighted, or unfair, or [insert some bad sentiment]. But this is how the world works.
And guess what. At least the US Government is aware of how the world works, and the Inflation Reduction Act decided to work within the system rather than fight it. So banks are very happy to extend credit, and green projects are booming. See for example [1]. All in all, a lot of people see the glass half full.
[1] https://www.gsam.com/content/gsam/uk/en/institutions/market-...
If lack of clarity in my proposed problem statement was the reason for the confusion then my apologies. Let me state the problem less abstractly and point out that in particular the problem statement is not about ESG lending.
1. Bank credit policies allow continued investment in fossil fuel extraction projects, meaning those projects go ahead.
2. Regulation could force a change in those credit policies, but regulation has not happened as banks have lobbied against them.
You state conspiracy theory, but again this is layering in value judgement into an hypothesis that is either correct/incorrect. Incidentally, depending on your definition of lobbying, the parent Bloomberg article does provide evidence of bringing influence at a closed event (arguably lobbying) and my general assumption is that Bloomberg is a credible source.
That said, as mentioned before, the problem of climate change could be solved by stopping fossil fuel production. But powerful actors prevent this. This may be with good reason, eg national security concerns, lack of political support, etc.
I have worked (a lot) with regulators, and here's how it goes: if a regulation exists, lobbying to change it is almost impossible. It sometimes works, but banks have finite resources, believe it or not, and they have to carefully choose their battles. I'll give you an example of regulation that was changed following such lobbying: starting in 2016 you need to post initial margin on any non-cleared derivatives you do (with some exceptions). Banks do a lot of internal trades between any of their hundreds of legal entities. Well, the regulation included those trades too, and for many banks the margin posted on these trades exceeded (by a factor of 2 or 3) the margin posted on the genuine, external trades. One could argue this type of margin was quite nonsensical and it was draining something close to $100 BN from the financial markets. At some point the regulation was changed to eliminate this. Still, the way regulators work, it was not simply voided. The banks need to continue to monitor how much margin they would need to post on these internal trades, and check against their capitalization, and if the capitalization is not enough, they need to start posting the margin.
What is the point of my anecdote? Banks have sometimes legitimate reasons to lobby. Even when they have, lobbying is very difficult, and the results are always quite convoluted. They don't get exactly what they wish.
> But powerful actors prevent this
In other words, the powerful actors are not that powerful.
To give a few more details. To change some regulations, it is not only necessary to grease a pair of hands in Washington. There are hundreds of government officials involved in the actual details of drafting the regulations, and many of them are quite rigid. You could say, "no problem, the top guy will propagate some of the grease down the ladder". This probably happens in a country like Russia, but in Western countries it's very difficult to pull a lot of government officials into a conspiracy.
Now, to your points. I think you are actually making two points, not one.
1. banks need to change how they lend to the good guys 2. banks need to change how they lend to the bad guys
And maybe a third:
3. banks like the way they currently do business, thank you very much, and they lobby against any change, be it for the good guys or for the bad guys. In that, they are the "powerful (bad) actors" you talked about.
While my argument before is that lobbying to change regulations (either existing or incoming) is hard, I will contend that lobbying to prevent new regulations is probably not that hard, because democracies are a bit dis-functional to some extend. They need to be: a democracy has lots of checks and balances to prevent bad things happening, and a side effect is that sometimes these checks and balances make it hard to enact good changes. We need to live with this fact of life.
So, it does not take that much lobbying to make Congress not pass a law.
Despite that, at least in the US, Congress managed to pass the Inflation Reduction Act, and this is a huge victory.
Let's stop here. Would you at least agree with me that the IRA was a good law, and it is real progress towards our green goals?
As for solutions, I'm not proposing any, I talked enough already.
> Would you at least agree with me that the IRA was a good law, and it is real progress towards our green goals?
I’m not American and whilst I’m aware of IRA and it’s broad objectives, I needed to look up some precise specifics. From McKinsey:
“Significant federal funding for climate efforts. The IRA directs nearly $400 billion in federal funding to clean energy, with the goal of substantially lowering the nation’s carbon emissions by the end of this decade.1 The funds will be delivered through a mix of tax incentives, grants, and loan guarantees”.
On the face of it, that sounds like good law and big bucks. Public money for public goods where there is market failure. You are right.
I also appreciated your point that lobbying to prevent new regulation is not hard.
I suspect you might also follow the logic that financing both sustainable business on the one hand, and unsustainable business on the other hand is plain and simple playing both sides.
The banking sector response to this is to say it is for governments to legislate which businesses are legal and which are not, and not to use banking regulation to suffocate unsustainable business by the back door. The head of the ECB has himself said as much.
This seems like a legitimate response until you realise that banks are powerful actors in many industry bodies lobbying against reduction in fossil fuel production, ie stopping unsustainable business in a more direct and transparent way.
As per the Bloomberg piece, after the Glasgow COP when the banks made big promises, they then went home and did their homework and realised they’d go bust if their unsustainable clients were cut loose.
Thanks again for participating in this discussion. It helped clarify my own thinking and I learned something new about the lobbying process. How to stop fossil fuel production has eluded everyone for decades. We probably won’t solve it today!
Is there a better mechanism than financial incentives? I am afraid that is the best working mechanism we have.
Planned economies generally have not fared well in history, not only from economic value added perspective, but also from the fascist political systems they produce as a by product. They may get some narrow domains correct, but by and large they are net negative.
Secondly, financial incentives are very powerful if correctly designed. At the moment they are used for things like subsidising hydrogen or adaptation technologies. But they are not deployed - for example as penalties - to deter investment in stuff that is net damaging to human wellbeing. We have a situation where banks are both financing companies that create climate change and also companies that create climate change solutions. Aside from that being GREAT business, it’s also the type of problem that might arise in a centrally planned economy (to the first point).
The best-known planned economies were socialist and were under constant attack from outside capitalists (hard to make a buck on some other country making life better for its citizens).
Socialists are notable because, like Woody Guthrie's guitar, they kill fascists. Capitalists tend to ignore that because they don't like to admit that strong capitalism is one of the pillars of fascism.
If you can't be bothered to read a book, at least start with Wikipedia:
2. I don’t trust Wikipedia, it is a far-left nutcases cesspool. Can you point to a book or two for me to read?
Yeah, the people who sell fossil fuels, and the politicians they finance are really annoyed at ESG for some reason.
https://www.sustainalytics.com/esg-rating/exxon-mobil-corp/1...
ESG Risk Rating: 41.6 (Severe Risk)
It's nearly in the bottom 1,000 of 16,000 and middle of the pack even for Oil and Gas producers.
But what exactly are you even asking the banks to do? A green company suffers from the same climate risk as a regular company. Yes, a loan to a green company might reduce the global climate risk, but do you see how you've got a prisoner's dilemma here? A bank that gives a green loan below market rate is basically subsidizing the green transition. That's laudable, but that bank has to compete with other banks that don't make such subsidies.
It almost feels like stating a truism: subsidies should come from governments, not from for-profit corporations.
Maybe you deplore the whole "for-profit" thing, but that's a dangerous direction to go to. It has been tried before, a number of times, and it did not look that rosy in the end.
It's best to work with what you've got: people do business to make a profit. They are not hell bent to destroy the world, but they don't have a motive to save it either. Let them do business, and we as a society we'll take care of saving the world via government action, or via charitable NGOs.
I don’t think I’m asking banks to do anything in that comment.
What I am trying to do is set out a problem statement, and given your knowledge (and handle), I’d greatly appreciate your input on it:
1. Banks have a powerful ability to determine which projects happen and which don’t through the credit mechanism. Because often times no credit = no project.
2. When projects are evaluated on narrow financial criteria, wealth can be destroyed rather than made. The project will create free cashflow and the loan will be repaid, but the credit issuance process will not take into account whether the project is a net benefit to human wealth across other important metrics such as environmental and human heath.
3. To avoid the competition issue, governments could regulate to change market rules, but banks themselves frustrate this by lobbying against change.
If we have agreement on a problem statement, then we are in a position to discuss responses. Your response might well be do nothing, but that should be justified to be credible.
The solution is extremely simple: governments can make the assessment if a project is a net benefit for humanity, and either provide loan guarantees or loan subsidies. Then the banks will be happy to do the thing they do best, provide credit using their existing lending framework.
But this doesn’t get around the problem: how to stop financing of projects which damage the environment? And that’s also the problem raised in the parent Bloomberg article. The usual response is that government must legislate to stop these businesses. But the reality is that governments won’t do something banks don’t want. That’s the Catch22 I described in my first comment.
I would go further. Entities which arent banks like blackrock or for that matter countries are also quitting these promises. Recently withdrawing from the United Nations climate alliance. Largely speaking blackrock's move to withdraw from these resulted in massive losses to the "ESG" indexes.
https://www.reuters.com/business/environment/germanys-climat...
Germany for example in a major energy crisis had to choose fossil fuels and sign on to multidecade contracts dispelling any thoughts they will continue with climate efforts.
Here in Canada, the next election is October 20, 2025 unless they can prove Canada has been invaded by a foreign nation or that there's an ongoing rebellion. They are even still obligated to receive approval from the conservatives(2/3rds vote) to postpone the election. Which I very much doubt will ever happen. Upon winning, the conservatives plan to scrap basically all climate initiatives especially the carbon tax.
Though the Canadian part of 'extinction rebellion' which really is just the same people behind the oil blockades in 2020 has asserted they will be forced to be that rebellion to prevent the conservatives from coming to power.
I wonder if the threats are legitimate.
It's against the guidelines to complain about paywalls in comments.
Posting to complain you can't read or even worse posting to complain about the source of something you didn't read is worthless to everyone including the people who didn't read the article
It is unfair to assume everyone knows the dozen ways. It would be helpful to share some of those. So far none of the alternatives posted are working, so the article should be flagged for removal.