Ukraine Crisis Could Prevent Banks From Ditching Fossil Fuels – Quartz

Over 100 of the world’s largest banks said that they will stop financing sources of greenhouse gas emissions by 2050. Yet most continue to lend billions of dollars a year to fossil fuel companies.

In total, the world’s 60 largest fossil fuel bankers have lent $4.6 trillion to the industry since the signing of the 2015 Paris Agreement, according to a March 30 report from environmental groups. And while some banks are rolling out new policies to accelerate their transition to greener forms of lending, the war in Ukraine and the resulting global clamor for more oil and gas are likely to put a damper on the work.

The report confirms that US banks are the biggest supporters of fossil fuels and finds that total funding is increasing for certain sub-sectors, including oil sands and Arctic drilling, which are particularly damaging to the environment. Major recipients of funding are companies like ExxonMobil and Saudi Aramco; their projects of develop drilling operations are beyond what the International Energy Agency says is compatible with the Paris agreement.

“There is a huge gap between the climate commitments made by banks and their financing of the energy sector,” says Lucie Pinson, executive director of Reclaim Finance, a French non-profit association co-author of the report. “Most banks just commit to act later.”

Banks take small steps against climate change

Banks are a crucial piece of the climate puzzle. If they turn off the tap to energy companies that refuse to adopt science-based transition plans, the cost of producing fossil fuels will rise and alternatives will become more competitive. Meanwhile, some economists say, banks should protect themselves and their customers from the risk of fossil fuel companies defaulting once this transition is made.

In October 2021, La Banque Postale in France set a new bar by becoming the first to set a deadline, 2030, for quit the oil and gas industries altogether. On March 23, ING in the Netherlands announced that it immediately end funding for fossil fuel projects (although it will still provide general corporate loans to fossil companies). Some small banks have already gone fossil fuel free.

As more green investment opportunities arise, new financial regulations roll out and younger staff push their bosses for change, banks are reaching a breaking point in their relationships with energy companies, a said James Vaccaro, executive director of the Climate Safe Lending Network, a group of like-minded bankers and activists.

“While this report is discouraging, the philosophical objections have all been dismantled,” he said. “There are now a significant number of people within banks who know they can’t do this stuff any longer.”

The crisis in Ukraine will push banks to increase loans to fossil fuels

Still, most bank managers think it’s best to stay invested in fossil fuel companies to maintain leverage and help fund their transitions.

In the immediate term, oil and gas companies continue to be a profitable investment, and banks have an interest in maximizing their profit from the sector before it dries up. This is especially true today: although most US and European banks quickly withdrew from Russia after the invasion of Ukraine (and in doing so demonstrate that rapid divestment from toxic assets is possible ), the crisis is pushing politicians to call for more drilling.

This means a lucrative opportunity for fossil financiers that will likely slow climate progress, especially when most, even those with long-term net zero goals, currently do not have policies in place to exclude oil and the gas. Even before the war, when natural gas was already in short supply in Europe, some banks dug loopholes in their climate policies for Europe-based drilling.

“There’s a mad rush for gas going on, and I think it’s going to be a real test for banks,” Vaccaro said. “How are you going to answer that?”

In addition to fossil-exclusion policies, banks need to stop pushing against policies such as corporate climate risk disclosure, Pinson says. All the best fossil banks remain members of professional groups like the US Chamber of Commerce which continues to lobby against climate legislation.

Meanwhile, shareholder resolutions are on the table at Citi, JPMorgan and other big banks calling for funding to be aligned with the IEA’s net zero trajectory, which excludes any investment in new drilling. But these resolutions are not binding and the leaders do not always respect them.

Ultimately, fossil fuels make up a relatively small share of most banks’ total portfolios – around 8% on average across all banks featured in the Reclaim Finance report. So leaving them behind shouldn’t be fatal to the bank’s revenue, Vaccaro said, especially once the alternatives start to look more attractive.

“You drive with a handbrake in the future market,” Vaccaro said. “It doesn’t matter how profitable this cash cow is. Now you just drag it along the road with you.