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European banks have a dirty climate secret – but a new initiative could make them come clean

Banks are keeping most of their fossil fuel financing off the books

The world’s 60 largest banks have provided an eyewatering $5.5 trillion in fossil fuel financing since the Paris Agreement was adopted. Just last year, $673 billion of finance was provided. BNP Paribas, Barclays, Crédit Agricole, Societe Generale, and HSBC were the worst offenders.

Our research revealed that most of this funding doesn’t come from European banks directly lending money to companies. Instead, most of their financing to top oil and gas expanders came via a financial service called “capital markets facilitation”. This is where banks act as intermediaries for companies that are looking to raise funds (usually shares or bonds), with the actual capital coming from other sources.

Yet, so far most banks have excluded these financial flows from their climate targets, and don’t include them when reporting how much they finance high carbon activities.

An industry-led initiative called PCAF could force banks to come clean

An industry-led initiative called the Partnership for Carbon Accounting Financials (PCAF) is trying to change this. The group has been working on a set of guidelines for banks to report on the emissions created as a result of their funding through capital markets. These guidelines could force banks to come clean about their full impact on our climate.

Banks are refusing to take responsibility for their full climate impact

However last month newswire Reuters reported that the process had stalled due to disagreement about how much responsibility banks should take over their climate impact.

Sometimes more than one bank provides finance to a company expanding fossil fuels. PCAF has already agreed on a way to split responsibility for emissions among banks when a group of them are working on a joint transaction. But now banks are trying to argue that their responsibility should be reduced further.

If a bank is responsible for helping an oil and gas company raise $100 billion, they should take full responsibility for that amount. In the industry, this means adopting a ‘weighting’ of a 100 per cent. Some banks like NatWest agree with us. But others are arguing for a weighting as low as 17 per cent, which would lead banks to massively under-report their climate impact for years. It would keep substantial financing for fossil fuels off the ledger.

At the same time, banks are giving 100 per cent weighting when they report how much capital they provide for sustainable investments. They can’t have it both ways – if full weighting is good enough for sustainable investment, it’s certainly needed to understand how much finance banks are arranging for high carbon activities. These banks’ double standards cast significant doubt on the legitimacy of their pushback against adopting a 100% weighting for high-carbon activities.

We partnered with Bloomberg to debunk the arguments against full weighing some in the industry are making. Anything less than 100% weighting would be a smokescreen for inaction.

Banks must take full responsibility for the emissions their financing helps create – even if it’s other investors’ money.

Some banks argue since they are just raising money from other investors for fossil fuel expanders, it shouldn’t be the bank that shoulders the responsibility for those emissions. Most banks in Europe have said they support assessing investments for any harm they cause to the climate. But if they undercount the funding they’ve raised, they’ll be able to claim a lower impact on the climate than they’re actually having. As well as the harm to our planet, this can expose them to significant reputational and legal risk. For example, lending and capital markets data has been used to support a recent climate lawsuit against BNP Paribas.

Banks claim properly weighting their emissions contributions will make it harder to show they are reaching their climate targets, but this doesn’t stand up to scrutiny.

Our research shows there’s no correlation between the per cent weighting used, and big reporting variations in the amount of finance provided to fossil fuels year-on-year. In fact, more ambitious climate accounting methods, such as the ‘average flow approach’ dismissed by PCAF and the approach taken by US bank Wells Fargo suggested lower year-on-year fluctuations.

Banks claim that action on capital markets would distract attention from other areas, but this is also wide of the mark

Banks claim they have a greater opportunity for influence the transition plan of a company when they provide direct loans than they would if they simply helped raise finance through capital markets. Therefore, the argument goes that focusing on capital markets transactions would undermine the impact they could have as lenders.

In fact, publicly available data suggests that the share of capital markets activity varies from bank to bank. And there’s nothing stopping these large, profitable institutions from focusing on both types of transaction.

Banks must be ready to diverge from PCAF if the initiative falls prone to corporate capture

Many banks already include capital markets flows in their green finance disclosures and targets. Six banks globally, such as JPMorgan and Barclays, already include the emissions caused by arranging finance on capital markets in their targets, and most of them use a full weighting. If these banks can do it, others like BNP Paribas and HSBC can too.

If PCAF, the industry initiative, adopts a weighting of less than a 100 per cent, banks that are serious about net zero must be ready to go their own way to do what’s right.

Read our full analysis of how banks can, and should report the full extent of their financing for fossil fuels

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