Climate activists protest outside Mizuho Financial in Tokyo. Some 35% of shareholders supported a proposal for the banking group to disclose a Paris agreement plan . © Kentaro Takahashi/Bloomberg

Earlier this year, State Street, one of the world’s largest asset managers, threw its support behind a shareholder petition urging Japanese bank Mizuho to disclose more information about how it is aligning its investments with the Paris agreement on climate change. 

Closer to home, Boston-based State Street’s asset management arm backed a shareholder proposal asking JPMorgan to report how it plans to reduce greenhouse gas emissions associated with its lending business in alignment with the Paris accord.

As banks this year have drawn fire from asset managers — themselves sometimes accused of greenwash — over the risks of inaction, the banks are now putting pressure on giant oil-and-gas companies to accelerate their renewable strategies. The European Central Bank and other regulators are also starting to scrutinise what climate change risks are under-appreciated by banks.

For banks, the energy transition is a massive opportunity. Coal, oil and gas account for about 65 per cent of electricity generation, according to a Morgan Stanley report. To comply with the Paris agreement’s goal of limiting man-made global warming to no more than 2 degrees centigrade, $14tn in clean, renewable energy will be needed over the next 30 years. BP, for example, will need to double or even triple its annual wind and solar investments for the next 30 years to meet net-zero carbon emissions targets.

An aerial view shows pumpjacks in the South Belridge Oil Field near McKittrick, California in April, during a US oil price crash provoked by the spread of the coronavirus pandemic © David McNew/Getty Images

European banks are leading the pack globally. In 2018, BBVA, BNP Paribas, ING, Société Générale and Standard Chartered together pledged to steer their portfolios toward the Paris agreement’s goal. 

The Dutch bank ING, for example, has increased its renewable power generation financing in 2019 while reducing its exposure to coal power plants by 22 per cent. As a result, renewables accounted for 59 per cent of power generation lending outstanding at the bank at the end of last year.

Chart shows support for climate-related engagement priorities (% of asset managers) showing investors can take a more strategic approach to climate change

In some cases, ING has been linking more favourable loan interest rates and conditions to a company’s environmental, social and governance (ESG) performance. The better a company’s ESG score, the better the terms of the loan for that borrower, ING has said.

Credit Suisse has partnered with the Climate Bonds Initiative, a standard setter, to accelerate the energy transition. The duo has established a pathway for certain companies to issue “transition bonds” as a bridge between their current business models and greener offerings in the future.

Transition bonds are a new asset class targeted at so-called “brown industries” with high greenhouse gas emissions that are designed to allow them to raise capital with the goal of reducing their contribution to global warming.

While it is easy for companies with little pollution to issue green bonds, energy producers cannot meet green-bond criteria. And without agreement about what types of energy projects are genuinely moving in a cleaner direction, banks are vulnerable to accusations of greenwashing.

So to help companies and investors, Credit Suisse and the Climate Bonds Initiative in September established requirements for transition bonds. Authentic transition projects should be backed by operating metrics rather than company pledges, which can be fudged in time. And the transition projects cannot count carbon offsets as part of the sustainability plan.

“It’s not that anybody can enter this market,” explains Marisa Drew, Credit Suisse’s chief sustainability officer. For companies looking to issue transition bonds, “there has to be a very serious effort,” she says. “It has to be backed by science and clear metrics.”

Special purpose acquisition companies (Spacs), also known as blank cheque companies, offer tools that banks can deploy to accelerate the energy transition. In September, a Spac bought ChargePoint, a California-based charging network operator. ChargePoint said it would use the proceeds from the deal to expand in North America and Europe.

Other Spacs are being launched with a specific focus on the energy transition. Riverstone, a private investment firm specialising in energy, on October 26 launched a $200m Spac to acquire businesses that decarbonise the most pollution-intensive sectors.

“We see Spac focus as offering further reason for traditional companies to consider whether to accelerate their own pivots,” analysts at Bank of America said in a report last week.

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