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The pandemic lockdowns did strange things to all of our brains. We lost track of time, we held Zoom parties, we made lots of buttery banana cake and kidded ourselves it was wholesome banana bread. We also allowed ourselves to believe that banks could become superhero agents for change and fix the global climate crisis.
In 2021, scores of them teamed up in the UN-led Net Zero Banking Alliance, pledging to “align . . . lending and investment portfolios with pathways to net zero by 2050 or sooner”. But while they may be trying their best, the impact is limited, a new paper suggests.
Parinitha Sastry at Columbia Business School, Emil Verner at MIT Sloan School of Management and David Marqués-Ibáñez at the European Central Bank first published “Business as Usual: Bank Net Zero Commitments, Lending, and Engagement” late last year, and updated it in April with additional data covering project financing.
It makes sobering reading, finding “no evidence” (net zero evidence, if you will) that signatory banks have stopped lending to un-green borrowers. “Net zero banks neither reduce credit supply to the sectors they target for decarbonisation nor do they increase financing for renewables projects,” the paper states in its rather bracing summary.
Not to worry, you may think. Surely “engagement”, to use the buzzword, with high-polluting borrowers, helps those companies to renounce their planet-destroying ways? Again, the paper suggests this is wishful thinking.
“We find no evidence of reduced financed emissions through engagement,” the paper states. “Borrowers of net zero banks are not more likely to set decarbonisation targets or reduce their verified emissions . . . We conclude that net zero commitments do not lead to meaningful changes in bank behaviour.”
Heavy-hitting institutions have clearly noticed — the paper thanks the ECB, the US Federal Reserve and Sweden’s central bank for their feedback while stressing the study does not necessarily represent their views.
“This is not to make a moral judgment that banks are evil,” Sastry, one of the authors, told me. She is keenly aware that she has never written a loan, and that anything from nimbyism, supply chain snarl-ups and infrastructure limitations can crimp demand. “The broad question I’m interested in is, ‘How far can you get to your climate-change goals without policy?’”
Tracking the share price of big listed companies, be they carbon-belching or green, is easy. Bank lending is arguably more impactful, particularly in Europe, where it is a more important part of corporate finance but trickier to monitor.
The study uses what Sastry describes as unique sets of data from the ECB that enabled the researchers to track lending in the Eurozone down to credit of €25,000. They cover the lender, borrower, loan amount, interest rate and so on, going back to 2018.
The researchers found that net zero banks, in comparison to their non-signatory peers “do not reallocate lending away from firms operating in targeted sectors”. Meanwhile, the increase in lending to companies that meet green criteria under the EU’s taxonomy is small and the cost of borrowing for “brown” sectors like mining increases by a minuscule degree.
This is much more likely to reflect real-world complexity than skulduggery. And if green-minded banks do not lend to polluting companies, then other lenders that really don’t care will be happy to fill the gap. A spokesman for NZBA said that given how recently founding members submitted transition plans and progress reports “we believe it is premature to draw conclusions on whether the commitments NZBA member banks choose to make have resulted in reductions in their financed emissions”.
On an individual bank level, several can point to convincing evidence that they have made a difference with dirtier companies or cut back hard on carbon-heavy lending. BNP Paribas say they have withdrawn from oil and gas bond deals entirely in recent months.
More broadly, if net zero banks divested entirely from problematic companies, their lending books would look pristine but the planet would be no better off. And we need steel and battery metals to make the green transition a reality. “This alliance has made the topic public,” one senior European banker told me. “It’s unfair to say the alliance doesn’t deliver anything.”
Bankers’ key point is that these things take time. But assuming it takes around a decade to build a renewable energy plant and plug it into the grid, time is in short supply. Scrutiny that agitates for faster change may feel harsh but is no bad thing.
katie.martin@ft.com
