3 min read.Updated: 30 Jun 2021, 07:15 PM ISTBloomberg
The bank has pledged a vast sum to advance climate objectives over the next decade. But the true test will be what it does with its own balance sheet.
One of the world’s largest financiers of fossil fuels just bought a company that oversees 1.7 million acres of forest in the U.S., Chile and New Zealand. Is that enough to make it green? The rest of Wall Street may hope so, but the reality is uncertain.
Earlier this month, JPMorgan Chase & Co.’s $2.5 trillion asset management arm announced the acquisition of Campbell Global LLC, a Portland, Oregon-based investment manager that focuses on timberland, forestry and natural resources. The bank says the deal gives it an “active role" in the booming market for carbon offsets, which help companies compensate for emissions generated elsewhere in their operations by doing things like planting trees or buying credits.
A wide range of industries have made such pledges, from Big Oil to Big Tech. But these ambitions are perhaps nowhere more important than the banking sector, largely because financial institutions are force multipliers. Every dollar of capital lenders have to put into the economy goes farther with leverage. While the financial crisis demonstrated the danger of this phenomenon, green financing could prove its virtue. In April, Chairman and Chief Executive Officer Jamie Dimon said JPMorgan would “finance and facilitate" more than $2.5 trillion over 10 years to advance climate change efforts.
Yet as big and bold as these commitments sound, they’re also a bit vague. Carbon offset markets don’t so much lessen or deter activities that add to global warming, but neutralize them with projects that seek to remove carbon dioxide from the atmosphere. That means emitters lack incentives to change behavior expediently, if ever. It's difficult for banks to hold the companies they deal with accountable, while quantifying just how much skin lenders themselves have in the game can amount to guesswork.
The move to buy Campbell Global is a good example. JPMorgan isn't using its own balance sheet to invest in timberland, but rather managing money for third-party investors that want to put their capital to work in green-focused areas. By contrast, consider how much of its balance sheet lending goes directly toward carbon-intensive businesses: Last year, JPMorgan found that 20%, or about $228 billion, of its wholesale credit exposure went toward sectors such as autos, chemicals, and oil and gas, according to the results of a pilot exercise detailed in its ESG report. The bank said that it intends to conduct a deeper analysis.
Since the adoption of the Paris Agreement in 2015, more than three dozen banks globally have provided $2.7 trillion in lending and underwriting to the fossil fuel industry, according to a report put together by a coalition of environmental groups. JPMorgan was the first to “blow past the quarter-trillion dollar mark in post-Paris fossil financing." Yet the New York bank is by no means alone. If global lenders want their climate pledges to sound credible, they will have to start figuring out what to do with their existing book of business, which, at the current rate, is causing significant damage to the environment.
Cutting off credit to emitters is an obvious, albeit complicated, solution, but not the only one. Boosting advisory services for environmental governance and adding loan covenants to make sure borrowers stay below emission thresholds would also help. Shareholders can then decide if they want to reward that business model.
Financial institutions are aware the moment of reckoning has arrived. In its latest annual filing, JPMorgan noted that it faced reputational risks that could harm its business: “social and environmental activists are increasingly targeting financial services firms such as [the bank] with public criticism for their relationships with clients that are engaged in certain sensitive industries."
Meanwhile, regulators are focusing on ESG, too. The U.S. Securities and Exchange Commission concluded a public comment period recently on climate change disclosure, and the New York State Department of Financial Services has raised warnings about the impact of a warming planet on the financial system, amplifying the ESG rhetoric on Wall Street.
But banks can’t wait for rules to be made for them. It’s time for Wall Street to come up with solutions the best way it knows how: taking risks. Cutting off lending to the worst offenders and accelerating it toward green energy would be a worthwhile place to start.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!