Don’t blame banks for the environment – it’s bad for business.

The Future of Banks: Navigating Environmental Enmity

Adonis Hoffman
10:40 AM – Friday, June 2, 2023

Major banks have been in the news for all the wrong reasons lately. From First Republic to Signature Bank and Silicon Valley Bank, their misdeeds have become lead stories in the mainstream media. But despite their recent lapses, banks play a critical role in society. They facilitate the flow of needed funds, provide a reservoir of investment dollars, and foster economic progress, production, and profit. From the mom-and-pop store down the street to the mega-cap corporation downtown, business relies on banks and banks rely on business. They bring capital to commerce and anchor our economy.

However, the future for many banks is inextricably tied to their policies and practices on climate, energy, and the environment. And that portends more risk than reward. We are entering a new era of environmental enmity, where environmental exhortations supersede almost anything else. The least imprecision on climate or the environment could imperil positive economic performance.

The Rise of Environmental Activism

In the pervasive context of climate change, environmental activists are working to penalize banks for doing their core business – lending money. Well-funded initiatives and worldwide campaigns have adroitly linked greenhouse gas to green eyeshades, and have cast banks, insurers, and their investors as subjects of societal scorn.

The broad umbrella of “greenwashing” has allowed aggressive plaintiffs lawyers and activists to sue companies for fraud and deception in their environmental marketing claims. The cumulative number of climate change-related cases has more than doubled since 2015, now totaling over 2,000. One quarter of these were filed in the last two years alone.

But tactics have been shifting in recent years. Class-action lawsuits, proxy battles, shareholder actions, and intensive media campaigns are now quite common. Environmental enmity has been extended from oil and gas companies to banks, insurers, and financial institutions. The most recent trend sees banks being sued for financing oil, gas, and coal projects that emit high levels of greenhouse gas. There are also cases against food and agriculture, transport, plastics, and other companies. All based on yet-unproven legal theories of climate change liability.

The Role of Financial Institutions

Activists have sought to dictate the terms and conditions of environmental responsibility for years. But financial institutions are right to push back on such overreach. Frivolous, headline-seeking litigation against banks for lawfully lending money is antithetical to international norms of commerce and is patently anti-capitalist. There is nothing inherently wrong or illegal about the production, sale, and distribution of coal, oil, and natural gas.

By following the money, banks have embraced the international sanctions script that penalizes any direct or remote connection to fossil fuel. It is a well-worn playbook drawn from successful crusades against Big Pharma and tobacco. Demonizing banks is easy after all, because only economists and other bankers will rally to their defense.

In trying to shift the tenor from sustainable to sinister, activists miss the larger point. Financial institutions have embraced environmental sustainability in a big way just on their own terms, committing billions to reduce their credit exposure to oil and gas and comply with international conventions like the Paris accord.

Most major banks made commitments as part of the Net Zero Banking Alliance (NZBA), the flagship climate initiative intended to accelerate climate target setting and common practice under the Principles for Responsible Banking and the Race to Zero. Convened by the U.N. Environment Programme Finance Initiative, it is an industry-led effort that “brings together a global group of banks, currently representing over 40% of global banking assets, which are committed to aligning their lending and investment portfolios with net-zero emissions by 2050.”

JP Morgan Chase has committed nearly $3 trillion to advance sustainable development and climate change. Wells Fargo has committed to deploy $500 billion in sustainable finance over the next 10 years. Citigroup has committed $1 trillion in sustainable finance by 2030. Bank of America has committed $1 trillion by 2030 to accelerate the transition to a low-carbon, sustainable economy.

These are not insignificant sums of money, and the commitment behind them should not be dismissed as meaningless or merely the cost of business.

The Way Forward

Whatever moral transgressions banks have committed over the years – and there have been many – financing fossil fuels is not one of them. Financial institutions have a critical role to play in society, and they are taking steps to address environmental concerns. But they should not be penalized for doing their core business – lending money. Frivolous lawsuits and overreach by environmental activists are antithetical to international norms of commerce and are patently anti-capitalist.

It is time to recognize the important role that banks play in our economy and to work together to find a way forward that balances environmental concerns with economic progress.