On 25 January, members of the European Parliament’s Economic Affairs Committee (ECON) rejected a proposal to adopt higher capital requirements for lending to fossil fuel projects, as part of a draft law to bring the outstanding components of the international regulatory framework for banks, Basel III, into effect.
The abandoned proposal would have required banks to hold back one euro of their own capital for every euro invested in fossil fuel expansion projects – otherwise known as the ‘one-for-one’ capital rule.
The decision to drop the proposal was met with frustration by a number of actors, particularly the 16 organisations that penned an open letter to ECON in advance of the vote urging lawmakers to adopt the one-for-one rule.
Led by Finance Watch, a non-profit founded after the global financial crisis to safeguard financial stability, the letter’s authors argued that separate climate proposals approved by the committee, including measures to make it compulsory for banks to adopt transition plans, would alone “fall short of protecting taxpayers”.
Adding to these organisations’ frustration, ECON did vote for a proposal that the same one-for-one capital requirement be applied for crypto assets, given their perceived high level of risk. This would amount to a 1,250% risk weighting, given that the existing minimum requirement under Basel III for corporate loans stands at 8%.
“How MEPs could introduce a one-for-one rule for crypto and then not do so for new fossil fuel projects is beyond comprehension,” said Finance Watch secretary general Benoît Lallemand in a press statement.
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Without tighter capital requirements, taxpayers remain on the hook for the costs of a fossil market crash. Assuming that between now and 2030 the world mobilises to hold global temperature rise to 2°C, banks will have to be bailed out of an estimated $4.9trn in fossil assets when they become stranded, leaving 13.6 million jobs at risk worldwide, according to a report published in early January by the One for One campaign, led by the Sunrise Project.
For context, that figure is more than double the amount required to bail out banks after the 2008 global financial crisis.
According to the International Energy Agency (IEA)’s net-zero scenario, there can be no new oil or gas fields in development beyond 2021, meaning any bank continuing to finance oil and gas expansion is contravening the IEA’s research.
As such, the One for One campaign argues there would be no need for any “sound European bank to actually raise capital” to comply with what “on paper” would be a new capital requirement.
While such a requirement would likely have had the effect of making fossil fuel investments less desirable by increasing their risk profile, this was not, campaigners say, its explicit intention; rather, it would have provided a “safety net against any potential reckless risk-takers” continuing to invest in fossil fuel expansion.
Fossil fuel banks: “reckless risk-takers” abound
As new data reveals, there are a number of banks that currently meet this “risk-taker” definition, including a significant number of banks that are part of the Net Zero Banking Alliance (NZBA), the banking arm of former governor of the Bank of England Mark Carney’s wider Glasgow Financial Alliance for Net Zero (GFANZ).
Research published in mid-January by financial non-profit Reclaim Finance found that 56 of the biggest NZBA banks have lent $270bn to 102 fossil fuel companies for their expansion since signing up to the alliance, via 134 loans and 215 underwriting arrangements.
That includes the Alliance’s founding members: BNP Paribas, Citi, HSBC, Mitsubishi UFJ and Société Générale, who together participated in a “massive $10 billion syndicated loan to Saudi Aramco, the company with the largest global oil and gas expansion plans”, just a month after the NZBA was launched.
Although NZBA members have begun to set decarbonisation targets for the highest-emitting sectors, the extent of their financing is less surprising given that the initiative currently lacks any robust rules on fossil fuel financing.
To put these figures in context, research published on 23 January, using data gathered by Profundo for campaign groups BankTrack, Fair Finance International, Rainforest Action Network and Sierra Club, reveals that banks’ fossil fuel financing has not significantly slowed in recent years, while conversely, their renewables investment has hardly increased at all.
Profundo finds that just $178bn (or 7%) out of a total $2.5trn in loans and bond underwriting services for energy activities provided by 60 major banks to 377 leading energy companies between 2016 and 2022 went towards clean energy activities.
GFANZ has disputed these figures, which exclude biomass, nuclear and blue hydrogen (made from natural gas with carbon capture and storage), saying they do not present a “comprehensive view of clean energy”.
Regardless of exactly which assets are included, Profundo’s research reveals that GFANZ members as a group gave a lower proportion of finance to renewables than non-members, although GFANZ argues this could be due to the alliance having a smaller share of banks based in China, “where renewable buildout in recent years has been extremely strong”.
GFANZ banks’ lower share of funding for renewables comes despite Mark Carney himself recently endorsing research that finds that low-carbon energy investments need to be, on average, at least four times fossil fuels investments by 2030 to stick to net-zero scenarios published by the IEA, the IPCC and the NGFS.
Carrot of opportunity versus the regulatory stick
The notion that financial regulation in the form of tighter capital requirements is needed to ensure banks wind down their fossil fuel assets at a rate commensurate with net-zero goals sits in direct contrast to the ethos of GFANZ, espoused by Mark Carney himself, that the free market, aided by government policy and propelled by voluntary initiatives, will lead us to net zero.
In a 2021 interview published by the UN, Carney describes how “dialogue has shifted from viewing climate change as a risk, to seeing the opportunity… that’s a tremendously exciting development because what we have now in private finance is a focus on a clear goal – net zero – and finding the opportunities to advance that and to be rewarded by it”.
Just as he emphasises rewarding investors with the carrot of opportunity, in his well-known 2015 speech, 'Breaking the tragedy of the horizon – climate change and financial stability', made in advance of COP21 in Paris, Carney pre-emptively warned against beating investors with the regulatory stick, noting that: “Some have suggested we ought to accelerate the financing of a low-carbon economy by adjusting the capital regime for banks and insurers. That is flawed. History shows the danger of attempting to use such changes in prudential rules – designed to protect financial stability – for other ends.” During the 2007-8 financial crash, when bankers discarded stability for ‘other ends’ such as profits, there was a massive fallout, but many argue that preventing climate change and protecting financial stability actually go hand in hand.
Finance Watch’s Lallemand, however, takes the opposite view, arguing that such regulation is necessary for preserving financial stability in a changing economy. “If you don’t have regulation that bites, things won’t change,” he tells Energy Monitor.
Some banks may soon have no choice but to change their ways, as actions forcing them to reduce fossil fuel financing escalate. On 24 January, shareholder advocacy group As You Sow announced it had filed shareholder resolutions with the five largest US banks demanding they disclose transition plans to meet net-zero targets. Lallemand remains confident that capital requirements will be brought into law at some point in the near future.
“These ideas have gained a lot of momentum, but in the end it is a power struggle,” he says, noting that the financial lobby is “extremely powerful at a national level”.
So far, the global financial lobby’s insistence that capital requirements will stymie investment in the green economy “is working”, but for Lallemand, it is only a matter of time before policymakers’ patience runs out.