What the banks refuse to finance

In the build-up to the Paris-based United Nations Climate Talks this weekend, banks are falling over themselves to demonstrate green credentials through their lending, their asset books and their borrowing. But just as important is what they choose not to finance, and why.

  • By Owen Sanderson
  • 24 Nov 2015
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John D. Rockefeller, the richest man in recorded history, said: “Next to doing the right thing, the most important thing is to let people know you are doing the right thing.” It's a motto which might serve the ethical finance industry well.

There’s nothing wrong with shouting about ethical behaviour — doing so normalises ethical behaviour and creates pressure for others to conform — but sometimes it is more interesting to examine what banks are not shouting about.

BNP Paribas and Société Générale, for example, announced major financing commitments to the renewables sector last week, ahead of the Paris talks. Both institutions will double their commitments to renewables financing by the end of the decade (the size of the renewables market is expect to grow by around 50% in the period, according to the International Energy Authority, so the commitment is faster than trend).

Other banks took other approaches. Barclays underlined the presence of £1bn of green bonds in its liquidity book, pledging to buy another £1bn when it can, quite a commitment in a £40bn market. Deutsche is targeting €1bn, Credit Agricole €2bn, and HSBC $1bn.

HSBC, ING and Société Générale issued green bonds themselves, following other banks including Bank of America, Morgan Stanley, SMBC Nikko and TD.

But most of these institutions have provided plenty of finance to environmentally damaging activities, and proud, profitable natural resources groups.

Of the institutions above, Barclays is fourth in BankTrack's list of coal-financing banks, Bank of America is sixth, Morgan Stanley eighth and BNP Paribas ninth. The other institutions are all top 30. Firms that don’t have billions of dollars lent out to coal-burning firms certainly do for oil.

Actually, there are signs that this is changing. As part of their commitments to renewables financing, BNPP and SocGen committed themselves to self-imposed conditions about when they will consider coal projects, including bans on coal power finance in high income countries. 

Natixis has already made such a commitment (though only has $1.5bn out to the industry).

But banks must keep up the pressure.

Critics of divestment initiatives — the refusal to finance or invest — argue that it is ineffective. Even if it is successful in crimping the flow of funds to projects, it raises the cost of capital for polluting or unethical firms, therefore raising the returns for those investors unconcerned by the destruction of the planet.

Other financiers argue that by staying involved, they can better influence the ethics or environmental impact of a project or firm. It’s hard to argue this with a straight face if you’re a bond investor, but it’s possibly true for a project finance bank, or if you hold a major equity stake.

But that’s really not the point. The purpose is embarrassment, peer pressure, and the reassertion of what is right and proper. The financing of investments which kill the planet should carry as much stigma as financing rogue states or money laundering does.

Perhaps this is unrealistic, given the parade of banks being fined for sanctions violations. But it’s backed up by a strong strain of self-interest as well.

It seems obvious, in retrospect, that financing an overtly racist and oppressive regime, such as apartheid South Africa, was wrong. But when Chase Manhattan pulled its lines from apartheid South Africa in 1985, it made sure it outlined the self-interest at the heart of the decision. It pulled out because South Africa was becoming less stable, not because of any ethical twinge.

Similarly banks have clear commercial, as well as moral reasons to avoid the most environmentally damaging financing.

The biggest issue is regulatory risk — often associated with early stage renewables financing, through the removal of subsidies, fossil fuel finance comes with the same problem. Preferential exploration tax regimes, extraction license terms, and subsidies in poorer countries could all change quickly.

Further out, carbon taxes, or punitive attempts to push consumers away from fossil fuels could easily hit the statute book, and pole-axe projects that will only pay returns in the longer term.

Governments have been slow to tackle climate change, but we have to believe they’ll get better (the alternative is believing we’ll all fry, starve or drown), and that will hurt investments that are inherently polluting. The way it plays out is going to be complicated and uneven, and that’s exactly what should scare the banks.

So two cheers for the banks which have taken steps on what not to finance so far. But there’s plenty still to do.

  • By Owen Sanderson
  • 24 Nov 2015

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 379.86 1758 8.36%
2 Citi 351.46 1511 7.73%
3 Bank of America Merrill Lynch 301.83 1298 6.64%
4 Barclays 270.59 1135 5.95%
5 HSBC 224.42 1237 4.94%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 48.34 226 7.37%
2 Credit Agricole CIB 43.62 205 6.65%
3 JPMorgan 33.50 97 5.11%
4 SG Corporate & Investment Banking 29.45 149 4.49%
5 UniCredit 29.45 158 4.49%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13.16 82 8.29%
2 Goldman Sachs 12.58 64 7.92%
3 Morgan Stanley 12.18 55 7.66%
4 Citi 10.09 71 6.35%
5 Credit Suisse 6.93 38 4.36%