Investment Strategy

Banks Profit from Fossil Fuel Boom

They’re like the new kid at school who just wants to fit in and do all the right things.

Big banks went to the U.N’s CPO26 recently with that in mind. The herd mentality had momentum switching in the green direction and banks like JP Morgan, Bank of America, and Morgan Stanley, among others, were only too happy to jump in and celebrate at the punch bowl. The nerve of such banks putting Milton Friedmanesque mission statements like shareholder profit above sea turtle nesting.

One must still be reminded that, at least for now, it isn’t illegal to invest in oil and gas and other fossil energy loathed by the left. So states Harald Walkate, former head of environmental, social, and governance investing at Natixis Investment Managers and now a sustainable finance consultant.

“While from an ethical or ideological perspective many people might not like the idea of investing in fossil fuels, and it may in fact be very good business for some time to come.”

On April 21, 2021, 43 financial institutions from around the world formed the Net Zero Banking Alliance (NZBA). Since its founding, a total of 108 banks representing 40 countries and 38% of the world’s banking assets have joined the alliance. That’s $68 trillion in assets. Righteous bucks.

Banks are taking a step back and trying to figure out how to get out of this mess. It sounded like a good idea before Russia invaded Ukraine and all hell broke loose. In light of the recent rise in the need for fossil fuel energy, big banks have done a mean reversion and are returning to the lucrative business of funding coal and other non-green sources.

According to Bloomberg data, global bank lending to fossil fuel companies is up 15%, to over $300 billion, in the first nine months of this year, from the same period in 2021. When banks signed on the dotted line they may not have been fully aware of the legal risks associated with such a net-zero commitment.

A coalition of NGO’s, including ShareAction, BankTrack, Reclaim Finance and the Sierra Club, called on NZBA members to set more stringent rules on financing fossil fuel projects, in line with tougher criteria issued by the U.N.’s Race to Zero campaign.

According to Adele Shraiman, campaign representative in the Sierra Club’s Fossil-Free Finance campaign, “In order for financial institutions’ net-zero commitments to be credible, they must explicitly commit to phase out financing for new fossil fuels.

It’s time for the NZBA to make clear that banks who continue to finance massive fossil fuel expansion, while making grand pronouncements about climate goals, are not welcome in the alliance.”

Contrary to liberal desire, the NZBA decided to weaken its language on phasing out coal and other fossil fuels after a number of the world’s biggest banks, including JPMorgan, Bank of America, and Morgan Stanley, raised concerns about legal liabilities related to phasing out the commodities and antitrust rules. 

There appears to be a love-hate relationship between the greenies and the big banks. The banks know that it takes capital to finance these green projects and the folks at places like the Sierra Club also know that they need financing to make their dreams come true.

As one would expect, the banks are holding all the cards and in the current environment will do whatever it takes to keep the cash flow coming in, albeit green or not.

In trying to get this religious movement off the ground with financial institutions, these coalitions have put up way to many obstacles in the way of required data and compliance that some of the member organizations are balking at. This is the modus operandi of these groups.

You saw it with the insidious use of the SEC to usurp power and put burdensome reporting requirements on small businesses that do business with the bad guys (oil and gas companies, et al). This is the Scope 3 emissions scheme to hold companies accountable at the exorbitant expense for their supply chains and their carbon footprint.

According to the Capgemini Research Institute, although 85% of organizations recognize the business value of emissions measurement and analytics, half of those surveyed said that they were not equipped to capture or use the data they generate to drive decision-making. 

There will always be loudmouths like Chris Hohn, the billionaire founder of the TCI hedge fund, who iterates, “Shareholders should vote against the directors of banks who are hiding their exposure to climate risk.” Shills like Hohn call this greenwashing.

I call it getting back to the fundamentals of business, where companies attempt to maximize shareholder value. Sane investors want returns commensurate with risk.

Give to your local aquarium if you want otherwise.

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