How Banks Should Phase out Financing of Fossil Fuel

1. Identify the priority sectors where bank financing is contributing to the most greenhouse gas emissions. In 2004, the US emissions profile looked like this:

The utilities sector is the largest single source of GHG in the US, and coal, which provides 50% of US electricity, is responsible for 80% of utility sector GHG emissions. Other important sectors in the US are transportation, real estate, chemicals, manufacturing, mining and metals, oil and gas and agriculture.


2. Measure the contribution of bank financing to the greenhouse gas emissions of clients in these sectors and establish a baseline against which to measure future actions.

Banks should develop methodologies that assess both significant energy production as well as energy consuming sectors, such as real estate.

3. Set absolute emissions reduction targets for the bank financing portfolio for each sector.

Reduction targets should be consistent with scientific recommendations, such as those of the Intergovernmental Panel on Climate Change, for a 80% reduction in GHG emissions globally by 2050, or 2% reductions per year. Bank financing, since it supports the development of infrastructure that will determine emissions rates for decades to come, is a leading indicator. Therefore, bank reduction targets will have to be anticipatory and accelerated in order to be consistent with scientific recommendations of overall reductions needed to avoid dangerous climate change.

4. Establish exclusion lists for financing of particularly egregious GHG intensive technologies.

Banks should immediately halt financing of any new coal fired power plants as a first step in the phase out of financing for fossil fuels. From a climate perspective, coal is the dirtiest and most significant source of greenhouse gas emissions. Other egregious fossil fuel financing includes the expansion of tar sands in Canada, the most greenhouse gas intensive source of gasoline currnently coming on market.

5. Internalize current and anticipated prices of carbon into financing decisions.

This is particularly the case for countries, like the US, where no price for carbon emissions currently exists. The social cost of carbon emissions has been estimated at $85 ton in a recent authoritative report for the UK government by Sir Nicholas Stern, former chief economist for the World Bank.

6. Identify and aggressively scale up opportunities for financing of renewable energies and energy efficiency.

The real estate sector in the US is the largest single energy consumer worldwide. By simply financing already existing technologies with internal rates of return greater than 10%, 2020 energy demand from the US real estate sector would be reduced by one third.

7. Set up appropriate social and biodiversity screens to ensure that support for alternatives do not lead to unintended negative consequences.

An example of this is the explosive growth in agro-fuels worldwide, which is accelerating tropical deforestation and threatening serious social unrest due to rising food prices increasing hunger among the poor. Bank safeguards should include assessment of the sustainability of feedstocks for any financed agro-fuel facility.

8. Provide investors with analysis and tools that incorporate climate change perspectives, relative risks, costs and opportunities.

A range of new tools assessing the relative carbon exposure of companies within sectors, between sectors and in different regions are emerging that can help investors make more informed decisions and steer capital towards investments that are smart for the climate, while avoiding emerging regulatory and climate risks. These include tools that assess the relative carbon intensity of different mutual funds, which many banks offer. A study in the UK found that the difference in carbon emissions for every $15,000 invested in the lowest carbon intensity versus the highest carbon intensity mutual fund is equivalent to a typical households entire annual greenhouse gas emissions.

9. Conduct energy audits to determine the footprint of the bank’s operations.

10. Increase energy efficiency and switch to renewable energy providers.

11. Provide transparent and comprehensive annual reporting on all aspects of the bank’s climate policies and commitments as they relate to:

  • Reducing financed emissions from fossil fuel energy production and consumption;
  • increased support for renewable energy and energy efficiency, and;
  • greenhouse gas emissions associated with bank operations.

12. Support the development of public policy that will create an enabling regulatory environment to ensure accelerated achievement of deep mandatory greenhouse gas emission reductions.