Fire hazard: Funding the burning of fossil fuels will eventually leave bank money burnt
Lenders seem ready to play with fire so long as they get short-term profits. Banks have upped their financing of fossil fuel projects. But the economic destruction caused by climate change will return to haunt them.
If you come home early from vacation and find robbers ransacking your house, you could call the police and try to stop the crime. But the true alpha move would be to help the robbers load your valuables onto their truck and then tell them which of your neighbours are also on holiday in exchange for a cut of their profits.
Banks seem to be choosing the alpha option by abetting theft from themselves in backing new projects to extract and burn fossil fuels, thus stoking global warming that stunts economic growth and their own insurance and mortgage businesses. Of course, these financial companies do get a cut of the short-term profits from this environmental sabotage. And by abandoning the pretence of siding with the planet’s future, they avoid political blowback from a US government that has declared war on it.
But the long-term result will be a global economy trillions of dollars poorer and far less stable, impoverishing just about everyone, including banks.
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The world’s 65 biggest banks delivered $869.4 billion in finance to fossil-fuel companies last year, up $162.5 billion from 2023. Banks have funnelled $7.9 trillion in loans and underwriting to these polluting industries since the Paris climate accord took effect in 2016. This doesn’t include any investments by banks’ asset-management units, which amount to hundreds of billions of dollars more.
Last year’s funding surge reversed two years of decline and coincided with a turn of political sentiment against ‘woke’ environmental, social and governance (ESG) considerations in business. Climate action drew some of the harshest attacks, with US President Donald Trump and other conservatives blaming climate activism for high energy prices. Such claims helped Trump win a second term.
On his first day in office, he declared that his predecessor’s climate concerns had created a “national energy emergency" that hurt the finances of Americans. His prescription has been to attack any public or private activity meant to slow the burning of fossil fuels.
Also Read: Trump’s solar panel tariffs deal climate action a severe blow
Banks caught the direction in which the wind was blowing and quickly changed tack. The biggest immediately quit the Net Zero Banking Alliance, a group that vows to help eliminate greenhouse-gas emissions by 2050. They still claim to have their own goals for curbing emissions, but they’ve apparently given up trying to make their actions match their words.
To meet the Paris Agreement’s rapidly fading stretch-goal of capping global heat at 1.5° Celsius above the pre-industrial average, energy financing should favour green projects over fossil fuels by a 4-to-1 ratio, according to BloombergNEF. In 2023, the latest data available, the ratio was just 0.89-to-1. Boosting fossil-fuel funding last year could not have moved that ratio in the desired direction.
Meanwhile, the economic damage caused by a fast-heating planet keeps mounting. Global climate-related costs—including insured and uninsured losses, government relief spending and higher insurance premiums—have topped $18.5 trillion since January 2000, Bloomberg Intelligence (BI) estimated recently.
The US alone accounted for $7.7 trillion of the damage, or 36% of its growth in GDP over that stretch. In just the 12 months through April, US climate-related costs totalled nearly $1 trillion, BI said, roughly matching bank financing for fossil fuels during that time.
Also Read: David Fickling: How a simple valve can cut fossil fuel emissions but won’t
You might argue economic activity is economic activity, that building a house is basically the same as rebuilding a house, that government disaster relief is no different from any other flavour of government spending. But simply responding to disasters again and again is no way to grow an economy. Money spent on rebuilding houses, bridges and roads is money not spent on education, better infrastructure or other productivity-boosting measures. It steals growth from the future.
A National Bureau of Economic Research paper last fall estimated that a planet hotter by 3° Celsius—its current trajectory—would have a GDP that’s smaller by more than a third.
A study last week from the University of Maryland’s School of Public Policy found that a complete rollback of the Inflation Reduction Act’s climate measures, something Trump and congressional Republicans have been working hard to do, would shave $1.1 trillion from US GDP alone over the next decade. It would also kill 22,800 Americans, take $160 billion from American incomes and cause the average home’s energy bill to be $206 higher. Talk about an emergency.
Given the political reality, it’s understandable for US banks to speak softly about protecting the planet and their own future profits. Helping fossil fuels build an even bigger stick with which to beat them makes much less sense. ©Bloomberg
The author is a Bloomberg Opinion editor and columnist covering climate change.
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