Wall Street banks including JPMorgan Chase & Co., Morgan Stanley and Bank of America Corp. have threatened to leave Mark Carney’s financial alliance to tackle climate change because they fear being sued over increasingly stringent decarbonization commitments.
In tense meetings in recent months, some of the most significant members of the Glasgow Financial Alliance for Net Zero (GFANZ) have said they feel blindsided by tougher UN climate criteria and are worried about the legal risks of participation, according to several people involved in internal discussions.
“I am close to taking us out of these global green commitments — I’m not going to allow third parties to create legal liabilities for us and our shareholders. It is immoral and irresponsible,” one senior executive at a United States bank said. “What if we get it wrong, make a mistake or someone lies? Then the bank can be sued, that is an unacceptable risk.”
“We spent one hour in our last call discussing (U.S. banks quitting). It was extremely tense,” one of the people involved in recent GFANZ bank talks said.
European banks including Santander Bank NA have also expressed misgivings.
The potential loss of some of the world’s biggest and most influential banks would be a serious blow for Carney’s GFANZ group, which was formed last year and took centre stage at the COP26 climate talks in Glasgow in November.
More than 450 finance companies accounting for US$130 trillion of assets have joined GFANZ, which is co-led by the Canadian ex-Bank of England governor and current Brookfield Asset Management Inc. executive.
The banks’ biggest concern is over strict targets on phasing out coal, oil and gas introduced over the summer by the UN’s Race to Zero campaign, a UN-led net zero standard-setting body that accredits pledges made by Carney’s alliance.
The body will soon be able to take action against financial companies for failing to hit targets, which could lead to them being kicked out of GFANZ, the FT reported last month.
Banks’ legal departments are particularly anxious about tougher U.S. Securities and Exchange Commission rules around climate-risk disclosures and commitments proposed by SEC chair Gary Gensler in February.
The SEC will soon require formal disclosures in annual reports about governance, risk-management and strategy with respect to climate change. Companies will also have to disclose and be held accountable for any targets or commitments made, with detailed plans on how to achieve them.
A European bank executive said that “there is no way we are joining any new ESG groups, we don’t control them” and echoed their U.S. counterparts’ fears about lawsuits due to the SEC’s renewed focus on ESG and emissions reporting.
Bankers say that the proposed SEC rules could add hundreds of pages to annual reports and require a small army of extra accountants and lawyers to produce and vet the data, which they contend is not yet reliable or properly codified.
GFANZ has faced pushback from lenders since its inception. Banks successfully resisted committing to the most explicit road map for cutting greenhouse gas emissions to net zero by 2050, refusing to end financing of all new oil, gas and coal exploration projects immediately.
Bankers complain that the demands placed on them are not supported by equally robust government action on climate change, nor does the technology exist that hitting some of the net zero targets will rely on.
They also point out the lack of GFANZ members from China, Russia and India — three of the world’s top carbon-emitting countries.
Of the 116 banks that have signed up to the Net Zero Banking Alliance (NZBA), the GFANZ banking subsidiary, none are from China or India, while Sovcombank is the only Russian lender. By comparison, Liechtenstein has three members.
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Bank of America, JPMorgan, Morgan Stanley, Santander, Race to Zero and the UN Environment Programme Finance Initiative, which helps run the NZBA, declined to comment. The SEC and GFANZ did not respond to requests for comment.
U.S. banks have also come under pressure from domestic politicians, notably in the Republican party, over their sustainability commitments. Red states such as Texas and West Virginia have been openly hostile to financial institutions that they feel do not offer enough support to the fossil fuel industry.
“There are a lot of banks looking at this and saying there will be a Republican Congress next year, so we’re going to have to be accountable for that,” said one person involved in the NZBA discussions. “It’s true that a global alliance without American banks, that’s a failure.”
© 2022 The Financial Times Ltd.