For the last decade, environmental and shareholder activists have been increasing pressure on companies to move towards sustainable finance and to divest fossil fuels. Recently, those actions have spurred some major changes from big banks.
Morgan Stanley said they will take responsibility for greenhouse gas emissions from projects that they finance. Similarly, JP Morgan and Goldman Sachs announced they will stop funding Arctic oil & gas projects, increase internal restrictions on the funding of fossil fuel ventures, and spend much more on sustainable projects. These are just a couple examples of business decisions that are a direct result of activist shareholder proposals from the 2020 proxy season, not to mention years of political pressure.
Moves like this are known as “sustainable finance.” As of late, any financial service that integrates environmental, social and governance (ESG) criteria into its business decisions can claim this title. Sustainable finance touts the strong belief that money should be used for good. At first glance, it sounds like a wonderful thing. But in practice, banks use the umbrella of “sustainable finance” to accept responsibility for carbon emissions from organizations they are only tangentially related to, giving them carte blanche to increase fossil fuel restrictions on their own customers. That sets a chilling precedent for other banks and organizations.
Danielle Fugere, president of As You Sow, a shareholder activist group, stated, “Access to capital will increasingly be tied to a company’s ability to reduce its emissions at the rate and scope necessary to align with the Paris goal.”
Some major banks will now base their decision on whether or not a company will receive funding on their success in reaching, or striving to reach, Paris Climate Agreement standards. These standards are not only almost impossible to achieve, but also take years to measure improvements and are expensive to implement. And most importantly to shareholders, these changes often do little to improve the company’s profitability.
As with most things sustainability related, political activists seem to only consider what should be removed and don’t consider what it could be replaced with. For example, banning reusable plastics requires an increase in paper products, and therefore, cutting down more trees. What will the adverse effects be on the environment, economy, and your portfolio if fossil fuels are divested?
Banks should be able to invest and divest however they see best for their company, employees and shareholders. If a bank chooses to withhold capital because of their sustainability requirements, they should do so because it creates jobs, a better work environment and profitability for shareholders.
However, these banks appear to be making these changes only to appease the political activists yelling the loudest. Sustainability goals continue to be a moving target, and regulating by these ever-changing standards could prove to be a poor business decision.