Weighing the Risks of Underwriting Fossil-Fuel Bonds

The bond-underwriting fees banks earn from fossil-fuel companies are not worth it, given the associated environmental impact and reputational risk, according to a group of climate-focused nonprofits.

For 22 leading global banks, the multimillion dollar revenues from arranging bond sales for coal, oil, and gas companies pale in comparison to the climate impact of their emissions profile, the Toxic Bonds campaign said, citing an analysis of data from firms including Bloomberg LP.

“Fossil-fuel companies need banks, but banks don’t need fossil-fuel companies,” said Alice Delemare Tangpuori, senior strategist at Bank on Our Future. “Coal, oil, and gas bond underwriting is no cash cow for banks. Rather, it’s a sickly beast, putting banks’ reputation and the future of our planet on the line.”

For the world to avoid catastrophic levels of warming, the UN Intergovernmental Panel on Climate Change has said there must be a rapid phasing out of coal mining. It’s also called for a “substantial reduction” in overall fossil-fuel use and financing. Separately, the International Energy Agency (IEA) has said there should be no new coal, oil, or gas development from 2021 onward.

Since the landmark Paris climate agreement in late 2015, banks led by JPMorgan Chase & Co., Citigroup Inc., and Bank of America Corp. have earned fees of around $12 billion from arranging about $1.7 trillion of bond sales for oil, gas, and coal companies, according to data compiled by Bloomberg. In the same period, they garnered $69 billion of fees from arranging other U.S. investment-grade and high-yield corporate bond sales.

Almost 115 banks, which collectively control 38 percent of the industry’s global assets, have joined the Net-Zero Banking Alliance (NBZA), meaning they’ve committed to align their lending and investment portfolios to the goal of achieving net-zero emissions by 2050. However, banks can exclude their underwriting and other off–balance-sheet activities from these targets, according to NZBA guidance.

Weak climate policies and loopholes in emissions-reduction targets “allow toxic bonds to slip through the net,” which shouldn’t be the case, Delemare Tangpuori said.

NZBA said the group intends to make emissions from the banks’ capital-markets activities part of its 2030 target-setting and disclosure requirements. This depends, however, on the development of appropriate methods for attributing these so-called “facilitated emissions” to banks, NZBA said.

The Partnership for Carbon Accounting Financials is working on one approach, which the NZBA said it’s likely to recommend but not prescribe in order to allow for the development of other methods.

Some banks have taken proactive steps to go beyond NZBA’s current guidance. JPMorgan, Goldman Sachs Group Inc., Toronto-Dominion Bank, and Canadian Imperial Bank of Commerce include their underwriting businesses in their emissions targets. Earlier this year, HSBC Holdings Plc caved to shareholder pressure and committed to update its fossil-fuel targets to include capital-markets activities. The bank’s new plan is scheduled to be unveiled in the fourth quarter.

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