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What banks really mean when they put trillions into ESG

Alastair Marsh, Greg Ritchie, Bloomberg News on

Published in Home and Consumer News

In recent years, many of the world’s biggest banks have published reports chronicling the vast sums they say they’re channeling into environmental and social activities. Now, senior people inside the industry are raising questions about those statements.

Banks including Morgan Stanley, HSBC Holdings Plc, Goldman Sachs Group Inc. and JPMorgan Chase & Co. have announced individual sustainable finance targets for 2030 that range from $750 billion to $2.5 trillion. Yet such statements leave investors with little real insight into the very different ways in which banks are defining what’s sustainable, according to senior bankers familiar with how the figures were compiled but who asked not to be identified discussing private deliberations.

The differences in accounting range from how banks treat mergers and acquisitions and debt underwriting to how they calculate revenue from market making, private equity investing, money-market funds, private banking, mortgages and revolving credit facilities, the people said.

Emily Farrimond, a partner at London-based consultancy Baringa Partners LLP, said the absence of a consistent methodology “can impact the credibility of the entire market, raising fears of greenwashing.” And Greg Brown, a partner in the banking practice of law firm Allen & Overy, points to the lack of “a law or regulation” to steer the industry.

As a result, deciding what to call “sustainable” in bank reports is “kind of up for grabs,” Brown said.

It’s currently “impossible to compare `like for like’ between banks,” said Rachel Richardson, head of ESG at law firm Macfarlanes. “Until a standard market methodology or framework emerges, this is unlikely to change.”

 

Banks’ contribution to the energy transition will be the subject of keen debate in Dubai on Monday, as discussions at the UN climate talks turn to the vast sums needed to decarbonize industry and protect exposed communities. According to provisional figures, COP28 will host significantly more bankers and investment managers than any previous Conference of the Parties.

Banks first started publishing sustainable finance goals a few years after the 2015 Paris climate agreement. By 2021, the role of finance in creating a greener, fairer planet was a growing part of the public debate, leading an ever greater number of lenders to produce such targets.

But in the absence of regulations, banks have been free to set their own parameters for defining what counts as a sustainable or climate-transition investment.

Among the most contentious claims are those within the field of M&A, according to one European senior banker close to the matter who asked not to be named discussing sensitive information.

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