Banks backpedal on climate amid federal scrutiny, anti-ESG pressure

Many of the largest U.S. banks and asset managers are retreating from their climate commitments amid rising federal scrutiny and an assault on environmentally conscious investing in state legislatures.

As more stringent federal oversight looms and bills to blacklist and in some cases criminalize banks that refuse to invest in fossil fuels are proposed in statehouses across the country, many banks have in different ways backpedaled — at least rhetorically — on steps they have taken since the 2015 Paris Climate Accords toward slowing the warming of the planet by financing a gradual transition away from fossil fuels.

Last week, State Street and the asset management arm of JPMorgan Chase announced they would exit the environmentally friendly Climate Action 100+ investment alliance — citing that group’s approach to proxy voting, which has been a consistent target of punitive Republican legislation.

That announcement followed Bank of America’s reversal two weeks ago on its pledge not to pay for new infrastructure to mine, ship and burn coal — a fuel that is the dominant historic contributor to a warming planet — or oil exploration in the Arctic.

And in perhaps the most potent and symbolic image of the retreat, BlackRock CEO Larry Fink — long a bogeyman of “woke capital” to Republican lawmakers — in early February co-produced an energy conference with the state government of Texas, which had blacklisted his company in 2022 over allegations that it was boycotting fossil fuels.

Marking a further closure of that rift, Fink announced during the conference that the company would help Texas raise $10 billion to build new fossil fuel-powered plants.

“As a business leader and a leader of government, we saw that those differences can be minimized quite, quite quickly,” Fink said — warm sentiments that Texas’s Republican leadership echoed.

“I don’t know what I expected from the king of Wall Street, but we kind of hit it off immediately,” Lt. Gov. Dan Patrick (R) told the Houston crowd.

At least in a rhetorical sense, Fink’s overtures to Texas represented the end of an era: a sign of BlackRock’s — and much of the U.S. financial industry’s — retreat from the environmental, social and governance (ESG) investment that the company has long promoted.

That era began in 2015, but picked up in the 2020s, when — after years of pushing from the climate movement — banks began acknowledging the financial risks posed by climate change and making commitments to use their considerable financial power to pull the economy away from burning fossil fuels by 2050.

The financial industry is intertwined with climate because nothing — be it a solar plant, a transmission line or a coal plant — gets built without investment, loans and insurance coverage.

Given that fact, climate change poses two kinds of financial risk for financial institutions: the potential physical damage to assets they loaned money for — or against — and the danger that the transition to renewable energy will make once-lucrative assets less valuable, or even worthless, earlier than expected.

Both types of risk threaten the banks themselves, and the economy as a whole.

A 2022 study in Nature Climate Change found that the transition to clean energy will “strand” $1 trillion in fossil fuel assets — rendering those assets, and the derivatives and securities built on top of them, worthless in a clean energy world.

And a 2023 report by the Financial Stability Oversight Council found that financial risk from climate change — and feedback loops between physical and transition risk — could spread  throughout the economy.

In recent years, in addition to acknowledging these risks, banks have formed coalitions including the Glasgow Financial Alliance for Net Zero, set up in 2021 alongside the Net Zero Insurance Alliance and the United Nations’s Net Zero Banking Alliance — all of which committed to ending their financing of planet-warming chemicals by 2050.

This goal framed climate science in terms of a balance sheet: The idea of “net zero” is that the release of planet-heating chemicals is akin to accounting — that while emissions of carbon dioxide, for example, may not cease, they can be canceled out by removing carbon dioxide elsewhere

In addition to offering a way to address climate risk, for big banks and investment houses the nascent field of ESG represented a chance to pitch sustainability-flavored products to a new generation of investors — younger and more female, Tensie Whelan of the NYU Stern School of Business told The Hill.

It also didn’t constitute a decisive move away from fossil fuels: Firms like BlackRock made it their policy to hold on to fossil fuel companies, offering the reasoning that they could improve them, rather than selling them off to less responsible owners.

“Their strategy was always to have both feet in the puddle,” Whelan said.

She noted that the pre-2020 embrace of climate commitments also benefited from slumping returns from fossil fuels — though that changed with the fossil fuel sector’s sudden, lucrative price surges after the 2022 Russian invasion of Ukraine, when global energy markets decisively shifted, creating new opportunities for financial firms to make money on deals.

That new opportunity led banks to backpedal on their commitments to move away from fossil fuels, Anne Perrault of Public Citizen’s energy group said — causing investment in renewables to “stagnate” compared with fossil fuels in 2022, Reuters reported.

But even before that shift, Whelan said, financial institutions also often overpromised on their climate and environmental commitments.

“That is the seed of the challenge,” Whelan said. “Most financial institutions did not understand what they were signing up for, and they didn’t have people or expertise to implement what they were signing up for.”

This, she said, left the banks exposed to consumer disillusionment and federal penalties — amid a political backlash from the right.

Beginning in Texas, legislation promoted by the coal industry — the first fossil fuel sector that banks were pressed to withdraw from — banned banks and investment firms that “boycott energy companies” from doing business with state public entities.

This campaign sought to portray the move by banks to cut financing for fossil fuels — even coal — as an inappropriate intrusion of politics into investing.

Texas’s SB13 — which applied to fossil fuels the protective cover that state law offered in 2019 to firms that boycotted the Israeli-occupied territories — opened the floodgates. Between 2021 and 2023, Republican-majority state legislatures introduced 318 anti-ESG bills, of which 37 passed, according to progressive asset manager Pleiades Strategy.

In 2023, attorneys general from 20 GOP-controlled states threatened legal action against banks that took part in climate alliances such as “Climate Action 100+, Net Zero Asset Managers Initiative, or the like.”

And once Republicans retook the House in 2022, ESG became a perennial target of the chamber’s Oversight and Finance committees — with Finance Committee Chair Jim Jordan (R-Ohio) arguing that the net-zero alliances constituted illegal market manipulation by the banks.

In a statement last week following the JPMorgan and State Street announcements, Jordan touted the companies’ retreat as “big wins for freedom and the American economy,” and took credit for the moves in comments to Fox.

The banks themselves have reinforced the idea that the push against ESG was behind their decisions. In explaining why BlackRock had transferred its membership in the Climate Action 100+ from its U.S. to international branch, the company implied that the anti-ESG campaign had worked.

“In our judgment, making this new commitment across our assets under management would raise legal considerations, particularly in the U.S.,” the note said.

But the right-wing political reaction is just part of the story, NYU Stern’s Whelan said. “The backlash is giving them the cover to pull back — but it’s related to all these other things as well,” she said.

In particular, she said, the reversals are related to banks being held newly accountable — both by voluntary climate alliances like the Climate Action 100+ and the federal government — for the ambitious promises they made before the war in Ukraine.

She pointed in particular to increasing federal scrutiny of the once-freewheeling world of ESG and sustainability investing.

These areas have seen a “massive falloff” in ESG investment in the past two years, Whelan said — but she said much of that is a reflection of once-rampant “fraud” in the sector.

In 2023, the Federal Trade Commission cracked down on deceptive environmental claims, as did the Securities and Exchange Commission.

That same year, the Federal Reserve joined the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency in establishing stringent new principles for banks to manage climate financial risk; the Department of the Treasury passed its own net-zero principles; and the Securities and Exchange Commission cracked down on companies’ strict new guidelines.

This uptick in enforcement came alongside a push from groups like Climate Action 100+, which want to put increased pressure on members to commit to hard targets.

Both Climate Action 100+ and the banks told The Hill that little had substantively changed.

The organization told The Hill it still counts more than 700 investment firms — 60 of which had joined just last fall.

These companies were “committed to managing climate risk and preserving shareholder value through their participation in the initiative … and we expect strong interest to continue,” Climate Action 100+ said.

In its comments to The Hill about leaving the alliance, JPMorgan Asset Management cited its work building out its own internal climate risk practice, and suggested it wanted to follow “its own climate risk engagement framework.”

The firm added that it would continue to factor climate risk into its investment advice. “Climate change continues to present material economic risks and opportunities to our clients.”

Conservative critics of the banks echoed the idea that little about banks’ approach to climate has changed, despite their retreat from some of their stated commitments.

The withdrawal of JPMorgan Chase and State Street from the Climate Action 100+ constitute “welcome developments,” Texas State Comptroller Glenn Hegar said last week.

But Hegar accused the firms — which his office had blacklisted from doing business with Texas firms for “boycotting the oil and gas industry — of “doublespeak.”

“We heard firms telling Texas one thing but then providing very different and often contradictory information to states like New York or California,” he said.

Brent Bennett, head of the energy practice at the conservative Texas Public Policy Foundation (TPPF), told The Hill that the banks haven’t really changed their policies — they’ve just made “rhetorical” concessions to conservatives.

“I haven’t heard anyone saying, ‘We’re dropping net zero by 2050 as a goal,’” Bennett said.

Conservatives have argued that moving away from fossil fuels and toward renewables risks the reliability of the country’s power grid, particularly absent reforms to permitting for the staggering array of transmission lines needed to power an ever-more-electric economy.

Jason Isaac, CEO of the American Energy Institute — a trade group for the thermal power industry, which includes coal — told The Hill that the banks weren’t going far enough in reversing their climate commitments.

“In meetings that I’ve had with BlackRock, I have mentioned to them: You need to pull out of all of these groups and abandon your alignment with the Paris accords,” he said.

The left, meanwhile, has offered a mirror image of these concerns, saying not that the banks hadn’t gone far enough in rolling back climate concerns, but that their willingness to retreat now suggested their earlier commitments — even the ones they’re still sticking with — hadn’t been sincere to begin with.

“When faced with the need to show in practical terms that they meant what they said about what to do about the climate crisis, banks are punting,” argued Perrault of Public Citizen.

In that context, she said — one in which investments in renewables had stagnated compared with those in fossil fuels — “It’s fair to ask if they’ve been greenwashing all along.”

Whelan argued that the broader financial reckoning with climate risk is still in its infancy, and that banks haven’t yet truly begun to feel the pressure — both regulatory and climatic — that will force them to fully engage with it.

But over the next five to 10 years, she said, that’s going to change.

“As we have forest fires everywhere, insurers can’t insure anything, and regulators feel pressure from people — this stuff is going to get real.”

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