Citi, JPMorgan First Adopters of Energy Finance Ratio

By Trina White, Sustainable Finance, BloombergNEF

If the world is to limit global warming to 1.5C, investment in low-carbon infrastructure will need to dramatically outpace spending on fossil fuels. For banks, that will translate to massively scaling finance and facilitated capital for clean energy and phasing down support for fossil fuels. A new disclosure agreement from two of the world’s biggest banks will help investors gauge progress on this process and pave the way for other banks to follow.

Citigroup Inc. has joined JPMorgan Chase & Co. in agreeing to disclose to investors their clean energy financing ratios, or the proportions of their low-carbon to fossil-fuel financing activity.

The metric Citi and JPMorgan have committed to report is similar to the Energy Supply Banking Ratio developed by BloombergNEF. Estimated for individual institutions based on commercially available data, the ESBR helps contextualize bank financing against broader energy investment and climate scenarios. BNEF estimates that JPMorgan facilitated 80¢ of financing for low-carbon projects and companies for every $1 directed toward fossil-fuel activities in 2022, for a ratio of 0.8:1. BNEF estimates Citigroup’s ratio at 0.6:1.

Chart of energy supply ratio

Both announcements followed engagements with the Office of the New York City Comptroller, which houses the city’s public pensions and has filed a proposal with these and four other North American banks – Bank of America, Royal Bank of Canada, Goldman Sachs and Morgan Stanley – asking them to report this metric. If an agreement is not reached with the other four banks, the proposal will go to shareholder votes this spring, beginning with the Royal Bank of Canada on April 11.

Crucially, and in contrast to BNEF’s metric, disclosure from banks may incorporate private transactions, like direct lending and bilateral loans. It may also encourage the adoption and standardization of this metric more widely by other banks.

That’s an important step for the world’s climate targets. The most commonly cited scenarios consistent with limiting warming to 1.5C imply that real-economy investment needs to reach a minimum ratio of 4:1 by 2030. At the moment, of any of the banks under pressure from the Comptroller, Morgan Stanley has the highest ratio – at 1.3:1. The global average is just 0.73:1. That suggests that banks have a long way to go.

BNEF clients can read more here.

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