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June 22, 2023

Divestment is banks’ best tool for net zero

Philadelphia, one of the US cities engulfed by smoke from Canadian wildfires in June. Stegeman wonders how US politicians and bankers could see it and yet not question the physical risks of investment decisions (Photo: Hannah Beier/Bloomberg)
Philadelphia, one of the US cities engulfed by smoke from Canadian wildfires in June. Stegeman wonders how US politicians and bankers could see it and yet not question the physical risks of investment decisions (Photo: Hannah Beier/Bloomberg)

Climate pledges and greenwashing regulation are a distraction from concrete divestment targets, according to Hans Stegeman, chief economist at Triodos Bank.

Temperature records on land and at sea are being broken at an alarming pace, shows research from the World Meteorological Organization, a UN agency, as the impacts of climate change are increasingly felt globally. The international political will needed to slash emissions in line with science and slow global warming is, however, sorely lacking.

In the face of this inertia, divesting from fossil fuel companies may be the strongest net-zero tool banks have at their disposal, argues Hans Stegeman, chief economist at Triodos, a sustainable bank headquartered in the Netherlands.

COP26, the international climate summit that took place in Glasgow in 2021, seemed to herald a brave new world for the banking sector with the creation of the Glasgow Financial Alliance for Net Zero and the Net-Zero Banking Alliance.

In the intervening 18 months, however, “nothing really has happened and things have even got a little bit worse in terms of pledges and promises”, says Stegeman. “There isn’t much progress from an international angle. We see some investors and pension funds divesting from fossil fuels, but it is still very limited.”

US backlash

He says the reasons for this lack of action are “complex”. Any attempt at international coordination across the financial sector is made “even more difficult” by the backlash against environmental, social and corporate governance investing in the US, led by certain Republican states, he adds.

The “step back from sustainability” by asset managers in the US is “extremely dangerous,” says Stegeman. These are big capital flows, and there is no easy way to see how we can resolve this, he adds.

Neither does he understand how US politicians and bankers can see the smoke from the wildfires in Canada yet not question the physical risks of investment decisions. ESG “has nothing to do with being woke – these are material risks to your portfolio and you can see them if you look out of the window”.

“The hope is that EU financial standards become the standards for all capital flows,” says Stegeman, while expressing concerns about what EU regulations are really trying to achieve. “Even with all the new regulations in Europe, it is not clear they will lead to more sustainable outcomes.”

He says: “I think regulations are more concentrated on combating greenwashing, when the original objective was on redirecting capital flows. Let’s concentrate on what is really bad and not what is light green and dark green. Let’s mobilise public opinion to show the damage your money can do.”

Difficult but necessary

The US situation is far from being the only reason why banks and other financial institutions are not moving to net zero as fast as science shows is necessary to limit global warming to 1.5C above pre-industrial levels, says Stegeman.

“Moving from pledges to implementation is not easy. The financial sector finances the real economy. If governments don’t follow up on their plans, the economy doesn’t decarbonise.” Banks are left largely stuck between a rock and a hard place, he suggests. “Why do we think the finance sector can do more, when policymakers don’t do anything?”

A lack of action from governments doesn’t let banks off the hook: “There is a huge responsibility for the financial sector to work on this and implement change, but we should be honest that it is difficult,” he says.

He observes that one problem is a lack of data, as banks have the most detailed data for the biggest companies, but often less agency with them, while “with smaller companies, you have the most agency, but you only have proxy data”.

“You have an idea on a portfolio level about their emissions, but you can’t follow up on a granular level or have a meaningful conversation.” Information gaps “which will be worse for biodiversity” are, however, “not an excuse to do nothing, it just makes it harder”.

“We need data and regulation, but we also have our own responsibility to do something,” – this “something”, in his view, is divesting.

Stegeman cites the announcement by energy major Shell last week that it is shelving plans to reduce oil production each year for the rest of the decade and will continue to invest heavily in oil and gas. Trying to engage as a bank with Shell on net zero, given the company’s stance, is not really credible, he says. “If you take [net zero] seriously, divest. Divesting is the first step, unless you have real agency to help clients decarbonise.”

The best outcome at COP28 to advance the pledges made at COP26 would be for the financial sector to agree “very concrete targets, in line with the Paris Agreement, showing fossil fuel companies there will be less capital from us in the next five years”. In the current climate, however, that is not happening, he adds.

An earlier version of this article appeared in The Banker.

A service from the Financial Times