Investment pressures on banks funding fossil fuels: are these efforts by investors losing effectiveness?
The banking sector is making strides towards adopting science-based strategies to reduce fossil fuel financing and increase renewable energy financing. These strategies, which center on adopting net-zero aligned frameworks, setting targets to end fossil fuel expansion, and redirecting capital towards low-carbon sectors, are aimed at addressing climate change and aligning with the Paris Agreement goals.
One of the key strategies is the adoption of Science-Based Net-Zero Standards, such as the Financial Institutions Net-Zero Standard by the Science Based Targets initiative (SBTi). This standard, released in July 2025, urges banks to cease financing fossil fuel expansion and set credible, science-based targets for transitioning their energy portfolios to net zero by 2050.
Another strategy is the redirection of loans towards renewable and low-carbon projects. Banks are encouraged to finance renewable energy, energy efficiency, and sectors like public transit and clean manufacturing to reduce the carbon footprint of their loan portfolios.
However, the implementation of these strategies faces challenges. The voluntary nature and lack of enforcement of standards like SBTi’s net-zero framework can limit effectiveness and lead to inconsistent progress across institutions. Some major banks, such as Banco Santander, have been reported to increase financing for fossil fuel expansion, even while claiming net-zero goals.
Banks also face the challenge of balancing financial stability and climate risks. They must manage risks associated with climate transition, including policy changes, technological shifts, and physical risks from extreme weather, while maintaining profitability and shareholder value. The Financial Stability Board has warned about the growing financial risks climate change poses, emphasizing the need for urgent action but also operational complexity.
Accurately measuring and reporting the carbon footprint of loan portfolios remains complex. While databases and methodologies exist, there are still challenges in assigning emissions intensity by sector and tracing financed emissions accurately, which complicates target setting and progress tracking.
During the current proxy season, investors are putting pressure on banks to reduce fossil fuel financing and tilt their loan books to renewables. However, regulatory headwinds, NZBA exits, and dwindling shareholder support for climate resolutions have presented hurdles for investors this season.
For instance, the SEC disagreed with a resolution filed by the New York City Retirement Systems, calling on Bank of America to disclose its energy supply ratio. The board recommended a vote against the resolution due to concerns it would divert management attention from other climate strategy efforts.
At Royal Bank of Canada's AGM in April, a proposal asking for a 'say on climate' vote surfaced again - for a fourth consecutive year and received 16% shareholder backing, a marginal gain from 15% the year prior. However, the 'Say on Climate' vote at RBC was opposed by over 80% of shareholders.
In summary, the sector is moving towards formalized, science-based strategies to curb fossil fuel financing and favor renewables, but voluntary compliance, policy inconsistencies, and practical financial challenges hinder uniform implementation. Efforts such as the SBTi Financial Institutions Net-Zero Standard provide a pathway, but rigorous enforcement and transparency remain critical for meaningful impact.
- Environmental science plays a crucial role in the banking sector's strategy to address climate change, as science-based net-zero standards, such as the Financial Institutions Net-Zero Standard by the Science Based Targets initiative (SBTi), urge banks to transition their energy portfolios to net zero by 2050.
- Businesses in the finance sector are increasingly investing in renewable and low-carbon projects to reduce their carbon footprint, a shift driven by the need to align with the Paris Agreement goals and the voluntary net-zero frameworks adopted by banks.
- However, investing in clean energy and reducing fossil fuel financing faces challenges, including the voluntary nature of standards and the operational complexity of accurately measuring and reporting the carbon footprint of loan portfolios, which can impact both the effectiveness and the authenticity of environmental efforts in the banking sector.
