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Good morning. The language of JPMorgan’s latest annual climate report reflects an increasingly mainstream vision of the green transition among banks and some analysts, in which financing clean energy is at least as important as stepping away from fossil fuels. But the US banking giant’s decision to no longer hold itself to a target focused specifically on oil and gas end-use emissions makes it unusual among global peers.
Banks mostly share climate data and targets on a voluntary basis, which means they have endless flavours of carbon accounting to choose from. The risk, activists say, is that banks could end up pushing disclosures out to investors that are accurate but do little to meaningfully track portfolio decarbonisation. Read on for my analysis.
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corporate climate targets
Rethinking climate maths for banks
One of the world’s biggest financiers of fossil fuels has been completely open about its decision to shift the climate goalposts by which it wants to be judged.
In its annual climate report last week, JPMorgan said it planned to combine some of the greenhouse gas emissions from its clean energy portfolio with some of those from its oil and gas portfolio in a new, single “energy mix” target. This means the US bank no longer has a target exclusively focused on carbon output linked to the use of oil and gas sold by its clients — the top source of its energy sector emissions.
“Our expanded target recognises a singular focus on fossil fuels will not successfully achieve the necessary transition of the global energy system,” the bank explained. “Therefore, our targets should aim to reflect the reality that we also need to prioritise a significant buildout of clean energy sources.”
The move coincides with the bank’s decision to use stricter climate modelling in its accounts. Previously, JPMorgan’s target was to cut end-use oil and gas facilitated emissions by 15 per cent by 2030, compared with a 2019 baseline. This used an International Energy Agency scenario under which the long-term increase in global average temperatures is “well below” 2C. Under the new IEA scenario it is using, which models a more stringent 1.5C limit to global average temperature rises, JPMorgan would have had to lift its original end-use oil and gas target to a 29 per cent reduction, the bank said.
Instead of doing this, JPMorgan has come up with a new target altogether, which it says is “more ambitious”. This will reduce the carbon intensity of its “energy mix” activity by 36 per cent by 2030 from the 2019 baseline. It says this more accurately reflects the global energy mix needed to hit net zero emissions by 2050.
The unusual move to combine a target relating to wind and solar clients with a target linked to relationships with oil companies underlines how banks are rethinking how to meet self-imposed targets as end-of-decade deadlines approach.
In contrast to some banks that have promised to make wholesale cuts to their oil and gas loan books, or to all their financed emissions, JPMorgan’s chosen climate targets focus on reducing a measure of its clients’ carbon emissions in relation to energy produced.
Activists pushing for higher standards to be used in the world of green finance have long argued that the widely used “intensity” metric is prone to creating distortions.
Patrick McCully, an energy transition analyst at the French campaign group Reclaim Finance, told Moral Money that JPMorgan had simply “diluted” its previous target by adding inputs to its “intensity” metric.
The bank’s emissions intensity numbers are obtained by dividing facilitated and financed emissions by the energy produced by its clients (measured in megajoules). And as the new target involves adding zero-emissions energy to the more polluting energy covered by the old target, this should in theory lead to an automatically smaller final emissions intensity number.
JPMorgan provided $39.2bn of lending and underwriting services to fossil fuel companies in 2022, according to calculations by the Rainforest Action Network. The intensity of JPMorgan’s financed emissions linked to fuel sold by its oil and gas clients rose 1 per cent between the end of 2020 and June 2022.
The sheer variety of metrics that banks use for financial carbon accounting risks muddying the waters, Pietro Rocco, head of green finance at the UK-based Carbon Trust consultancy, recently told Moral Money. “There is a [danger] of confusing investors who get overloaded with different methodologies,” he said. “The big risk is it opens everything up to a bit of cherry picking.”
Overall, “there’s a risk of ‘bullshit emissions reductions’ being reported or sold to investors”, he said, drawing a parallel with Charlie Munger’s description of a widely used accounting term (ebitda) as “bullshit earnings”. Munger is vice-chair of Warren Buffett’s Berkshire Hathaway.
Another financial climate metric is in the spotlight at the moment. The climate-focused financial industry body, the Glasgow Financial Alliance for Net Zero (Gfanz), has recently closed a consultation on transition finance, which includes possible methodologies to work out “expected emission reductions” (EERs), ahead of the COP28 UN climate conference in Dubai later this month.
EERs would quantify the hypothetical greenhouse gas emissions that have been prevented or reduced by an investment, compared to business as usual. They could, for example, be issued to banks investing in coal power plants that are in the process of shutting down.
Activists say the idea has parallels with the controversial concept of “avoided emissions” carbon credits, which are commonly issued in exchange for protecting forests in places with high deforestation risk. These have been criticised because of their reliance on hypothetical “business-as-usual” scenarios which have allegedly often lacked rigour.
The idea is meant to give banks an incentive to extend finance to clients that are committed to transitioning away from fossil fuels, not just to sectors such as wind and solar which are already seen as “green”. Curtis Ravenel, a senior adviser at Gfanz, said EERs were a “forward-looking concept to help financial institutions better understand the impact of transition finance allocation on real-world decarbonisation, to complement other methodologies and metrics”.
In some ways, JPMorgan paints a more complete picture of its activities than is standard among banking groups, as it includes capital markets work such as bond underwriting, while most banks still focus only on loans. It also discloses the emissions linked to its backing of the oil and gas sector, albeit as part of a wider “energy mix” metric.
JPMorgan also avoids one common accounting quirk that can warp the signal given by banks’ climate disclosures. In its latest climate report, the bank looks at emissions in relation to a three-year average for its clients enterprise value including cash, rather than a more commonly used and more volatile yearly figure.
Because of the way banks usually do emissions accounting, using a yearly figure for a company’s enterprise value including cash, the rise in valuations of oil and gas majors last year may have made it easier for banks to hit targets for this sector. Banks including Deutsche Bank, Morgan Stanley and Standard Chartered have all recently said that changes to clients’ valuation could lead to volatility in climate disclosures.
Robert McKay, a consultant for Reclaim Finance, has modelled a number of scenarios for how valuation fluctuations could shape banks’ climate journeys in the decade to 2030. A 55 per cent increase in the valuation of public companies in a bank’s loan portfolio, for example, and with a 30 per cent increase in their debt levels, would lead to a fall in a typical bank’s financed emissions by nearly a third, he says — even with no change to the bank’s loan book. In other words, seemingly ambitious 2030 targets could be hit even in a plausible business-as-usual scenario with no changes to real world emissions.
Despite efforts by banks and big investors to rethink their ties to the fossil fuel sector, borrowing costs for oil and gas companies in the US and Europe have largely mirrored those for other debt issuers.
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