Major banks, both in the United States and globally, have begun to assert an active role in the transition to a low-carbon economy and the reduction of climate risk. All six major U.S. banks have committed publicly to achieve global net-zero emissions by 2050 and to align with the goal of the Paris Agreement on Climate Change to limit global warming to well below 2ºC.
Particularly significant among these commitments are the declarations, such as that of J.P. Morgan Chase & Co. (JP Morgan Chase), that these banks will not only reduce their own operational emissions but also that they will achieve net-zero emissions with respect to their lending portfolios.
Likewise, Citibank has adopted the “2025 Sustainable Progress Strategy,” committing $250 billion to finance and promote a smooth transition to a low-carbon economy through investments in renewable energy, clean technology, and sustainable agriculture and transportation, among other industries.
Other major U.S. banks, including Bank of America, Goldman Sachs, and Wells Fargo have made similar commitments not only to reduce emissions from their operations but also to finance “green” technologies and industries that will promote a smooth transition to a low-carbon economy and to reduce climate risk in their lending portfolios.
These building blocks of bank strategy that orient capital flows toward more sustainable investments and push debtors to be more environmentally responsible represent significant new forms of private environmental governance.
In other words, rather than government regulators dictating compliance with environmental standards to address climate risks and promote sustainable economic activities, banks themselves are acting as change agents with respect to their lending portfolios in the first instance and also, in some cases, in regard to their securities underwriting and asset management businesses.
The banks’ actions are consistent with appeals from major nongovernmental organizations (NGOs) representing investors. For example, Ceres, a leading investor-oriented NGO, has called for banks to align with the goals of the Paris Agreement by engaging in more robust climate risk assessment and disclosure and setting targets to achieve net-zero emissions within each affected sector of their lending portfolios.
The banks’ actions are likewise facilitated by the actions of NGOs of which they are members, including the Partnership for Carbon Accounting Financials (PCAF). In 2020, PCAF launched the Global GHG Accounting and Reporting Standard for the Financial Industry, the first standard for financial institutions to measure and report greenhouse gas (GHG) emissions in their lending and investment portfolios.
These actions by banks resemble the actions of firms in other industries that have sought to reduce emissions and promote environmentally positive actions throughout their value chain.
In the non-financial corporate space, Walmart has used its market power to insist that its suppliers report on and reduce their GHG emissions.
Through Project Gigaton, Walmart aims to avoid one billion metric tons (one gigaton) of carbon dioxide emissions in its supply chain by 2030.
Technology firms have also made public commitments. Google reports that it has been carbon neutral since 2007, and aims to be carbon-free in its operations by 2030.
Other major firms in diverse industries have likewise required their suppliers to disclose and reduce GHG emissions through the CDP (formerly Carbon Disclosure Project) Supply Chain initiative.
In addition, there has been a great deal of scholarly focus on the role of shareholders in advancing the transition to a low-carbon economy and in reducing climate risk. Legal scholars have argued that shareholders have an especially important role to play in reducing climate risk and shaping firm behavior, particularly, “universal owners” like Vanguard, State Street, and BlackRock, which collectively hold almost a third of all public equity.
Thus, the notion that a firm would seek to reduce greenhouse gas emissions within its value chain as a form of private environmental governance is not new.
However, unlike other major corporations—even those as dominant in their industry as Walmart or Vanguard—banking institutions, as sources of private environmental and climate governance, have several unique features that warrant special focus. First, banks hold a special place in society as financial intermediaries.
Second, banks play their capital-allocation role in reaction to a particular set of economic incentives—to mitigate financial risk and to accelerate high-potential projects—which motivate them to facilitate the kinds of structural change required for transition to a low-carbon economy. Third, banks, as one type of private creditor, also possess significant contractual power over the operations and cashflow—and thus behavior—of their borrowers.
Regardless of what position one may take on the authority of U.S. financial regulators to address climate change through public law—a subject on which there remains disagreement
—the forms of private environmental governance that banks are adopting to address climate change are central to their legal, economic, and historic roles. This Essay is the first to offer a descriptive and analytical account of the tools that banks have at their disposal to lead and innovate in the private climate governance space, as well as to offer normative criteria against which to evaluate the impact of these tools.
Part I offers a brief primer on private environmental governance in general and private climate governance more specifically. Part II sharpens the focus to banks in particular. It considers how banks’ economic role and financial market structures provide incentives for these institutions to adopt private governance mechanisms and arrangements to solve problems that impact both finance and society. In particular, Part II considers three such private governance arrangements that may extend to climate change. First, the industry has developed measures to mitigate and screen risk that can motivate borrower behavior in environmentally responsible ways. Second, and relatedly, banks’ appetite for risk and reward can propel them to invest in sustainable and clean energy projects with a combination of debt, equity, and advice. Third, and regarding the industry’s structure, the homogeneity and competitiveness of the banking sector compels banks to experiment together—to associate—to address public policy problems that implicate the integrity and reputation of the banking sector as a whole. Banks’ desire to solve complex, transitional problems collectively has, and will likely continue to, include climate change.
Thus, all of these actions, though private, serve information-signaling functions to other industries and all of society about risk and climate—information that is highly valuable as society transitions to a low-carbon economy.
Part III builds on the theory of Part II—that banks possess a natural propensity and aptitude for private climate governance—to offer a descriptive and analytical account of the specific actions that banks are taking to address climate risk and to promote the transition to a low-carbon economy. In doing so, Part III creates a novel taxonomy categorizing four overarching categories of measures that banks have, to date, innovated to address climate change. These include: (1) measures to address banks’ operational/onsite emissions; (2) the promotion of portfolio analysis, carbon emissions targets, and negative screens to reduce exposure to climate-related risk; (3) measures by which banks undertake to accelerate or positively facilitate the transition by dedicating financing, investing equity, offering advice, and engaging in climate philanthropy; and (4) the use of voluntary association including the development of collective industry efforts to establish carbon pricing, set standards around disclosure, and brainstorm best practices. Part III shows that each of these measures accomplishes one or more of the goals of private governance that Part II discusses—to motivate climate-positive borrower behavior, to facilitate technological development and research, to establish best practices, and to increase transparency.
Part IV turns to the normative by discussing the broader implications that follow from banks engaging in private environmental and climate governance. First, we explain some of the normative criteria against which the banks’ actions could be measured, including their effectiveness, potential for global impact, accountability, and potential for greenwashing, among others.
Part IV concludes by offering some additional considerations that arise only in the banking context, including the relative ability of debt versus equity to engage in this supervisory role with respect to other firms’ actions.