Climate Responsibility in Banking Series: Bank Climate Policies (Chapter 3)

In episode three of Bank.Green’s new series, Katherine touches on financial institutions’ policies, specifically exclusion policies. Not sure what those are and how they matter in the energy transition? This blog's got you covered.

What are fossil fuel expansion policies?

Anoushka: Diving straight in — this month, we're going to be honing in on a key pillar that Bank.Green analyses when looking at banks. And that is: policies — the policies that these banks follow or don’t follow. This helps us to rate a bank and its environmental impact. So, the first question I have for you, Katherine — I’ve heard the term “fossil fuel exclusion policies.” Could you explain what those are, and how common they are in banks?

Katherine: So, many banks have exclusion policies for harmful activities and companies that work in these harmful sectors. For example, it’s very common to see policies that state that a bank will not finance arms manufacturers, tobacco producers, or gambling. Fossil fuel exclusion policies are also fairly common. We’ve mentioned spectrums a few times in this series, right? And banks’ policies sit on a spectrum as well. So, on one end of it, you have a really simple policy — something that says, “I will never lend to any fossil fuel companies.” Very straightforward! And indeed, some financial institutions, just by virtue of their operating model, naturally never support fossil fuel companies. For example, there’s a bank in the U.K. called Charity Bank, and they only do business with charities, right? So, there’s naturally no way they’ll be doing business with oil and gas companies. And then, on the other side of the spectrum, you have very lengthy and sophisticated policies — with lots of exceptions, different start dates, and different caveats. And sometimes, these caveats and exceptions create loopholes for banks to exploit. So, that hopefully shows you the spectrum — from “really simple” to “super sophisticated.”

What does Bank.Green analyse in a bank's exclusion policy?

Anoushka: Great. And following on, what are key factors that Bank.Green looks for in banks' policies around climate? 

Katherine: Really good question. So, when we look at banks' policies, our primary source of data comes from our partners at Reclaim Finance. It's a French non-profit. They score banks' exclusion policies based on a number of metrics. To give you a few examples: they look at whether a policy covers fossil fuel companies as well as projects — so, if it covers existing activities or renewals, as well as expansion (which means new infrastructure being developed). They also look at how banks define fossil fuel companies in the first place. And if a bank's policy hasn't been rated by Reclaim Finance, in those limited circumstances, we look at parameters such as: is the policy effective immediately, or will it be effective at some point in the future? We look at whether it covers all types of fossil fuels — coal, oil, gas, biomass — and even different types of coal within that. And also whether it covers companies as well as projects. The last point is actually very important, because one way that banks can greenwash is by making a sweeping statement that they do not lend to fossil fuel projects — but that doesn't mean they aren't financing the day-to-day operations of a fossil fuel company. So, that distinction is very important.

Do banks always follow through on their policy commitments?

Anoushka: Cool. Thank you. And my next question is: do banks always follow through on their policies? Do they always deliver what they promise with regards to climate?

Katherine: Great question. Not always, no. This is something we definitely look out for when we rate banks. From time to time, we come across banks that have committed to, say, Net Zero or some other target — which essentially means that any fossil fuel investments they have would need to be reduced gradually to zero, typically by 2050. At the same time, support for renewables needs to be ramped up — and not just renewables, but also storage, carbon capture — all of that needs to scale up within the same timeframe. Occasionally, they even set specific targets for different sectors — high carbon-intensive sectors, such as fossil fuels. But at the same time, some of these same institutions are still financing new fossil fuel projects — what we call expansion, right? New pipelines, new infrastructure — which is clearly not compatible with their commitment to reach Net Zero. If we come across such inconsistencies between policies and actual lending practices, we point them out on our website.

Examples of good vs. bad climate policies

Anoushka: Great, thank you. And lastly, I'd love to know a summary of an example of a good climate policy versus a bad climate policy that a bank might be following in its climate strategy?

Katherine: Great question. A good policy is comprehensive. It doesn't leave room for loopholes. Like what I mentioned about projects and companies, ideally, it's effective immediately or in the very near future, so maybe 2026, 2027, not by 2040 or 2050, right? Phasing in a policy over three decades – not good! Ideally, it would also cover all jurisdictions in which the bank has customers, not just select jurisdictions where perhaps there isn't much fossil fuel development happening. Anyway this policy would be publicly available, easy to find, easy to interpret. And then, obviously the most important thing is that the bank actually adheres to this policy. 

Wrap-up

Anoushka: Thank you so much, Katherine, for continuously helping to explain how Bank.Green works, the important work that it does in the climate space, and the potential impact that it can have — and is having. I’ll see you next time for the next episode in this educational series.