What world's biggest banks really mean when they put trillions into ESG

By Alastair Marsh and Greg Ritchie

In recent years, many of the world’s biggest banks have published reports chronicling the vast sums they say they’re channeling into environmental and social activities. Now, senior people inside the industry are raising questions about those statements.
 

Banks including Morgan Stanley, HSBC Holdings Plc, Goldman Sachs Group Inc. and JPMorgan Chase & Co. have announced individual sustainable finance targets for 2030 that range from $750 billion to $2.5 trillion. Yet such statements leave investors with little real insight into the very different ways in which banks are defining what’s sustainable, according to senior bankers familiar with how the figures were compiled but who asked not to be identified discussing private deliberations.

The differences in accounting range from how banks treat mergers and acquisitions and debt underwriting to how they calculate revenue from market making, private equity investing, money-market funds, private banking, mortgages and revolving credit facilities, the people said.

Emily Farrimond, a partner at London-based consultancy Baringa Partners LLP, said the absence of a consistent methodology “can impact the credibility of the entire market, raising fears of greenwashing.” And Greg Brown, a partner in the banking practice of law firm Allen & Overy, points to the lack of “a law or regulation” to steer the industry.

As a result, deciding what to call “sustainable” in bank reports is “kind of up for grabs,” Brown said.

It’s currently “impossible to compare 'like for like’ between banks,” said Rachel Richardson, head of ESG at law firm Macfarlanes. “Until a standard market methodology or framework emerges, this is unlikely to change.”

Banks’ contribution to the energy transition will be the subject of keen debate in Dubai on Monday, as discussions at the UN climate talks turn to the vast sums needed to decarbonize industry and protect exposed communities. According to provisional figures, COP28 will host significantly more bankers and investment managers than any previous Conference of the Parties.

Banks first started publishing sustainable finance goals a few years after the 2015 Paris climate agreement. By 2021, the role of finance in creating a greener, fairer planet was a growing part of the public debate, leading an ever greater number of lenders to produce such targets.

But in the absence of regulations, banks have been free to set their own parameters for defining what counts as a sustainable or climate-transition investment.

Among the most contentious claims are those within the field of M&A, according to one European senior banker close to the matter who asked not to be named discussing sensitive information. 

Some of the biggest banks in the UK, including Barclays Plc and HSBC, don’t include M&A in their sustainable finance targets even if a deal has elements of ESG, representatives for the banks told Bloomberg. 

On the other side of the Atlantic, it’s a different story. Goldman, JPMorgan, Morgan Stanley, Citigroup Inc. and Bank of America Corp. count M&A deals in their sustainable finance targets. However, some of the banks include whole deal values instead of just their pro-rata share or the fees earned, according to people familiar with the matter. 

“All firms – including banks – can use discretion when determining sustainable finance targets,”  said Richard Monks, a former policymaker at the UK’s Financial Conduct Authority who is now a partner at EY.  “All, however, will need to evidence and justify their approach to the regulator with regards to which transactions they’ve counted in their targets.”

Spokespeople for the FCA and the US Securities and Exchange Commission declined to comment.

M&A shouldn’t be included in sustainable finance targets because the sheer size of such transactions often means their “inclusion can skew achievement of targets in a way that other advisory services wouldn’t,” said Farrimond, who advises banks and asset managers on ESG strategies.

ShareAction, a UK-based nonprofit known for pushing climate-change resolutions at banks including HSBC and Barclays, is increasingly calling out lenders that list activities such as M&A, arguing that these don’t “result in the allocation or facilitation of capital.”

While services such as foreign-exchange hedging or M&A advisory can play a role in the low-carbon transition, they shouldn’t be included in sustainable finance targets because they don’t “cover actual financing,” said Xavier Lerin, senior research manager at ShareAction. 

A representative for Morgan Stanley, which in August said it was 70% of the way toward reaching the $1 trillion in sustainable financing it’s told investors it will achieve by 2030, declined to comment beyond referring to the bank’s latest environmental, social and governance report.

A spokesperson for Goldman Sachs, which in April said it was more than halfway toward reaching its $750 billion sustainable finance goal, said banks “differ in their targets, business size and mix.” Goldman, which ranks as the world’s leading M&A adviser, has an approach that reflects its “expertise and capabilities,” and that is “rigorous and thoughtful,” the spokesperson said.

Representatives for Citigroup, BofA and Barclays declined to comment.

An HSBC spokesperson said that in the absence of regulations, the bank is trying to apply what it views as “market standards.” The UK lender, which has compiled its own sustainable finance and investment data dictionary, has said it’s made “good progress” toward reaching a 2030 sustainable finance goal of between $750 billion and $1 trillion.

JPMorgan, which recently published an update on its 2030 sustainable finance target of $2.5 trillion, only includes deals on which it acted as an adviser if there’s a clear sustainability justification for doing so, according to Ramaswamy Variankaval, global head of corporate advisory and sustainable solutions at the bank.

Then there’s the issue of how banks account for their capital markets activities.

Anderson Lee is a researcher at the World Resources Institute, which has been examining sustainable finance statements since 2019. He said WRI’s work shows that most banks call debt underwriting “sustainable finance” when they arrange deals that are judged to have an ESG component, but they don’t account for the emissions of deals arranged for fossil-fuel clients.

It’s “cherry picking,” he said.

Another area in which there’s significant divergence among banks is the extent to which they book ESG debt products.

Sustainability-linked loans, a $1.5 trillion unregulated market, aren’t included in the sustainable finance targets of JPMorgan, according to Variankaval.

There is “a variety of judgment questions that people can ask about how ambitious or how aggressive” the so-called key performance indicators on sustainability-linked loans are, he said. JPMorgan is the world’s largest arranger of SLL deals after BofA, according to data compiled by Bloomberg.

ING Groep NV, which pioneered the SLL market back in 2017, includes all sustainability-linked loans it helps arrange, according to information available on its website.

“Our approach is, either it deserves the sustainability-linked label or it doesn’t,” said Jacomijn Vels, ING’s global head of sustainable finance. “And only if it fits our standard for the label will it be included in volume mobilized.”

Other big banks only include some SLL transactions, according to representatives from the firms who asked not to be identified discussing non-public information. 

Banks also differ in how they account for investments, with some counting new inflows and others tallying assets under management.

They also diverge on derivatives. Such products can come in the form of currency hedges related to deals that claim to have an element of sustainability, or as sustainability-linked derivatives (SLDs), ESG credit-default swaps, exchange-traded derivatives on listed ESG-linked equity indexes, as well as emissions-trading derivatives, according to the International Swaps and Derivatives Association.

Some banks, including Barclays and BofA, don’t include any of these in their sustainable finance targets. But others do.

On its website, ING says it includes the full notional amount of the SLDs it structures. To prevent double counting, ING says it then excludes sustainable derivatives that are being used to hedge sustainability-linked loans already included in the bank’s sustainable finance target.

The sustainability-linked label can be attached to any financial products including derivatives, since it’s all about the targets and the incentives, according to an ING spokesperson. If a sustainability-linked derivative is structured on a normal loan, ING does take that into account, the person said.

Royal Bank of Canada also includes derivatives toward its target. Yet unlike ING, it doesn’t add the notional amount. Instead, it attributes the amount of so-called stand-alone credit line-utilization at the time the trade was executed, which RBC says reflects the portion of balance sheet that it’s committed toward the client.

"The notional value is the face value that is used to determine payments on a financial asset and therefore risks overstating our financial contribution," an RBC spokesperson said.

For banks wondering what the best practice is to reassure investors that they aren’t inflating their numbers, “the general principle should be for conservatism,” said Lee of WRI. That means only including “financing that really goes into capital investments in the real economy.”