In a bid to address environmental and social concerns, major global banks, including Morgan Stanley, HSBC Holdings plc, Goldman Sachs Group Inc, and JPMorgan Chase & Co, have set ambitious sustainable finance targets for 2030, ranging from US$750 billion to US$2.5 trillion. However, concerns are now being raised about the lack of consistency and transparency in how these targets are defined and reported.
Divergence in Definitions
Senior figures within the banking industry are questioning the credibility of the reported figures, highlighting the significant variations in how banks define and account for sustainable finance activities. Differences in accounting practices encompass various aspects, including the treatment of mergers and acquisitions (M&A), debt underwriting, revenue calculation from market-making, private equity investing, money-market funds, private banking, mortgages, and revolving credit facilities.
Challenges in M&A Reporting
One contentious issue revolves around M&A activities, with UK banks such as Barclays plc and HSBC excluding M&A from their sustainable finance targets, even if the deals have environmental, social, and governance (ESG) elements. In contrast, US banks, including Goldman Sachs, JPMorgan, Morgan Stanley, Citigroup Inc, and Bank of America Corp, count M&A deals in their sustainable finance targets. Discrepancies also exist in how these deals are calculated, with some banks including entire deal values rather than their pro-rata share or fees earned.
Lack of Regulation and Standardization
The absence of regulations has allowed banks to establish their own parameters for defining sustainable or climate-transition investments. This lack of standardized methodology has raised concerns about the credibility of reported figures, leading to fears of “greenwashing.” The industry currently lacks a specific law or regulation to guide banks in uniformly defining and reporting sustainable finance activities.
Debates and Discussions at COP28
Discussions about banks’ contributions to the energy transition and sustainable finance will take center stage at COP28 in Dubai. As the United Nations climate talks focus on the financing needed for decarbonization and community protection, questions about the legitimacy and transparency of banks’ sustainable finance targets are expected to feature prominently.
Call for Standardization and Best Practices
Experts emphasize the need for a consistent methodology to ensure the credibility of sustainable finance targets. The absence of regulations allows banks to set their own parameters, leading to variations in reporting practices. Organizations like ShareAction are increasingly calling out lenders for including activities like M&A in sustainable finance targets, arguing that they don’t result in the allocation or facilitation of capital.
Striving for Consistency
While banks continue to play a crucial role in financing the transition to a low-carbon economy, the lack of standardization and transparency in defining sustainable finance activities poses challenges. Calls for a more consistent approach and adherence to best practices are likely to intensify as stakeholders seek greater credibility in banks’ efforts to contribute to a greener and fairer planet.