Australia’s biggest lender, Commonwealth Bank, have released their latest climate report, which estimates the cost for the country to transition to net zero will be trillions of dollars. But loopholes in the bank’s policies keep the door open for fossil fuel investment, which has led to increasing shareholder pressures.
Australia’s biggest lender Commonwealth Bank’s latest climate report reveals loopholes for fossil fuel investment and inadequate climate scenarios for net zero.
The bank is facing pressure from climate organisations and shareholder resolutions to stop its financing of fossil fuels to stay aligned with targets.
Previous shareholder resolutions have been rejected, but an increasing trend of fossil fuel divestment could put economic pressure on banks to scale back fossil fuel funds.
Commonwealth Bank (CBA) (ASX:CBA) claims to be committed to becoming a leader for climate action in Australia, but critics of the bank’s latest climate report question if the lender’s actions are in line with their own goals with continued investment in fossil fuels.
The report outlines the bank’s strategy, updated targets, and progress so far on contributing to Australia’s net zero goals across four priority sectors: energy, property, agriculture and transport.
“We see our role centring on financing the transition to a sustainable economy, helping our customers navigate the transition, and leading the transition conversation” explained CBA in the report.
Transition will require ‘A$2.5 trillion to A$3 trillion’
To aid CBA’s net zero alignment in these sectors, the bank has been undertaking climate scenario analysis since 2018, to provide them with “the opportunity to consider aspects of our lending portfolio” by assessing risks and the cost of the net zero transition.
“Our estimate is Australia’s transition to a net zero emissions economy will require A$2.5 trillion to A$3 trillion [US$17.2 to US$2.1 trillion] of investment to 2050” said CBA’s CEO Matt Comyn in the report.
Comyn acknowledges that while this is ambitious, it is similar to the levels of investment that went towards Australia’s mining boom from 2005 to 2015. On the other hand, a report from consultancy Deloitte estimates that inaction on climate change could result in a A$3.4 trillion loss in the country’s GDP by 2070.
Australia has recently ramped up its climate ambitions, passing a new bill that enshrines into law the country’s emissions reduction target of 43% by 2030 against 2005 levels and net zero by 2050.
CBA recognises that Australia has a lot to gain by transitioning to net zero and the country is “well positioned to capture the many opportunities of transitioning to a net zero emissions economy through its abundant renewable energy resources, deep pools of capital, and innovative workforce”.
Despite efforts to align the bank’s temperature ambition to 1.5 C to inform their sector-level financed emissions targets and joining the industry-led, UN-convened Net Zero Banking Alliance, climate organisations are questioning if CBA is quite literally putting its money where its mouth is.
CBA’s investments in fossil fuels worries climate organisations
According to climate activist organisation 350.org, CBA’s updated fossil fuel lending targets are “just smoke and mirrors, and fail to meet the basic requirements to reach net zero emissions by 2050”.
While the bank included new interim targets for upstream coal, oil and gas exposure, the targets do not include fossil fuel reserves and are based on scenarios that are not aligned with its own goals.
The scenarios that CBA uses to set their targets are based on the rapid decarbonisation of Australia’s electricity grid, and take into account emissions trajectory, local and domestic policy, regulation, technological developments and consumer preference. The bank’s analysis is also based on a scenario for OECD countries where net zero emissions are achieved by 2070, twenty years later than the bank’s own net zero commitment.
This means that despite claiming to take a leadership role in emissions reductions, CBA is in reality taking a back seat and basing their emissions reductions targets entirely on external factors instead of being proactive to actually limit the investment of high-emitting industries like the fossil fuel sector by the deadline it claims to be aligned with science.
The problem with misleading scenarios
These misleading scenarios keep the door open to continue the flow of investment into the fossil fuel industry, and its current policy allows for the financing of new oil and gas projects as well as expanding existing coal projects.
Additionally, the report puts the focus on the bank’s accomplishments in reducing its financed emissions significantly from 2020 to 2021, while actually increasing its exposure to fossil fuel emissions, which is not in line with its own targets of decreasing emissions exposure.
From 2020 to 2021, CBA reduced its financed emissions in upstream oil by 35%, upstream gas by 30%, and thermal coal mining by 25%. Yet at the same time, it increased its exposure to upstream oil emissions by 12% and upstream gas by 22%.
“CommBank’s latest climate report is heavy on greenwash, but allows billions of dollars in loans in coming decades to fossil fuels, which we know will drive dangerous climate impacts like floods, bushfires, and drought”, warned 350.org’s campaign director Kelly Albion.
Shareholders put pressure on banks to increase climate accountability
Albion hopes that they will “see words met with action” at the bank’s board review of their oil and gas policy this year by having the bank commit to stop financing new or expanding fossil fuel projects and companies, and a complete phase out by 2030 of existing exposure.
The same concerns were echoed by the executive director environmental finance campaigning organisation Market Forces, Julien Vincent, who commented that it is “disappointing” that while CBA has seen some positive declines in its financed emissions over the last year, the bank is using this “as a licence to increase its exposure to carbon pollution from oil and gas in the coming eight years”.
“On the same day as Commonwealth Bank’s latest targets are released, it is acting as a mandated lead arranger for a loan to Santos (ASX:STO), a company attempting to increase oil and gas production at least 17% this decade”, warned Vincent.
Market Forces have coordinated a shareholder resolution on behalf of over 200 shareholders for the bank’s upcoming annual general meeting that calls on the bank to demonstrate how their financing will not be used for the purpose of new or expanded fossil fuel projects.
Many have tried but few have succeeded
This will not be the first time a shareholder resolution to stop fossil fuel investments will be proposed to CBA’s board. At the bank’s AGM last year, a similar resolution was put forward, which was backed by only 14% of shareholders and ultimately rejected.
Other banks across the world have faced similar shareholder resolutions relating to climate strategies and fossil fuel investments, but few have succeeded in their efforts.
In 2022, shareholder resolutions to crack down on investments in new fossil fuel development were submitted to Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Citigroup (NYSE:C), but were eventually rejected by a large margin.
Only HSBC (NYSE:HSBC) has been willing to engage with shareholders to close their fossil fuel investment loopholes, when a shareholder resolution submitted to the bank in February 2022 was eventually withdrawn as the bank agreed to work with investors to update its climate commitments and phase down financing of fossil fuels.
Divestment from fossil fuels is being led by pension funds
In other areas of the financial sector, the phasing out of fossil fuel investments has already begun, led by pensions funds.
NGS Super, an Australian super ‘industry’ pension fund, announced in August 2022 that it will be the first fund of its kind in the country to divest from the oil and gas sector. The majority of the pension funds’ oil and gas holdings were invested in Woodside Energy Group (AX:WDS) and Santos Ltd, top Australian independent gas producers.
Other pension funds across the world have made similar commitments. Ducth ABP, one of the world’s largest pension funds, announced in 2021 that it will be selling €15 billion worth of its holdings in fossil fuel companies.
In February 2022, the $280 billion New York State pension fund, the third-largest US state pension fund, announced it would divest half its stock and debt in shale companies, a total value of $238 million.
If the shareholder and climate organisation’s pressure is not enough to steer big banks away from continuing to invest in new and expanding fossil fuel projects, economic risks from these divestment activities may be another pressure point.