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ECB Research Finds Climate-Aligned Banks All Talk, No Action

White paper’s findings suggest that voluntary private-sector initiatives ‘may have relatively little impact on decarbonization.’

By Michael Katz




Global banks that have embraced climate-related targets, regardless of how ambitious they may be, show little to no evidence of having changed their business practices to meet their goals, according to a white paper released by the European Central Bank.

“Climate-aligned banks do not change their lending or loan pricing differentially compared to banks without climate commitments, suggesting they are not actively divesting,” the paper stated. “Further, we find no evidence of a change in interest rates charged by climate-aligned banks to high-emission firms.”

The paper researched the impact of voluntary climate commitments by banks on their lending activity, with a particular focus on members of the United Nations-convened Net Zero Banking Alliance, which describes itself as a group of global banks “committed to financing ambitious climate action to transition the real economy to net-zero greenhouse gas emissions by 2050.”

Although there are several voluntary climate-related groups globally, the paper focused on NZBA as it’s the largest one–with 138 member banks from 44 countries–and represents more than 40% of banking assets worldwide.

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“Our results cast doubt on the efficacy of voluntary climate commitments for reducing financed emissions, whether through divestment or engagement,” the paper said. “More broadly, it suggests that voluntary private-sector initiatives may have relatively little impact on decarbonization.”

The paper also suggests that a major motivation of many banks to join the NZBA is to gain ESG street cred. The paper’s authors noted that there has been increased participation in climate initiatives by the largest banks and banks with the most pre-existing exposure to high-polluting industries, adding that setting a commitment leads to an increase in a lender’s ESG rating.

“Many laud these initiatives as evidence that banks are beginning to seriously incorporate climate change concerns in their lending and investment decisions,” the paper said. “Others, however, have suggested that these voluntary initiatives with limited enforcement reflect ‘greenwashing’ behavior and are unlikely to bring significant changes in firm carbon emissions.”

However, the paper said it found “no evidence of divestment by climate-aligned banks” from sectors with high carbon emissions. It also said it found no evidence of divestment from other “proxies of high-emissions firms,” such as mining companies. The ECB’s research said this is true for firms not just in the Eurozone, but also internationally, where it said the majority of so-called “brown lending” occurs.

“Our evidence suggests that NZBA banks are neither divesting nor engaging differently from banks without a climate commitment,” the paper said. “That said, the alliance is at an early stage. It remains to be seen whether these voluntary net zero commitments by banks can translate into meaningful emission reductions by borrowing firms. Perhaps these trends will shift in the coming years.”

The NZBA launched in April 2021. Representatives for the alliance did not immediately respond to a request for comment.

Related Stories:

ECB: Most European Banks Don’t Measure Climate Risk

NYC Comptroller: Major Banks Neglect Their Own Net Zero Goals

Greenwashing Among Banks, Financial Services Firms Jumps 70%

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Home > News > Risk > If a Hesitant Fed Won’t Cut, Other Central Banks Will, Says Ned Davis
Risk

If a Hesitant Fed Won’t Cut, Other Central Banks Will, Says Ned Davis

Chair Jerome Powell declares that the Federal Reserve is in no hurry to reduce rates due to sticky inflation.

By Larry Light

The Federal Reserve, to hear Chair Jerome Powell tell it, is in no hurry to slice interest rates further because inflation remains stubbornly above 3%. If U.S. inflation (now 3.5%) stays stuck, he said in a public appearance Tuesday, then the Fed can keep rates steady for “as long as needed.”

The result of keeping them stable may be that other nations’ central banks will trim their rates in the near future, going lower than the Fed, according to a Ned Davis Research report. Right now, the Fed’s benchmark rate is in a band from 5.25% to 5.5%. The Bank of England’s rate is lower, at 5.2% (inflation: 3.1%) and the European Central Bank’s rate is at 4.5% (inflation: 2.4%).

If the other banks act first, that would be a switch. The Fed has initiated almost all rate reduction cycles since the early 1980s, except for in 1998, Davis’ chief economist, Alejandra Grindal, and senior analyst, Patrick Ayers, wrote.

For investors, the report noted, the good news is that stocks globally, as measured by the MSCI World Index, have risen in the past after a cut, regardless of whether the Fed did it or another central bank.

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Once the Fed starts cutting, the dollar tends to fall, the Davis paper pointed out, as U.S. fixed-income securities are not as attractive due to their shrunken yields. A dollar decline also tends to occur once a worldwide reduction cycle is under way.

Fed hesitancy is not good for equities, opined Jeffrey Roach, chief economist for LPL Financial, in a research note after Powell’s remarks made at a panel discussion in Washington D.C.: “Investors are reassessing risk appetite as Chair Powell is not confident that inflation is cooling enough for rate cuts.”

Indeed, the stock market has reacted poorly to the seeming plateau for inflation: The S&P 500, rallying starting in late October, has fallen 3% since the Consumer Price Index report’s release April 10.

Inflation has declined dramatically since mid-2022, when the CPI reached just under 9% annually. But since last fall, CPI progress has stalled, with the most recent reading at 3.5% for the 12 months through March.

The futures markets, which once expected several quarter-point cuts in 2024, now believes only one or two will appear late in the year. The Federal Open Market Committee, the Fed’s policymaking arm, next meets April 30-May 1.

 

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