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Banking on Fossil Fuels

Updated: Oct 3, 2022

More than a decade after the 2008 financial crisis, the banking system is once again vulnerable to a crisis, not one caused by mortgages but by climate change. A report from a climate-focused NGO called Ceres discovered that the largest banks in America were deeply invested in fossil fuels and other fossil-fuel reliant companies that could be put out of business by regulators.

The report discovered that more than half of the lending from the largest banks in America were made to industries that are directly vulnerable to new climate regulations. These industries include fossil fuels, agriculture, and manufacturing. Household names like Citigroup, Bank of America and Goldman Sachs are among the worst offenders. In the event of a shift in climate policies, the businesses that these banks have lent billions too could find themselves unable to compete with greener industries such as wind and solar, and could go bankrupt, creating a crisis that would reverberate through the entire banking system.

The report also discovered that banks lack the ability to assess their own levels of exposure. Banks see their own exposure purely in terms of their investments in energy and fossil fuel companies, but they fail to anticipate how new regulations could impact industries that rely on fossil fuels, such as manufacturing, transportation, and agriculture. For example, a bank that is heavily invested in Ford might not think that they are in danger, but climate regulations could force Ford to completely overhaul its line of cars in order to make them purely electric. Worse yet, these banks have all lent vast sums of money to each other, so if climate regulations caused one bank to fold, the crisis could spread throughout the entire banking system.

A nightmare scenario is easy enough to imagine. In the event that a new Democratic administration announced stringent emissions targets, the fossil fuel industries would be hit hard, and some might go into bankruptcy. This would spread to the industries that rely on fossil fuels and to the big banks that have lent them money. To address this problem, Ceres has recommended that banks develop new methods for assessing their risks, and that those banks make similar demands of their clients. However measuring the risks is not enough. Banks need to begin divesting from fossil fuels and fossil fuel-reliant industries now, in order to get out ahead of the risk.

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