The world’s first international conference dedicated to phasing out fossil fuels will convene in Colombia this April. It’s a historic moment, and a timely one given how the latest war in the Gulf has exposed once more the absurdity of fossil fuel dependency. But as governments and civil society gather to discuss the path forward, a critical obstacle remains largely unaddressed. Private finance continues to bankroll the fossil fuel industry’s expansion — and the regulators who should be reining it in are falling short.
The governments of Colombia and the Netherlands are convening the “First International Conference on Transitioning Away from Fossil Fuels” in Santa Marta, Colombia, on 24-29 April. Reclaim Finance has submitted input to the process explaining that a key barrier to this transition is the hundreds of billions of dollars that the private finance industry continues to pour into the fossil fuel industry every year.
Self-regulation is insufficient
Financial regulators, supervisors, and central banks have the tools to steer the financial sector away from fossil fuels — yet so far have mostly failed to use them. Part of the reason is likely that financial institutions have worked hard to persuade governments that they can be trusted to self-regulate on climate. This was most obvious in the run-up to the Glasgow “Finance COP” in 2021, when hundreds of asset managers, banks, insurers, and financial service providers signed up to a basket of net-zero alliances (1).
Yet, the record shows that few of these financial institutions were serious about their claimed climate commitments (2). And even the limited progress made by the alliances was too much for the fossil fuel industry, which pushed back hard against any efforts to restrict their access to finance. This backlash, boosted by the reelection of Trump, led many major banks, asset managers, and insurers to push to gut the alliances’ guidelines, and in numerous cases to quit the alliances, causing several of them to collapse (3).
Regulators must step up
The willingness of even the most powerful global financial institutions to give in to the desires of their fossil fuel clients shows that regulators must step in. One necessary measure is to mandate banks, investors, and insurers to develop climate transition plans that show how they are moving financial services from dirty to sustainable activities (4). Before it was significantly weakened with the “Omnibus” directive, EU law offered a model of what’s possible (5). The block’s sustainable finance and prudential framework still offers useful guidance, even if remains under threat.
Central banks, too, have a role to play. By excluding fossil fuel assets from its asset guarantee system (known as collateral frameworks), asset purchase programs, and reserve management, they can make dirty investments less attractive and signal their riskiness to the market. Conversely, targeted green refinancing operations can lower the cost of capital for renewables, so helping reduce price instability linked to dependency on fossil fuels (6).
Governments should also pass legislation that directly chokes off funding for fossil fuels, just as they ban other products that cause health, social and other harms. Regulators must also act to ensure that fossil fuels are systematically excluded from ESG, sustainable, and green products (7).
Progress is still possible — and happening
Despite the fate of the net-zero alliances, the picture is not entirely bleak. Hundreds of financial institutions have adopted policies to restrict support for coal, successfully limiting finance and insurance to the sector (8). While some financial institutions have rolled back these coal policies, the great majority have not, and others have continued to tighten their policies (9).
Some banks, especially in France, remain committed to meaningful targets and policies to cut their lending and conventional bond issuances for coal, oil and gas companies (11). While some prominent financial institutions have walked back their climate commitments, Wells Fargo is the only major global bank to have completely dropped its net-zero targets (10).
Over the past 18 months, some European institutional investors have pledged to stop buying new oil and gas company stocks and bonds, and in some cases to sell off their existing investments (12). This wave — targeting both upstream oil and gas production and LNG processing — is now beginning to ripple through larger financial institutions. This is illustrated by the German reinsurance giant Munich Re, which recently announced restrictions — albeit limited — on insurance coverage for, and investments in, LNG terminals (13).
Meanwhile asset owners have increasingly been warning their fund managers that they need to do better on climate (14). Several EU asset owners have recently fired BlackRock as their asset manager, citing its consistently poor climate performance (15).
Voluntary action by financial institutions and binding regulation can be mutually reinforcing. When financial institutions lead and go beyond what regulations currently require they build the political case for more stringent rules. At the same time, regulators must not fall into the trap of allowing voluntary commitments on climate to be a pretext for not enacting or for diluting regulation.
Private finance remains one of the most powerful levers in the global energy transition. The Santa Marta conference on transitioning away from fossil fuels must send an unambiguous message: governments need to regulate private capital to ensure that it accelerates the transition rather than obstructs it, and responsible financial institutions need to comply with and go beyond the regulations.
