Analysis

Big US banks say fossil fuel investments are dragging them down

In their second-quarter earnings reports last week, the nation’s biggest fossil fuel lenders detailed their financial performance from April through June — the period when the COVID-19 pandemic shut down the US economy.

At least five banks reported major problems stemming from their investments in fossil fuels, the latest indication that the weak performance of oil, gas, and coal companies is dragging down the broader financial system.

The banks are among the biggest financiers of fossil fuel industries, according to Banking on Climate Change 2020, an annual scorecard of banks’ activities in the sector authored by Rainforest Action Network, Sierra Club, and others. The report lists JPMorgan Chase & Co, Wells Fargo & Co., Citigroup, and Bank of America among the top 5 fossil fuel banks.

Goldman Sachs was among the top 10 banks that increased financing of fossil fuels in 2019 over 2018. Goldman also had some of the highest exposure to losses from loans to fossil fuel companies, according to separate research by CreditSights.

Among the revelations:

·      JPMorgan said it’s unlikely to collect on $79 million in commercial loans, about half of which were related to oil and gas. It also blamed the sector for half of the $2.4 billion it set aside to cover possible future losses.

·      Wells Fargo said oil investments drove a sharp increase in loans whose late payments suggest a high risk of default. Loans to pipeline companies performed especially poorly: They accounted for nearly half of all commercial loans whose borrowers can’t even afford interest payments, though pipelines account for just 3% of all commercial loans. Wells also said fossil fuel lending was the primary driver of its $278 million in losses on commercial loans, and a $6.4 billion increase in funds it set aside to cover expected future losses on commercial loans.

·      Citigroup said the creditworthiness of oil and gas borrowers declined steeply.

·      Bank of America reported that exposure to oil and gas companies drove a $162 million increase in commercial loans that it doesn’t expect to collect. The bank also blamed the fossil fuel sector’s weakness for an increase of $8.6 billion in loans that regulators deemed to be at risk of default

·      Goldman Sachs noted that “Natural Resources” — an industry euphemism for oil, gas and coal — helped drive losses of $540 million on large (including commercial) loans that the bank marked down.

Meanwhile, in a more hopeful development this week, Morgan Stanley — a New York investment bank that ranks 11th on the Banking on Climate Change scorecard — said it will be the first major US bank to publicly disclose how its loans and investments contribute to climate change.