Climate change and global finance: Is the financial sector reaching a tipping point?


The financial industry also sees the climate crisis as a threat to future speculation profits. Industry giants like BlackRock are calling for an end to fossil fuels and siding with the environmental movement.


In January 2020, viewers of the U.S. business channel CNBC witnessed an unusual scene. U.S. stock market guru Jim Cramer, who rose to fame as an author of books whose titles usually include the words “get rich,” was asked about the prospects for oil and gas stocks, such as Chevron or Exxon. His answer was surprising: “I’m done with fossil fuels. They’re done. They’re just done.” Cramer explained that this was because financial managers and pension funds are divesting from fossil fuels, and that young people don’t want these types of shares (Lewis, 2020).

This statement, coming from a man who is not exactly known for his altruism and concern for the environment, might only have anecdotal value. But even anecdotes can be indicators. Cramer, after all, is not alone: At almost exactly the same time as Cramer was making his comments, Larry Fink, CEO of BlackRock, the world’s largest asset manager, wrote an open letter to the CEOs of the companies in which BlackRock invests – and that’s almost every listed company. In the letter, Fink talks of no less than “a fundamental reshaping of finance.” He says that because climate risks are investment risks, there is a need for transparency for shareholders on sustainability-related issues, and all investments must become more sustainable in general (Fink, 2020).

In this article, we ask whether we are experiencing a tipping point in the relationship between the world of finance and the fossil fuel industry. Is the herd mentality of the financial markets turning against fossil fuels? Is it just greenwashing? Or can the financial sector actually become a key lever for stopping climate collapse? How must politicians support and steer this process so that it can have the desired effect?

To answer these questions, we will roughly outline the trends that have developed between the financial sector and fossil fuels over the last decade, and we will review the current status of the debates and initiatives happening in various parts of the financial system.

We assume that two major initiatives have played a particularly important role in this area: The first is the powerful narrative of the “carbon bubble,” or the risk that climate change and climate action will cause financial investors and markets to lose assets in the fossil fuel sector. This has primarily had an effect on private financial market actors and the financial market regulators. The second is a much-overlooked article in the Paris Agreement that calls for financial flows to be directed toward climate action. The article plays an especially important role for public and multilateral banks to gradually withdraw from fossil fuel loans.

A powerful narrative: the carbon bubble

If we look at the recent history of the connection between climate change and the financial markets, we come across two people who possessed complementary talents and together developed a powerful narrative. These two people were Mark Campanale and Bill McKibben.

Campanale, a Brit, had over two decades of experience in the financial industry and sustainable investments when he founded the Carbon Tracker Initiative in 2011. Its first report, published in November the same year, developed the concept of the “carbon bubble.” This stated that the market value of fossil fuel companies was largely based on their reserves of fossil fuels. But many of these reserves are made up of “unburnable carbon” – carbon that the firms are not allowed to burn. Eighty percent of the reserves of the 100 largest listed coal companies and the 100 largest listed oil and gas companies must remain in the ground if the world is to stay within the 2°C limit agreed at the 2009 climate conference in Copenhagen. As a result, fossil fuel companies are massively overvalued and the bubble is threatening to burst – with considerable risks for shareholders and the stability of the financial system (CTI, 2011).

This first Carbon Tracker report was followed by a whole series of more detailed studies from the initiative itself and from other institutions that used this basic assumption to shed ever-more detailed light on the risks that climate change poses to the financial system.

The report might have remained just a footnote in history if the financial expert Campanale hadn’t found an ally in the U.S. journalist and author Bill McKibben. McKibben wrote a powerful essay entitled “Global Warming's Terrifying New Math” (McKibben, 2012), which appeared in the July 2012 edition of Rolling Stone magazine and eloquently brought Campanale’s narrative to the world. It would become one of the most-read and influential essays in the history of the fight against climate change.

The terrifying math that McKibben does is simple and based on three numbers:

  • Two degrees Celsius[1]above preindustrial levels is the maximum increase in average temperature that the world has agreed on as a just-about-tolerable limit.
  • If we want to keep average global warming to below two degrees, we can only allow a limited “carbon budget” to be released into the atmosphere – at the time of the article, this was 565 gigatons of CO2.
  • But the proven coal, oil, and gas reserves amount to 2,795 gigatons of CO2 – in other words, five times as much as we can release. These reserves are held by fossil fuel companies, many of which are listed, and by countries such as Venezuela and Kuwait, which act like fossil fuel companies. The market value of these fossil fuels is roughly 27 trillion U.S. dollars. So if we have to leave the 80% “excessive,” unburnable fuels and their value in the ground, the financial markets will have to swallow a loss of 20 trillion U.S. dollars. This makes the U.S. property bubble that triggered the financial crisis of 2007/8 look small by comparison.

With his math, McKibben didn’t just provide an economic analysis, but also a plausible explanation for the lack of progress on climate action: The fossil fuel companies have a huge amount to lose and this is a powerful motive to deploy their immense lobbying resources to fight climate policies. In political-economical terms, it’s quite simple: The future value of unburnable carbon, which has already been priced in on the financial markets, is pushing to be realized via the production and sale of fossil fuels on the global markets, and this buys it political influence (Parramore, 2016).

McKibben’s new narrative differs considerably from other, established narratives about the climate crisis:

  • Instead of focusing on emissions in a myriad of places, McKibben directs attention to the fossil fuel reserves that are contained in the ground in a limited number of places and must stay there if we want to curb climate change.
  • Instead of focusing on consumers and how their behavior exacerbates climate change, he shines the spotlight on the fossil fuel companies and explains why they have a massive interest in the continued burning of fossil fuels.
  • Instead of talking about global negotiations between countries at climate conferences, he talks about investments and assets, about financial market mechanisms, and about how companies influence politics.

Campanale and McKibben had credibility among different social groups. While Campanale gained influence in the financial world and its center in London – we will talk more about this below – McKibben became an idol for a growing movement of climate activists. As unbelievable as it might sound, the carbon bubble narrative and the climate risks facing the financial market really did make an impact in these two very different settings.

The divestment campaign

McKibben is a cofounder, a climate campaign organization driven primarily by young people that began at U.S. universities and has since spread across much of the world. It brought McKibben’s narrative to a more global audience as part of a large-scale campaign called Do The Math. It also worked with many other organizations to launch a campaign for the remedy that McKibben had advocated: divestment, in other words, taking money out of fossil fuel investments.

The campaign started with towns and cities, municipalities, universities, churches, and foundations, which responded to pressure from the young activists and began taking their money out of fossil fuel portfolios. The combination of moral arguments and an appeal to their own financial interests – the risk of the carbon bubble bursting – proved extremely effective. Either argument on its own probably wouldn’t have had such a powerful impact.

Thanks to targeted NGO campaigns, what began with universities, churches, towns, and cities soon reached institutional investors such as pension funds and insurers. Though partly motivated by the fear of reputational damage, their withdrawal from fossil fuels is primarily driven by the need for risk management: If politicians decide to increase climate action, the money these institutions have invested could become “stranded assets” – assets that no longer have any value.

As well as raising awareness about these links, the divestment campaign has also persuaded institutional investors like Norway’s pension fund and the Allianz insurance company to at least partially divest from fossil fuels. By October 2020, a total of 1,245 institutions with combined assets of nearly 14.6 trillion U.S. dollars had committed to divesting from fossil fuels companies (Fossil free, 2020).

The Task Force on Climate-related Financial Disclosures (TCFD)

In 2015, the narrative of the carbon bubble that was threatening to destabilize the financial markets reached the highest level of global financial governance. The G20 commissioned the Financial Stability Board (FSB), chaired by Bank of England governor Mark Carney, with exploring how the financial sector could allow for climate risks to the financial system. The G20 set up the FSB in 2009 in the wake of the global financial crisis.

After receiving this mandate, Carney picked up on Campanale and McKibben’s analysis in a speech he gave at the Lloyd’s of London insurance market on September 29, 2015. Carney spoke about the “tragedy of the horizon,” explaining that the catastrophic impacts of climate change lay beyond the traditional horizons of central institutions – beyond the business cycle, beyond political cycles such as electoral terms, and beyond the horizon of technocratic authorities like central banks. Carney advocated responding to this by setting up a task force for climate-related financial disclosure (Carney, 2015).

The FSB created this task force during the Paris climate summit on December 4, 2015. It comprised key figures from the world of private finance and was chaired by Michael Bloomberg, CEO of U.S. financial data company Bloomberg. The TCFD’s goal was to develop standards for companies to voluntarily disclose climate-related risks for their investors, creditors, insurers, and other stakeholder groups. Companies would be asked to consider the physical, political and regulatory, and liability risks associated with climate change.

The TCFD submitted its recommendations in mid-2017, and these were addressed at the G20 summit in Hamburg. In October 2020, over 1,500 organizations, including 1,340 companies with a market capitalization of 12.6 trillion U.S. dollars and financial institutions responsible for assets of 150 trillion U.S. dollars had expressed support for the recommendations (TCFD, 2020).

Climate risks as a driver of change

Unlike U.S. president Donald Trump, financial market actors cannot afford to permanently ignore the reality of the climate crisis. But we shouldn’t be under any illusions – this is not about humanitarian concerns. The financial markets are not especially interested in whether Pacific islands go under or whether hurricanes leave farmers in Central America homeless. Poor people have neither insurance nor assets – and monetary assets are the only thing traded on the financial markets.

In the speech he gave at Lloyd’s, Carney divided the climate risks facing the financial markets into three categories that still apply today.

First, the physical risks: the destruction of financial assets, damages to infrastructure and property (buildings and production plants), and disruptions to trade that arise from extreme weather events caused by climate change (storms, floods). For examples, we need only look to Hurricanes Sandy and Harvey, which caused enormous damage in New York and Houston. These risks hit insurers and reinsurers first, as they have to pay their clients in the event of disasters. Munich Re has been warning about the impacts of climate change on insurers and the financial markets as a whole since as far back as the early 2000s. It was therefore no coincidence that Carney gave his speech at Lloyd’s, the oldest insurance market in the world.

Second, there are the transition risks that arise from adjusting to a zero-emissions economy and primarily affect companies that cause high emissions. These risks are about rapid changes in technology or values: Will Daimler and BMW manage to switch to zero-emissions mobility? What losses will airlines have to accept if “flight shame” becomes more widespread?

Another transition risk is the rather desirable “risk” of sudden decisions on climate policy (bans, strict reduction targets, high carbon prices, cuts to subsidies that damage the climate, legal rulings). These can devalue fixed asset investments and cause a sudden collapse in markets and consumption. Although politicians have reacted far too slowly to the climate crisis so far, they will have to do something at some point, even if it’s just because of a court ruling – as was the case in the Netherlands, where a lawsuit brought by a group of young people forced the government to take greater action on climate change. Increasingly, people are talking about an “inevitable policy response” to the climate crisis (UN PRI, 2019).

The third group of risks are liability risks. An example of a liability risk is the lawsuit that Peruvian mountain guide and farmer Saul Luciano Lliuya filed with the German courts against German electricity giant RWE. The melting of glaciers in the Peruvian Andes could cause floods that risk destroying the mountain village where Lliuya lives. For decades, RWE has contributed significantly to the rising levels of carbon dioxide in the atmosphere. Now it’s being sued for a contribution to protective measures. Even though RWE could pay the actual amount for which it is being sued “from petty cash,” a ruling against RWE would be groundbreaking and could have massive consequences for the value of carbon-intensive companies (Germanwatch, 2019).

Paris 2015: momentum from Article 2.1(c)

The 2015 Paris Agreement contains an important – but too-often overlooked – instruction to the financial markets and to public and private banks. In addition, under pressure from the most vulnerable developing countries, the agreement toughened the global temperature target: Global warming must now be kept significantly below 2°C, and the countries agreed to strive for 1.5°C. This has radically reduced the carbon budget.

In Article 2.1(c) of the agreement, the signatory countries agreed to align finance flows with the aims of the agreement. The specific wording is as follows: “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (UNFCCC, 2015).

More or less the only possible conclusion here is that all finance flows and investments – both public and private – must be regulated to ensure that the economic activities arising from them comply with the temperature targets set out in the agreement.

Article 2.1(c) of the Paris Agreement has hardly featured in wider public and political discussions. NGOs, however, do invoke it and are successfully putting bilateral and multilateral development banks under pressure to align their business practices with Article 2.1(c).

The sky is the limit: fossil investments and the Paris climate target

Before we take a closer look at the behavior of the largest financial institutions, we need to answer one more question: To what degree are specific infrastructure and investment decisions compatible – or not – with the Paris temperature goals? Or to put it another way: How high is the risk that specific investments in fixed assets reliant on fossil fuels will become “stranded assets” in a 1.5°C or 2°C scenario?

In 2016, a consortium of 15 NGOs led by Oil Change International published a study entitled “The Sky’s Limit.” It showed that the coal, oil, and gas already in production contain enough carbon to exceed the remaining carbon budget (OCI, 2016). This leads the authors to conclude that any financing that will fund the development of new coal, oil, and gas reserves and the associated infrastructure (pipelines, ports, railways, etc.) is not compatible with the Paris climate targets.

In 2019, a Research Letter published in the prestigious journal Nature (Tong et al., 2019) analyzed the compatibility of existing carbon-intensive infrastructure (primarily power plants, industrial plants, and transport) with the carbon budget for a 1.5°C and 2°C scenario. This study also concluded that – depending on the temperature limit and assumptions on which the budget is based – little or no new carbon-emitting infrastructure can be commissioned, and that existing infrastructure will probably have to be retired ahead of schedule.

With its analysis of listed power utilities, the Carbon Tracker Initiative (CTI) went further. On behalf of the investor initiative Climate Action 100+, which will be described in more detail below, CTI analyzed the risk profile of all major listed power utilities in terms of how compatible their coal-fired generating assets (detailed down to the plant level) are with the Paris climate targets (CTI, 2019). For Germany’s major power companies, the results show that while E.ON is in a good position after having given up its coal-fired power plants, RWE’s fixed assets – and those of other power utilities with multiple coal-fired power plants – are not considered Paris-aligned.

BlackRock: a Damascene moment on climate policy?

RWE’s biggest shareholder is BlackRock. With his abovementioned letter to CEOs, head of BlackRock Fink sent a powerful – some even say historic – signal. This is, after all, the world’s largest asset manager. It has 7.4 trillion U.S. dollars in assets under management, is one of the three largest shareholders in many companies, and this is what its boss had to say: “Given… the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them” (Fink, 2020).

BlackRock still tops the “Dirty Thirty” list of the 30 largest institutional investors with money in companies that develop coal projects. Analyses from the NGO urgewald and others found that BlackRock holds bonds and company shares totaling 17.6 billion U.S. dollars in 86 developers of coal-fired power plants (urgewald, 2019a).

It therefore remains to be seen whether Fink puts his money where his mouth is and BlackRock stops investing in fixed assets that rely on coal and other fossil fuels. An analysis by BlackRock Investment Institute published in February 2020 and entitled “Sustainability: The tectonic shift transforming investing” concludes that sustainable investment strategies do not generate lower returns than normal market approaches (BII, 2020). This might make it easier for BlackRock to transition to sustainability.

However, its most important business model presents an obstacle for a change in direction on climate policy. BlackRock primarily sells passively managed funds (exchange-traded funds, or ETFs) that replicate a specific index on the stock or bond market. The decision about the composition of these funds is therefore fixed and can’t simply be changed. BlackRock is only planning to take action on its actively managed funds and newly set-up ETFs (Buckley et al., 2020).

BlackRock accepted special responsibility when it came to managing the upheavals caused by the coronavirus pandemic. The U.S. Federal Reserve announced for the first time that it would buy company bonds to provide U.S. companies with liquidity (Federal Reserve, 2020), and appointed BlackRock to manage this program (Ablan et al., 2020). NGOs urged the corporation to hold onto its climate ambitions and refuse to buy shares in fossil fuel companies (BRBP, 2020), but without substantial success (Ross et al., 2020).

Climate Action 100+

BlackRock is not alone in gradually taking action: The world’s biggest insurers, pension funds, and other institutional investors are teaming up as never before to exert their influence together. At the One Planet Summit in Paris in December 2017, they founded the platform Climate Action 100+ to pool their climate-related activities. The 450 participating investors represent some 40 trillion U.S. dollars in assets under management (as of March 2020). They want to bring this weight to bear on 100 “systemically important emitters” that are responsible for two-thirds of global industrial emissions, and on 61 other companies that have significant opportunity to drive the clean energy transition. The investors are asking the 161 companies to reduce emissions across their entire value chain in line with the 2°C Paris goal, to improve governance of climate risks at the board level, and to strengthen climate-related disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures.

The first progress report published by Climate Action 100+ names companies – including Nestlé, HeidelbergCement, and VW – that have voluntarily committed to climate-neutral (net-zero) operations by 2050 (Climate Action 100+, 2019). Here, too, it will be important to look closely at exactly what each company means by “climate neutral”: actually reducing emissions to zero, or just buying dubious carbon offset certificates?  

Private-sector banks: better late than never?

What do the business strategies of private-sector commercial and investment banks look like? An alliance of U.S. and European-based NGOs puts out a report each year analyzing the fossil fuel financing practices of the world’s 35 biggest private banks since the adoption of the Paris Agreement in 2015. According to the most recent report, Canadian, European, Japanese, Chinese, and U.S. banks have pumped 2.7 trillion U.S. dollars into the fossil fuel sector in the four years after the Paris climate summit – that is, from 2016 through 2019 (RAN, 2020). These banks are funneling huge sums into projects and companies active in the production of tar sands oil, Arctic oil and gas, offshore oil and gas, and fracked oil and gas. Four U.S. banks – JPMorgan Chase, Wells Fargo, Citi, Bank of America – top the list of the 35 biggest funders of the fossil fuel sector, with JPMorgan Chase taking the No. 1 spot.

Coal mining is very high on the lending and underwriting agenda of Chinese and Japanese financial institutions. China’s four largest banks may have seen its financing for coal-fired power plants drop but they are still responsible for more than half of global funding for coal mines and coal power plants. Due to public pressure and global activism, total loans for coal infrastructure, in particular, have been on the decline: from 2016 through 2019, the flow of lending to the 30 largest coal mining companies and 30 largest coal power producers sank by 6% and 30%, respectively (RAN, 2020).

In light of these figures, it is worth mentioning a leaked 22-page report by JPMorgan Chase’s economic research team from January 2020. It summarizes the key findings of climate science and then goes on to state: “We cannot rule out catastrophic outcomes [from climate change] where human life as we know it is threatened” (Mackie/Murray, 2020).

The report’s conclusion is rather sobering: The most likely scenario is “business as usual,” carrying the risk of causing catastrophic, irreversible changes in the planet’s climate. The U.S. magazine The New Republic employed a bit of wordplay when titling its article about the report: “The Planet Is Screwed, Says Bank That Screwed the Planet” (Arnoff, 2020).

We are left in the dark as to whether this report with its pessimistic conclusion just serves to justify the irresponsible business strategy of JPMorgan Chase’s management or will actually lead to some rethinking within the bank. Not least because of massive pressure from NGOs, JPMorgan Chase announced in a statement on October 6, 2020 that it is “adopting a financing commitment that is aligned to the goals of the Paris Agreement.” The biggest financier of fossil fuel companies also said in the same statement that it “will establish intermediate emission targets for 2030 for its financing portfolio and begin communicating about its efforts in 2021…. [and] will focus on the oil and gas, electric power and automotive manufacturing sectors and set targets on a sector-by-sector basis” (JPMorgan Chase, 2020).

What is the situation in Europe? Ten European banks have adopted restrictive policies with regard to the financing of tar sands projects and, at the global level, 21 of the 35 commercial and investment banks studied in the report have placed restrictions on financing for coal projects (mining, power plants) or have withdrawn such financing (RAN et al., 2020).

Barclays was Europe’s biggest fossil funder in 2019, providing 30 billion U.S. dollars of financing for fossil fuel companies. Deutsche Bank stands 19th on the list of the 35 global private banks, financing the fossil fuel sector with some 70 billion U.S. dollars in the four years since the Paris Agreement (RAN et al., 2020). The bank revamped it guidelines for coal financing in 2017. Deutsche Bank and its subsidiaries have since then been committed to not providing “new financing for greenfield thermal coal mining and new coal-fired power plant construction.” The bank also plans to “gradually reduce its existing exposure to the thermal coal mining sector” (Deutsche Bank, 2017). But the implementation of these guidelines obviously leaves much to be desired, because in 2019 Deutsche Bank once again ranked as one of the biggest funders of the coal industry (urgewald, 2019b).

Banks must cut off all fossil lending and underwriting if the goals of the Paris Agreement are to be achieved – in fact, the great fossil fuel exit now needs to begin in earnest. The good news is that banks are increasingly putting into place policies that restrict their fossil financing. The emphasis here is currently on coal, but banks are slowly and gradually committing to phasing out support for new Arctic and offshore oil and gas projects as well as for tar sands projects. 

Insurance companies: the Achilles’ heel of the financial system?

In recent years, NGO activists have increasingly focused their attention on insurers. And not only in their role as major asset managers, but also as underwriters of large fossil fuel investments such as coal-fired power plants. Just as one cannot receive a mortgage for a building that has no insurance against fire and other damages, it is also difficult, and sometimes impossible, to build or operate a coal-fired power plant or mine without the suitable insurance.

The “Unfriend Coal” campaign of 13 NGOs from Europe, North America, and Australia has already been successful in pushing numerous insurers to abandon coal. In late 2019, the coalition reported that insurers, as investors, had already decided to divest 37% of their assets – nearly 9 trillion U.S. dollars. And already 46% of reinsurers (by market share) had adopted policies that at least exclude new business with coal-fired power plants or mines, including legacy business (Bosshard, 2019).

Multilateral and bilateral development banks: mixed progress

Multilateral and bilateral development banks are public banks that are financed by tax revenues. The best known is the World Bank Group (WBG)[2] and the strongest in financial terms is the European Investment Bank (EIB).[3] Each continent has regional development banks; the most important European players are the European Bank for Reconstruction and Development (EBRD) and the EIB. What they all have in common is that they are able to raise funds on capital markets at favorable conditions with public funds as equity capital backed by a state guarantee. With the money they borrow, they grant development loans, in some cases at reduced interest rates. States are their shareholders, so they are accountable to governments and parliaments. Their criteria for granting loans are agreed upon in the respective board, which is made up of government representatives.

The accents and understanding of development may vary, but in essence all promote infrastructure (roads, ports, energy infrastructure). The strongest signal should come from these tax-financed public banks to withdraw from the fossil industries and build infrastructures which do not create new fossil path dependencies for the world’s economies. Instead, they should signal a focus on the expansion of renewable energies in order to make development as climate-neutral as possible and compatible with the Paris climate goals. To anticipate our conclusion: we are unfortunately still a long way from achieving this, but positive steps have been made.

The WBG has been under observation for decades, particularly by civil society, because of its lending activities. There have been many documented examples of World Bank projects displacing people and destroying ecosystems. Even before Paris, the WBG committed itself to ending support for coal-fired power plants. In December 2017, the WBG announced that it would also withdraw from the exploration and development of oil and gas after 2019.

New analyses by the NGO urgewald (2020) show that since the Paris Agreement, the WBG has invested 12 billion U.S. dollars in fossil energies, with 10.5 billion of this sum invested in direct project financing. This means that fossil path dependencies are still being created after the Paris Agreement.

The WBG’s announcement in 2017 to withdraw completely from the exploration and development of oil and gas is only gradually being reflected in the bank’s portfolio, which has been declining in the fossil sector since 2019. However, the fossil path dependencies, especially the development and expansion of onshore/offshore oil and gas fields that have been created in Africa in recent years, are irresponsible; they encourage the countries’ “resource curse” and have considerably delayed the development of renewable energies. Ironically, multilateral development banks on all continents have so far thwarted the Paris Agreement (Mainhardt, 2018).

European Investment Bank as model

The EU states proved that it can be done differently, at least as a first step, when they voted in November 2019 for a climate-friendly support strategy in the European Investment Bank (EIB). The bank will phase out its support for energy projects that use fossil fuels such as coal, oil, or gas. In addition, from the end of 2021, it will no longer provide new financing for fossil energy projects without CO2 reduction. New gas projects are still possible until the end of 2021, and afterwards after modernizations in the gas sector. According to Sven Giegold, MEP, the EIB is thus not yet “completely on track for climate protection” (Giegold, 2019; Zeit Online, 2019).

From 2025 onwards, 50% of all financing projects are to flow into climate protection and ecological sustainability (EIB, 2019). Very important decisions have been made here and the EIB has become a role model for all the other public banks. However, for a change of course on the financial markets to materialize, further political decisions will depend not least on the central banks. They too must be committed to Article 2.1(c) of the Paris Agreement.

Central banks and the IMF

The “battleships” of finance are the central banks and financial supervisory authorities. Central banks, in particular, have unlimited financial “firepower,” enjoy a high degree of independence, and could thus do what is necessary to reconcile financial market stability and climate protection goals, free from electoral considerations. Central banks are moving in the right direction, but a large part of their corporate bond purchases are still made in sectors that are not climate compatible. 

Two years after Mark Carney’s speech at Lloyd’s in London, French president Macron hosted the “One Planet Summit” in Paris. Eight central banks and financial supervisory authorities were also present and founded the “Network for Greening the Financial System” (NGFS) there. Mark Campanale’s account of the “carbon bubble” threatening financial market stability had thus arrived at the heart of the habitually conservative institutions that are supposed to guarantee the stability of modern financial capitalist economies.

By October 2020, the network already numbered 74 member institutions and 13 observers. In April 2019, the NGFS published its first comprehensive report (NGFS, 2019). It contains six recommendations, ranging from better monitoring of climate-related financial risks to the development of a taxonomy of economic activities according to their impact on the climate. Since then, numerous specific publications have followed.

In an influential article in the journal Foreign Policy, British economic historian Adam Tooze called on central banks to go even further and abandon their traditional reticence (Tooze, 2019). Tooze gained prominence as the author of a history of the 2008 financial crisis and its aftermath (Tooze, 2018). Now he is calling on central banks not only to focus on transparency and avert risks to the financial system, but also to actively support climate protection. He named two possibilities – first, with regard to technical requirements for the equity capital of banks, to give preference to green bonds or to discriminate against those that are harmful to the climate. Second, to secure the issuance of public bonds for climate protection (green bonds) through bond purchases, thereby keeping the costs of climate protection low.

Since Tooze’s essay, some things did change in 2020. Both Christine Lagarde, president of the European Central Bank (ECB), and Isabel Schnabel, member of the executive board of the ECB, are giving clear signals that the ECB will systematically include climate risks in its work in the future. They are receiving tailwind from the European Parliament, which in its report to the ECB of January 28, 2020 adopted the following sentence: The Parliament “points out that the ECB as an EU institution is bound by the Paris Agreement on climate change and that this should be reflected in its policies, while fully respecting its mandate and independence.” On another point, Parliament “is concerned about the fact that 62.1% of ECB corporate bond purchases take place in the sectors that are responsible for 58.5% of euro area greenhouse gas emissions” (European Parliament, 2020).

The International Monetary Fund (IMF) has also recently begun assessing financial stability from the perspective of climate change. In its October 2019 Global Financial Stability Report, it states that the potential impact of climate risks is large, non-linear, and difficult to assess. Losses from climate-related risks have had a direct impact on the financial system through lower prices, loss of value of collateral and insurance losses, and indirectly through lower economic growth (IMF, 2019).

The new IMF president Kristalina Georgieva is actively involved in the debate. Since her first appearance at the IMF annual meeting in autumn 2019, she has signaled in many public statements the need to systematically include climate risks in the work of the IMF (Tett, 2019).

The EU taxonomy: a milestone

Critical commentators point out that central banks or the IMF have no technical expertise on climate change issues and should not presume to judge which specific companies are green or not green (Dizard, 2019a/2019b). The numerous ESG indices[4] initiated by private companies also do not produce consistent results. It is therefore important that not only public institutions, but also private market participants, can rely on a binding classification of economic activities with regard to their climate friendliness or, more generally, their environmental impact. Only on such a politically decided, binding basis can public stakeholders such as central banks and banking supervisors differentiate between various investments according to climate friendliness.

In this respect, the adoption of a classification system for sustainable finances, known as the EU taxonomy, by the European Parliament in January 2020 is a milestone. The taxonomy regulation defines which economic activities can be called sustainable and thus be included in corresponding financial products. Activities considered sustainable are those that make a positive contribution to climate protection. However, they should not cause any damage to other areas of the environment (“do no harm principle”). The classification is voluntary, but providers who do not apply it must indicate this.

So far, a first step has been taken with the definition of sustainable activities. The European Commission plans to present a study on the effects of a comprehensive taxonomy by the end of 2021, which will also classify environmentally harmful activities and include a social taxonomy.

A cautiously optimistic interim result

Where do we stand today? There are signs that projects and companies that are responsible for high CO2 emissions are finding it difficult to raise money on the capital markets. The Financial Times, for example, quotes an analyst from the rating agency Moody’s as saying that the world’s largest listed coal company Peabody was unable to obtain financing on the markets for a joint venture with its rival ArchCoal (Mooney/Nauman, 2020).

The Polish coal-fired power plant Ostroleka C, which is already under construction, was put on hold by the Enea and Energa Groups in February 2020, citing financing difficulties. Press reports also mention the new energy policy of the EIB in this context (Maksimenko, 2020).

The highly controversial Teck Frontier Mine tar sands mine in Alberta, Canada is stopping its plans with explicit reference to the desire of investors for products that are as “clean” as possible (Teck, 2020).

Murtaugh (2020), citing an analysis by Bloomberg New Energy Finance, reports that half of the 41 coal-fired power plants planned in Vietnam and Indonesia have no financing to date, and are increasingly unlikely to succeed with the advent of more restrictive bank policies in Japan, Korea, and Singapore.

Nor could Saudi Aramco’s IPO take place in one of the world’s major financial centers, but instead on a Saudi stock exchange. The Financial Times reported that the record proceeds of the IPO attracted little global capital and instead 5 billion U.S. dollars from Abu Dhabi, funds from persons accused of corruption, and generous loans from Saudi banks for small investors (Kerr, 2019).

There is a clear trend, but it would be premature to declare an end to the financing of coal, oil, and gas on the capital market at this stage.

First, despite this clearly positive trend, there are still many banks and other financial institutions that have made completely inadequate and only partially voluntary commitments in terms of fossil financing. Frequently these only concern coal; increasingly now also tar sands and Arctic oil (IEEFA 2020); conventional oil and gas are often excluded. In addition, the new guidelines have yet to be implemented – pressure from civil society and increased vigilance can be very effective here.

Second, financial institutions from Japan and especially China (see above) are still in the process of financing coal-fired power plants and similar CO2-intensive investments abroad. Japanese financiers are now coming under increasing pressure from a coordinated NGO campaign targeting the country on the occasion of its G20 presidency in 2019 and the 2020–21 Olympic Games. And while there is a lot of rhetoric from China regarding a “Green Silk Road,” in concrete terms, robust policies that significantly limit fossil financing have so far been largely absent (Chen, 2020).

Third, new private investors are filling the gaps left by some banks. For example, Jenkins (2020) argues in the Financial Times that private capital investors are showing increased interest in parts of the fossil industry: “As long as the cash flow is attractive, they will go for coal, oil, and gas, whether or not the traditional banks and large asset managers are involved.”

Fourth, when private capital pulls out, governments step in. The Carmichael Mine of the Indian Adani Group in Queensland, Australia was the subject of intensive NGO campaigns that put pressure on potential financiers. Now that almost all private donors have withdrawn, the government is providing massive subsidies. The think tank IEEFA estimates the state subsidies for the project, which the Adani Group grandiosely intended to finance itself, at 4.4 billion Australian dollars, or about 2.35 billion euros (Buckley, 2019).

In Canada as well, the state stepped in and bought the highly contested TransMountain Pipeline project for 4.5 billion Canadian dollars (2.8 billion euros) after the original private operator and investor, Kinder Morgan, had given up (Tasker, 2019). The costs have since escalated to 12.6 billion Canadian dollars (Kapelos/Tasker, 2020). The pipeline is intended to bring extremely climate-damaging oil from tar sands in Alberta to the coast near Vancouver, from where it can be shipped all over the world. The otherwise often progressive Trudeau government is trying to push through this ecologically catastrophic project by all means possible against massive resistance from broad sections of the population of British Columbia, but above all from many indigenous groups.

And when, in the wake of the coronavirus crisis and the drop in oil prices, the Canadian oil industry began to teeter, the Canadian federal government put together a rescue package for it, which is estimated at 15 billion Canadian dollars, or around 9.4 billion euros (Fife et al., 2020).

Strategy and outlook

Strategic lessons emerging from this analysis include:

  1. Well-orchestrated civil society campaigns are worthwhile. The developments traced in this article are not a foregone conclusion resulting from the internal logic of the market players. Over the past decade, philanthropic foundations, in particular, have increasingly invested in a broad approach to withdrawing from the fossil sectors, targeting key players such as BlackRock, central banks, multilateral development banks, insurers, and large commercial banks. This approach includes a good cop/bad cop strategy that combines massive external pressure on fossil financiers with political support and coalition-building for progressive pioneers. This is also having an impact within the financial sector (Mooney/Nauman, 2020). Certain highly CO2-intensive projects, including pipelines, coal mines, etc., play an important role in public campaigns. They expose the scandal of continued investment in climate destruction. Legal proceedings and civil disobedience to spearhead protest also play an important role. In this way, the risks associated with fossil investments become more apparent to investors.
  2. The state remains the central arena of conflict. While it makes sense to put financial market stakeholders under direct pressure and thus use the power of the financial markets against climate destruction, the experiences mentioned above show that this is not the case. Climate protection is always a struggle for more democracy. Social-ecological transformation remains a political task. Fossil interests have captured control of the state in many countries. State resources are thus being mobilized to delay urgently needed regulation and change at all levels. Improving cost ratios between renewable and fossil fuels are providing tailwind to civil society campaigns, but as things stand at present, they will not be enough.
  3. On the state side, a policy mix of several elements is needed: regulation of the real economy (coal phase-out), a highly controllable CO2 price and complementary regulation of the financial sector. Preventing the flow of fossil fuels is more urgent than promoting “green” investments. For the latter, regulation of the real economy remains crucial. The EU taxonomy for sustainable finance is an important starting point. This approach must be developed further; the criteria must be refined and made binding.

Public banks such as the EIB, KfW, and the World Bank Group, as well as regional development banks, can serve as role models and promote climate-compatible projects in the energy, transport, and building sectors, as well as in agriculture. All public banks must ensure that their cash flows are in line with Article 2.1(c) of the Paris Agreement. The shareholders of the World Bank Group and regional development banks are governments, which have the responsibility to change course and decide on a complete exit from the financing of fossil infrastructure.

The purchase of green bonds by central banks also opens up opportunities for a massive government investment offensive in favor of socio-ecological restructuring in Europe, as discussed in U.S. debates under the heading “Green New Deal” or “Green Deal.”

The target position of progressive politics must be to no longer make financial markets the central lynchpin in controlling all areas of the economy and life (“definancialization”). Nevertheless, as a parallel strategy, it also makes sense to include social and environmental factors in the way in which financial markets operate. However, this does not mean turning nature and ecosystem functions into tradable commodities (Fatheuer et al., 2015).

A significant portion of the global financial markets are realizing the momentum in which very CO2-intensive assets such as coal or tar sands no longer generate returns. Real economic developments, such as the massive drop in the cost of renewable energies or batteries and the growing pressure from civil society campaigns, all play a role here.

Increasingly obvious climate damage, such as the massive forest fires in Australia in November 2019 to January 2020, also show that the issue can no longer be ignored.

In the spring of 2020, the massive drop in oil prices in the wake of the global economic crisis triggered by the coronavirus and the price war between Saudi Arabia and Russia can now also be added to this. This will lead to a massive deterioration in the earnings situation of oil and gas companies and will further reduce the appeal of this market segment for financial investors. This is why it is so extremely important for states not to offer compensation or forge their own aid packages for the fossil industries.

Increasingly, there are signs that the carbon bubble is about to burst and the herd instinct of the markets is definitively and massively turning against fossil investments. A tipping point could soon be reached – and not only in the ecosystems, but also in the financial system. This might bring new economic risks, but these must be taken to prevent the destruction of our natural living conditions.


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Foot notes

[1] In 2012, the climate discussion was still focused on the goal agreed in Copenhagen in 2009 to limit global warming to 2°C compared to preindustrial levels. New scientific insights then resulted in countries agreeing a tougher target in the Paris Agreement: “Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C.” The scientific basis for this decision is summarized in the IPCC report entitled “Global Warming of 1.5°C” (IPCC, 2018).

[2] The World Bank Group consists of the International Bank for Reconstruction and Development, the International Development Agency, International Finance Corporation, and Multilateral Investment Guarantee Agency (MIGA). They provide low-cost credits or loans, promote equity investments, and hedge political risks with investment guarantees.

[3] The EIB was founded in 1958. It is the largest multilateral development bank in the world and is owned by the 27 EU states; their shares in the bank’s capital are based on their economic weight within the EU at the time of accession. Since 1958, the EIB has granted loans worth more than one trillion euros.

[4] ESG stands for environmental, social, and governance factors.

This article was first published in german at