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We often think of our environmental impact in terms of recycling, opting for sustainable transportation, or making conscious choices at the grocery store. All these actions and more are definitely important. However, there’s a less-discussed yet equally if not more powerful way we can make an impact: through our bank accounts. Not what you expected? Where we choose to deposit our money and how that money is used can significantly affect the environment, either contributing to harmful industries or supporting a transition to a sustainable future.
It might not be the most obvious way to reduce your carbon footprint, but how you save, invest, and give away your money can make a difference. We rarely consider the intricate network of investments and lending that occurs behind the scenes. Nevertheless, banks are not just passive holders of our funds. They are active participants in the economy, using deposited money to finance a wide range of projects, from infrastructure development and technological innovation to the operations of large corporations. And it’s in these financing decisions that the environmental impact lies.
Follow the Money
Traditional banking practices often channel funds towards industries with significant environmental footprints and nature-harming activities. Fossil fuel extraction, deforestation, large-scale agriculture with unsustainable practices, and manufacturing processes that generate substantial pollution are all examples of sectors that rely heavily on bank financing. When we deposit our money in banks that support these industries, we inadvertently become complicit in their harmful activities. Our savings, checking accounts, and even our retirement funds can be used to finance projects that contribute to climate change, biodiversity loss, and ecosystem degradation.
Consider the fossil fuel industry. Banks routinely provide loans and lines of credit to companies involved in oil and gas exploration, drilling, as well as pipeline construction. This financial support enables the expansion of fossil fuel infrastructure, locking us into a carbon-intensive energy system for decades to come. Similarly, banks may finance deforestation by providing loans to companies involved in logging or unsustainable agricultural practices. These activities not only release vast amounts of carbon dioxide into the atmosphere but also destroy vital habitats for countless species.
Between them, 35 of the world’s major banks have provided $2.7 trillion to fossil fuel companies since the Paris Agreement on climate change was adopted at the end of 2015.
The connection between our bank accounts and environmental harm is often invisible, obscured by the complexity of the financial system. We may be unaware that our hard-earned money is being used to fund activities that undermine the very future we’re trying to protect. This lack of transparency is a significant part of the problem.
Banks Financing Fossil Fuels
The 60 biggest banks globally committed about $705 Billion USD to companies conducting business in fossil fuels in 2023, bringing the total since the Paris agreement to $6.9 Trillion. The Banking on Climate Chaos report includes significant methodological changes for 2024. While 33 banks decreased their financing for companies with fossil fuel exposure from 2022 to 2023, notably, 27 banks bucked that trend and increased their fossil finance commitments in that period. Among these include top ranking JPMorgan Chase, Mizuho, Morgan Stanley, Barclays, Goldman Sachs, and ING Group.
Adopting New Policies
In 2023, these giants seemed to move in slow motion. While they tinkered with rules for oil and gas, their coal policies remained stubbornly sluggish. Some European and Australian banks took a bolder step, declaring they wouldn’t fund new oil and gas fields. Others went further, shutting the door on even the old, familiar ways of extracting fossil fuels. Was it a flicker of hope?
Then came the accountants, the guardians of numbers, with their new rulebook: the Partnership for Carbon Accounting Financials (PCAF). They demanded a clearer picture of the bank’s impact on the planet, forcing them to reveal the true cost of their investments. But a twist emerged: while banks had to count the emissions from their loans fully, they only had to account for a third of the emissions from the bonds and stocks they helped create. This loophole allowed them to downplay a significant source of pollution. So here we go again.
Promises vs. Actions
The real trouble lay in the gap between promises and actions. The banks pledged to reach net-zero emissions by 2050, but their wallets told a different story. The story became clear: the banks were playing a dangerous game, talking of climate action while funding the very industries that were destroying the planet. Their actions spoke louder than their words, revealing a chilling truth: profit still trumped the planet.
Financing for fossil fuel projects destroys communities and ecosystems living closest to the projects on the frontlines. Climate change is already harming rights-holders worldwide, while local impacts of fossil buildouts continue to devastate local communities. Indigenous Peoples and communities in the Global South disproportionately fight these burdens, which increase with each degree of warming. Higher temperatures bring greater violations of future generations’ rights. Banks financing fossil fuel expansion, therefore, share complicity in the global human rights violations brought by climate change.
The Rise of Ethical Banking
Ethical banking, or responsible banking, prioritises environmental and social responsibility alongside financial returns. Such banks often have strict lending criteria, excluding industries that harm the environment, such as fossil fuels, tobacco, and weapons manufacturing. They focus on financing projects that contribute to a sustainable future, including renewable energy, energy efficiency, sustainable agriculture, and community development. By choosing to bank with such institutions, we can directly support the transition to a low-carbon economy and help build a more just and equitable society. These are the banks that offer alternatives and share our vision of financing sustainable development rather than nature-harming activities.
Impact Investing
The concept of ethical finance extends beyond traditional banking to include investment decisions as well. Just ask deposits be used to fund harmful industries, our investments inadvertently support companies that contribute to environmental degradation. However, we can also choose to invest our money in ways that align with our values and support a sustainable future.
Sustainable and responsible investing (SRI) is a growing field that allows investors to consider environmental, social, and governance (ESG) factors alongside financial returns. SRI strategies can include excluding companies involved in harmful activities, actively engaging with companies to improve their environmental and social performance, and investing in companies that are developing innovative solutions to environmental challenges. Impact investing takes SRI a step further by specifically targeting investments that generate measurable social and environmental impact alongside financial returns. This can include investing in renewable energy projects, sustainable agriculture businesses, or companies that are developing clean technologies. Impact investing allows individuals to directly support projects that are making a positive difference in the world.
Do not worry; you don’t have to be an ESG or finance expert to invest and make a positive impact, thanks to your finances. Explore the world of impact investing and discover how your money can make a difference in this article.
How to Make the Switch?
The idea of aligning our finances with our values can seem challenging, but it’s more accessible than many people realise. Here are a few steps you can take to make your bank account and investments work for the planet:
- Research your bank: Find out where your bank invests its money. Look for information on their website or contact their customer service department. If you’re concerned about their investments in harmful industries, consider switching to an ethical bank. You can find some of the key players in the Banking on Climate Chaos Report.
- Explore ethical banking options: Research the options available in your area and choose an institution that aligns with your values.
- Consider your investments: Review your portfolio and identify companies contributing to environmental harm. Explore sustainable and responsible investing options, such as ESG funds or impact investments.
- Engage with your financial institution: Let your bank or investment firm know that you’re interested in sustainable finance options. Express your concerns about their investments in harmful industries and encourage them to adopt more responsible practices. If you decide to leave your provider, explain your reasoning.
By taking these steps, we can transform our bank accounts and investment portfolios from passive instruments into powerful tools for environmental change. We can choose to support businesses and projects that are building a sustainable future rather than those that are contributing to environmental harm. It’s about recognising that our financial choices have real-world consequences and that we have the power to make a difference. It’s about understanding that our wallets can be a force for good, shaping a future where both people and the planet thrive. Let’s take control of our financial impact and use our money to create the world we want to see.
“Every day, finance ministers, CEOs, investors, and development bankers direct trillions of dollars. It’s time to shift those dollars from the energy and infrastructure of the past towards that of a cleaner, more resilient future. And to ensure that the poorest and most vulnerable countries benefit”.
Simon Stiell, UN Climate Change Executive Secretary, April 2024
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