2 banks lose billions in fossil fuel loans

Source: By Avery Ellfeldt, E&E News reporter • Posted: Sunday, July 19, 2020

U.S. banks have come under mounting scrutiny in recent years for issuing trillions of dollars in fossil fuel loans that critics describe as environmentally fraught — and financially irresponsible.

Market volatility, cratered oil prices and weakened consumer demand brought on by the coronavirus pandemic, experts say, have further validated those concerns.

Over the last six months, both Wells Fargo & Co. and JPMorgan Chase & Co. disclosed that they’ve suffered dire financial losses — in part due to failed loans to beleaguered oil, gas and pipeline companies.

On Tuesday, Wells Fargo disclosed net income losses of $2.4 billion in the second quarter, which included $8.4 billion set aside in reserves to cover estimated costs for unpaid or defaulted loans. It’s the first time the bank has suffered a quarterly loss in over a decade.

“While the negative impact of the pandemic is unprecedented and many of our business drivers were negatively impacted, our franchise should perform better, and we will make changes to improve our performance regardless of the operating environment,” Charles Scharf, the company’s chief executive, said in a statement.

As it turns out, oil, gas and pipeline companies were prominent among the bank’s most severely affected “business drivers.”

Nearly 50% of Wells Fargo’s unpaid corporate loans were from carbon-intensive energy companies, The Charlotte Observer reported Tuesday, even though they make up just 3% of the bank’s total commercial and industrial loans. The bank reported $1.4 billion in past-due loans from the three sectors, an $865 million increase from the first quarter.

“It’s a very small proportion of their books, but it’s a very large proportion of the [loans] that aren’t performing,” said financial regulatory expert Graham Steele, who directs Stanford University’s Corporations and Society Initiative.

Rep. Sean Casten (D-Ill.) was among those who surmised from the losses that investments in planet-warming business activities are increasingly risky — and should be regulated as such.

“But this problem isn’t limited to Wells Fargo — this is a problem for our entire financial sector, and it’s just going to get worse,” Casten wroteon Twitter. “And as we all remember from 2008, a crisis in the financial sector is a crisis that spreads to the rest of the nation.”

E&E News reported in May that JPMorgan’s oil and gas loans likewise became problematic in the wake of cratering oil prices and the COVID-19 outbreak. In the first three months of 2020, the bank’s net income was less than $2.9 billion, which represented a 69% decrease. During the same period last year, the firm’s net income hit $9.2 billion (Climatewire, May 11).

In a securities filing, JPMorgan told investors that its poor performance was “predominantly driven by an increase in the provision for credit losses across the Firm reflecting deterioration in the macroeconomic environment as a result of the impact of the COVID-19 pandemic and continued pressure on oil prices.”

Environmental organizations have deemed the two companies the world’s largest fossil fuel financiers. In 2019, JPMorgan pumped more than $268 billion into the industry, while Wells Fargo provided $197 billion, according to a report card by the Rainforest Action Network. The banks were ranked highest among 35 lenders.

JPMorgan did not respond to a request for comment regarding its fossil fuel investments or related losses.

A Wells Fargo spokeswoman said in an email that the bank remains dedicated to supporting its customers in the energy sector as “many of them transition to more efficient and cleaner operations.”

She noted that the firm is a founding member of the Center for Climate-Aligned Finance, which was launched last week by the Rocky Mountain Institute to help accelerate the transition to a low-carbon economy.

But green initiatives aside, Cornell Law School professor Saule Omarova, who specializes in financial regulation and banking law, said the two earnings reports “crystallize” the long-term impacts that the oil, gas and pipeline industries could have on the financial system writ large.

“Typically, we would expect mostly smaller banks and banks that specialize in lending to the oil and gas industry … to feel the hit right away because most of their loan portfolios are geared toward maintaining this line of business with mainly local oil and gas producers,” she said.

But it’s notable, she added, that two of the world’s largest banks — where these loans make up a fraction of their total lending — have been so dramatically affected.

“Financial regulators, per se, don’t really worry about one sector of the economy or another sector of the economy — unless there is a reason to worry about it,” Omarova said. “And so seeing numbers of this kind show that perhaps there is a reason for the financial regulators to worry about this kind of impact.”

Ivan Frishberg, the sustainability banking chief at Amalgamated Bank, agreed. He said the two banks’ quarterly earnings affirm that “our current level of disclosing and understanding risk in the finance sector needs improvements.”

“That’s the exact purpose of good financial regulations, is to avoid those sorts of problems so that the federal government doesn’t have to come in and backstop things,” Frishberg added. “It’s always better to act before the crisis, but certainly there’s no time like the present.”