JPMorgan rejects Wall Street’s transformational financial trends

(Bloomberg) — JPMorgan Chase & Co. is bucking a trend embraced by many of its Wall Street peers.

Transition finance – a term intended to describe the allocation of capital to activities that ultimately help reduce carbon emissions in the wider economy – exists in a regulatory gray area. Meanwhile, financing corporate decarbonization is already considered a huge business area, with Apollo Global Management recently saying the energy transition could represent a $50 trillion investment opportunity over the next few decades.

Against this backdrop, some of Wall Street’s largest banks are designing transformational finance frameworks to define qualifying assets and activities. Lenders include Wells Fargo and Citigroup, according to public documents and people familiar with the matter. The people spoke on condition of anonymity because they were not authorized to speak on the issue.

Meanwhile, JPMorgan Chase is opting out.

Linda French, global head of sustainability policy and governance at JPMorgan, said it was unclear whether calling an asset a transitional asset would free up capital. She said this approach ultimately ignores the fact that investors are less concerned with definitions and more interested in evidence that capital allocation produces results.

“What is clear is that finance will only take action if there is an economically viable business case,” French said in an interview. “The taxonomy and disclosure framework by itself does nothing for the flow of finance and may even become a disruption. ”

French said the problems with transforming financial frameworks are similar to the obstacles facing the narrower, more clearly defined green asset sector.

“Fundamentally, this is a repeat of the green finance conversation: once the relevant economic activities are defined, then money will start flowing to those activities,” she said. As an approach, she says, it dilutes the fundamentals of financial logic.

This is a conversation taking place against the backdrop of growing tensions over climate finance. Purely green investments like solar and wind have largely proven to be a losing bet in recent years, with the S&P Global Clean Energy Index down nearly 40% since the start of 2023. During the same period, the S&P 500 rose more than 50%.

Then there’s the political environment. President-elect Donald Trump has made clear he is deeply skeptical of green policies — even calling climate change a “hoax” — and pledged to roll back Biden-era incentives.

The stigma surrounding green – and worse, ESG (environmental, social and governance) – is part of the reason the financial industry is trying to come up with new terminology. Transition finance, which in some cases can even include coal assets, is now the preferred term.

Wells Fargo began developing a transformational finance framework last year and said in August it would consider a “broad range of activities.” The goal is to determine what can be included in its $500 billion sustainable finance target and guide bankers in dealing with high-carbon clients, according to a person familiar with the matter who asked not to be identified. A Wells Fargo spokesman declined to comment.

Citigroup is also developing its own transformational financial framework, a person familiar with the matter said. A spokesman for the bank has not yet responded to a request for comment.

Lizzy Harnett, research and impact expert at Colorado-based environmental think tank RMI, said the lack of a clear regulatory framework should not be an obstacle to the financial industry moving forward.

“Banks who want to finance the energy transition can’t wait for perfect standards and data,” she said. “Transformational finance is difficult to define and there isn’t enough detailed guidance on what ‘good’ is, but it’s positive that banks are getting started and increasing transparency through the framework.”

She said she expected banks to “learn by doing” and eventually form unified industry standards.

David Carlin, former head of risk at the United Nations Environment Program’s Finance Initiative, said the transition framework “reflects an important step forward in delivering on the Bank’s commitment to a low-carbon transition”. But he also warned that “without sound science and clear impact, transition frameworks are no better than the papers they are written for.”

Although clear rules do not yet exist, jurisdictions such as Singapore and the EU are moving ahead with regulatory efforts to define the transition. In the UK, a government-commissioned report in October provided guidance on how to scale up transition finance, and several major banks have already taken up the challenge.

Standard Chartered emerged as an early mover, developing the first iteration of the framework in 2021. Elizabeth Girling, head of sustainable finance products and sustainable finance, said the bank uses the framework to help identify transactions that will help achieve its $300 billion sustainable finance goal. frame.

According to Standard Chartered, transition finance is “any financial services provided to clients to support their business and/or operations in alignment with the 1.5C trajectory”, a classification that spans from sustainable aviation fuel to the early retirement of thermal coal assets all content.

“The energy transition requires a global shift to low-carbon and carbon-free infrastructure,” said Ben Daly, global head of transition finance at Standard Chartered Bank. “This requires trillions of dollars of capital, and the Transition Framework is an effective way to showcase and promote investment today. ”

Barclays published its framework this year and said it would welcome clearer guidance.

“The industry as a whole is hampered by a lack of clarity and consensus on transformation activities,” said Daniel Hanna, head of sustainable and transformational finance at Barclays. “One of the factors holding back this progress is the perception of greenwashing Concern over accusations.”

Part of the reason, Hanna said, is that transitions are “dynamic” in nature.

Other European banks that are developing their own transformational finance frameworks include UBS Group AG, while UniCredit SpA has already laid out its definition.

James Vaccaro, a sustainable finance expert at the Climate Safe Lending Network, said it was acceptable for banks to have different definitions of transition finance.

Vaccaro said the bigger concern is ensuring transition labels are applied reliably rather than trying to envision a “grand unified transition path.” However, for now “no one is speaking out or even debating who will correct the bank’s work and what kind of detention they will receive,” he said.

Rather than designing a transition finance framework, JPMorgan established a so-called Carbon Transition Center. The goal is to provide clients with “the insights and firmwide expertise they need to address the challenges of transitioning to a low-carbon future,” according to Wall Street’s largest bank.

“It’s not a question of ‘transformation financing,’ it’s a question of whether companies investing in transformation can get the financing they need,” said J.P. Morgan’s French. “If the economy is not suitable for companies to invest in transformation, then what are we talking about?”

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