ESG appears to be retreating, with banks having increased their fossil fuel financing in 2024, just as climate change poses growing threats to the insurance industry and raises questions about financial stability.

A new report, Banking on Climate Chaos, by a nonprofit group finds that despite previous commitments to “net zero” and other climate goals, global banks significantly scaled back those pledges in 2024 and substantially increased fossil fuel financing.

Key findings in the report include:

• The 65 largest banks worldwide committed USD 869 billion to companies involved in fossil fuels in 2024.

• Of that, USD 429 billion went to companies expanding fossil fuel production and infrastructure.

• Over two-thirds of these banks (45 out of 65) increased fossil fuel financing from 2023 to 2024, with 48 banks boosting financing specifically for fossil fuel expansion.

Banks argue they must continue financing fossil fuel companies to support their transition away from fossil fuels. However, the report counters that this justification only holds if the company has a credible transition plan that includes winding down production.

Independent analyses show that oil and gas majors’ transition plans are “not credibly aligned” with 1.5°C pathways. Therefore, financing companies expanding fossil fuel infrastructure cannot be considered “transition finance.”

Banks exit Net Zero Alliance

The report also highlights what it calls the “collapse” of the Net Zero Banking Alliance (NZBA). Launched in 2021 with UN backing, the NZBA aimed to align bank lending and underwriting portfolios with net zero carbon emissions by 2050, limiting temperature increases to 1.5°C above pre-industrial levels.

However, earlier this year, all US, Canadian, and Japanese banks exited the alliance. Now, less than half of the banks covered in the report (30 out of 65) remain members. The NZBA subsequently softened its climate target to “well below 2 degrees.”

Accordingly, the report urges banking regulators, supervisors, and policymakers to implement measures that align financial activities with climate goals – a step it considers crucial for financial stability amid the worsening climate emergency.

Insurance viability threatens financial stability

This call comes amid growing concerns over climate change’s impact on the insurance industry’s viability and the wider implications for financial stability.

In January, the Financial Stability Board (FSB) announced it is coordinating international efforts to address climate-related financial risks. It noted that these risks are global and will affect all entities, sectors, and economies. Extreme climate events, as well as a disorderly transition to a low-carbon economy, could destabilize the financial system, according to the FSB.

The FSB highlights growing evidence that insurance is becoming more expensive – and in some cases, unavailable. Rising risk premia could trigger falling asset prices in the short term.

Günther Thallinger, former senior executive at insurance giant Allianz, echoed these concerns, warning that “entire regions are becoming uninsurable,” posing a systemic risk that threatens the financial sector’s foundation.

“If insurance is no longer available, other financial services become unavailable too,” he said. “Houses that cannot be insured cannot be mortgaged. No bank will issue loans for uninsurable property. Credit markets freeze. This is a climate-induced credit crunch.”

The move by BNPL provider Klarna into mobile phone services signals an ambition to builda “super app.” But while open finance holds promise, replicating Chinese platforms suchas WeChat and Alipay may be a step too far.

Intuition Know-How has several tutorials relevant to the content of this podcast:

• Banks & Banking
• Business of Consumer (Retail) Banking
• Banking Regulation – An Introduction
• Financial Inclusion – An Introduction
• FinTech – An Introduction
• APIs
• Digital Banking – An Introduction
• Open Banking & Open Finance
• BaaS & BaaP
• Embedded Finance