JPMorgan Rejects Transition-Finance Trend Gripping Wall Street

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

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Transition finance – a term meant to describe the allocation of capital to activities that will ultimately help reduce carbon emissions in the broader economy – exists in a regulatory gray area. Meanwhile, financing corporate decarbonisation has been identified as a huge business area, with Apollo Global Management recently noting that the energy transition could represent a $50 trillion investment opportunity in the coming decades.

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Against this backdrop, some of Wall Street’s largest banks are designing transitional financing frameworks to identify eligible assets and activities. Lenders include Wells Fargo & Co. and Citigroup Inc., according to public documents and people familiar with the process who requested anonymity because they were not authorized to speak on the matter.

Meanwhile, JPMorgan is choosing not to participate.

It’s not at all clear whether calling something a transitional asset will unlock capital, says Linda French, global head of sustainability policy and regulation at JPMorgan. Ultimately, she says, this approach ignores the fact that investors are less interested in definitions and more interested in proving that capital allocations produce results.

“To state what should be obvious, financing will only move in when there is an economically viable business case,” French said in an interview. “Ratings and disclosure frameworks by themselves do nothing to fund flows, and even risk becoming a distraction.”

French says the problem with transitional financing frameworks is similar to the obstacles faced in the narrower, more visible arena of green assets.

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“Basically, it’s a reframing of the green finance conversation: once the relevant economic activities are identified, finance will start flowing to those activities,” she said. As an approach, she said, it underestimates the basics of financial logic.

It’s a conversation that feeds into an increasingly tense backdrop to climate finance. Purely green investments, such as solar and wind, have proven to be largely a losing bet in recent years, with the S&P Global Clean Energy Index down nearly 40% since the start of 2023. In the same period, the S&P 500 has risen by more From 50%. .

Then there is the political environment. President-elect Donald Trump has made clear he views green policies with deep skepticism — even calling climate change a “hoax” — and has pledged to undo Biden-era stimulus.

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

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Wells Fargo began developing the transitional financing framework last year, and said in August that it would consider a “broad range of activities.” The goal is to determine what could be included in the $500 billion sustainable finance target, and to guide bankers who deal with high-carbon clients, according to a person familiar with the bank’s thinking who requested anonymity while discussing private deliberations. A Wells Fargo spokesman declined to comment.

Citigroup is also working on its transitional financing framework, a person familiar with the matter said. A bank spokesman did not respond to a request for comment.

The lack of a clear regulatory framework should not become an obstacle for the finance industry moving forward, according to Lizzie Harnett, a research and impact expert at the Colorado-based RMI Center for Environmental Research.

“Banks wanting to finance the energy transition cannot wait for perfect standards and data,” she said. “It is difficult to define transitional financing, and there is not enough detailed guidance on what ‘good’ looks like, but it is positive that banks are starting to act and increasing transparency through the frameworks.”

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The expectation is that banks will “learn by doing,” eventually leading to harmonized industry standards, she said.

David Carlin, former head of risk at the UNEP Finance Initiative, said the transition frameworks “reflect an important step in operationalizing the Bank’s commitment to the low-carbon transition.” But he also warns that “without sound scientific foundations and clarity of impact, transformation frameworks will be little better than the paper they are written on.”

Although there are no final rules yet, regulatory efforts to define the transition are moving forward in jurisdictions such as Singapore and the European Union. In the UK, where a government-commissioned report published in October provided guidance on how to scale up bridging finance, several major banks have embraced the challenge.

Elizabeth Girling, head of sustainable finance products and sustainable finance, said Standard Chartered Plc stands out as an early mover, developing the first iteration of the framework in 2021. The bank is using it to help identify transactions that can contribute to its $300 billion sustainable finance target. dollar. Frameworks.

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As defined by Standard Chartered, transition finance is “any financial service provided to clients to support them to align their businesses and/or operations with the 1.5°C pathway”, a classification that includes everything from sustainable aviation fuels to the early retirement of thermal coal assets. .

“The energy transition requires a global pivot to low and zero carbon infrastructure,” said Ben Daly, Global Head of Transition Finance at Standard Chartered. “This requires trillions of dollars of capital, and the transitional framework is a useful way to showcase and catalyze the investments being made today.”

Barclays, which unveiled its framework this year, says it would welcome clearer guidelines.

“The industry as a whole has been held back by a lack of clarity and consensus around what transition activity looks like,” said Daniel Hanna, head of the Sustainable and Transition Finance Group at Barclays. “One of the things that has held this back is concerns about accusations of greenwashing.”

This is partly because transformation is inherently “dynamic,” Hanna said.

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Other European banks developing their own transitional financing frameworks include UBS Group AG, while UniCredit SpA has already formulated its definition.

James Vaccaro, a sustainable finance expert at the Climate Secure Lending Network, said it was good for banks to have different definitions of what transitional finance is.

Rather than trying to predict a “large, uniform transition path,” Vaccaro said the greater concern is ensuring transition labels are applied credibly. However, he said: “Right now, no one is giving an opinion or even discussing who will take over the monitoring duties of the banks, and what kind of detention they get.”

Instead of designing a transitional financing framework, JPMorgan has built what it calls a carbon transition centre. The goal, according to Wall Street’s largest bank, is to provide clients with “the company-level insights and expertise needed to overcome the challenges of transitioning to a low-carbon future.”

“It’s not about funding the transformation, it’s about whether the companies investing in the transformation have access to the financing they need,” JPMorgan’s French said. “And if the economy is not successful for companies to invest in the transition, then what are we talking about?”

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