🔎 Market Mysteries
Am I funding fossil fuels without knowing?
The money you deposit with banks may have a more direct impact than your investments on what companies and industries succeed. If you want to be sure your money isn't funding fossil fuels, take a second look at your bank.
How do companies get funding?
When a company needs extra money to operate or expand, and its sales aren't enough to cover it, it can turn to banks and investors.
An investment bank helps companies raise money from investors. They connect companies with institutions and individuals who give these companies money in exchange for an ownership stake (stock) or debt (bonds). A company’s management team will rely on investment banks when working to figure out the best way to finance multi-year projects and structural decisions, such as Microsoft’s decision to invest in artificial intelligence, Intercontinental Exchange’s purchase of sustainable data capabilities, or Estee Lauder’s acquisition of the Tom Ford brand.
For more everyday funding, companies might decide to use a commercial bank. These banks take in deposits and lend that money to businesses for short-term needs.
Should I pay more attention to my bank deposits or my investments?
Your bank deposits might have a more direct path to funding fossil fuels than your investments. Money is fungible, so we can't perfectly trace the path of our dollars, but it's essential to understand the dynamics.
When you purchase an investment in the market, you're buying it from someone else. You become an owner of that company or its debt, but your money doesn't go to the company. Companies only get cash from issuing new debt or selling new portions of their company for the first time (like an Initial Public Offering). Large institutional investors are the ones who buy stock directly from the company when it first goes public (an IPO). Once the stock is out there, we're all just buying and selling from each other. As we mentioned last week, which companies' stock you own can still have an impact, even if your money's not going to the company directly.
Our bank deposits can have a much more direct impact on funding companies. Banks make money by taking in client deposits and paying them interest, then lending this money to others and charging a higher interest rate. The bank's profit is the net interest income. Banks can also lend out a lot more than they hold on reserve, so each incremental deposit gives them some magnitude more lending power. If a bank makes a loan to a solar farm, an education nonprofit, or a fossil fuel company, your money funds these loans.
How do I know who my bank is lending to?
It isn't easy to track. Very few banks provide transparency about where your money is going due to the sheer number of clients and privacy concerns.
At an aggregate level, we can see who the largest financers of fossil fuels are. JPMorgan Chase, Citi, Wells Fargo, and Bank of America were the world's four largest funders of fossil fuels. In the six years since the signing of the Paris Agreement, the top four banks were responsible for $1.2 trillion in fossil fuel financing – a number larger than Mexico's economy. On the flip side, 27 of the world's 60 largest banks have decreased their funding in the fossil fuel sector. Credit Mutuel and UBS are two banks that have reduced their funding of fossil fuel financing the most in the last five years, with Credit Mutuel completely pivoting away from their lending and underwriting activities to fossil fuel companies.
The impact of pivoting away from financing fossil fuels could be massive. Since 2016 renewable energy only received 7% of all bank loans and bonds to fund energy activities. The Glasgow Financial Alliance for Net Zero (GFANZ) says renewable energy funding needs to be four times larger than fossil fuel funding by 2030 to keep global temperature rise below the dangerous 1.5 degrees Celsius threshold. Harnessing the power of these existing fossil fuel funds and pivoting to the solar power market could drive scale, mass adoption, and the transition to a greener source of powering our world.
How do I make sure my money isn't funding fossil fuels?
Pay attention to where you bank and consider a switch. More financial services companies are committing to allocating their funds only to projects and companies helping the transition to a green economy. Small startup banks like Atmos lend money exclusively to sustainable projects and measure their impact. You can read our review here.
Community banks commit to loaning money exclusively to businesses in the local communities in which they operate. Micro-credit lending allows you to provide small loans directly to small businesses in impoverished communities to help fund their elevation out of the poverty cycle.
If you want to help ensure your money can make a difference in creating a greener, more sustainable world, options outside of traditional banking can allow you to do so.
Keep building, friends
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