First published in Fortune, Feb. 2, 2023

How Wall Street’s fossil-fuel money pipeline undermines the fight to save the planet

By Christopher Maag and Jeffrey Rothfeder

The protests started in the chill of winter and got bigger as the weather got warmer. At one gathering place outside rural Clearbrook, Minn., the demonstrators often outnumbered the town’s 500 or so residents, as activists, farmers, and citizens of nearby Native American reservations turned out to resist a catastrophe in the making. 

The protesters were there to stop the building of Enbridge Energy Line 3, a 1,000-mile-plus oil pipeline that would connect the Alberta tar sands in Canada to refineries in the U.S. Its foes believed the pipeline, if breached, could foul rivers and aquifers that they counted on for their livelihoods; more broadly, the flow of hydrocarbons it enabled would aggravate the global climate crisis.

The protests were mostly peaceful, but as the crowds grew, authorities made it clear that the law was on the pipeline’s side. On one tense day in June 2021, a Customs and Border Protection helicopter suddenly swooped in low, at about 20 feet above the crowd. The pilot positioned the aircraft to hover directly over a gravel road, and its tail rotor whipped up a tornado of dust and rocks, blasting dozens of protesters. Police later swept in and made more than 100 arrests.

The show of force didn’t stop the protests—but the protests didn’t stop the pipeline. Line 3 opened in October 2021, and since then it has pumped 760,000 barrels a day of heavy crude oil into the United States. Over the next 30 years, oil transported via Line 3 is projected to result in 5.8 billion metric tons of carbon dioxide being released into the atmosphere, equal to the emissions of 50 coal-burning power plants. That figure doesn’t account for the incalculable impact of the destruction of 2 million acres of carbon-absorbing forest in Alberta—denuded to access the oil in the ground—or the energy-intensive process of extracting oil from tar sands. 

Yet despite Line 3’s obvious environmental impact, some of the world’s biggest banks have financed it—including several that have pledged to reach net-zero carbon emissions. Indeed, Enbridge has been the top fossil fuel client of big banks in total dollars since the Paris climate change accords in 2015, bringing in nearly $100 billion in loans and equity investments through 2021.  

And incredibly enough, Enbridge gets a discount on some loans—for being “green.”

In early 2021, even as protesters rallied outside Clearbrook, Calgary-based Enbridge obtained $1 billion in financing for Line 3 and other projects in a loan package issued or underwritten by, among others, Citigroup, Bank of America, JPMorgan Chase, Barclays, and Credit Suisse, all of which have signed commitments to fight climate change. These bonds were linked to Enbridge meeting a series of sustainability goals, which include “reducing our own carbon footprint” to reach net zero by 2050. (Enbridge’s target doesn’t account for the cradle-to-grave impact of the oil pulsing through its many pipelines, since that oil will be burned by other users, not Enbridge.) If Enbridge meets this and other benchmarks, the company will pay 2.5% in interest. If Enbridge fails—unlikely, since the goals are ambiguous and their end date so far off as to be meaningless—the rate rises to 3.05%. 

“For the banks to be providing Enbridge with new funding for fossil fuel facilities in the middle of a climate crisis is unconscionable,” says Alison Kirsch, until recently policy manager at Rainforest Action Network, one of many environmental groups that oppose Line 3. “To call the financing ‘sustainability linked’ rubs salt in the wound.” 

The participating banks declined to comment about their relationships with Enbridge. Enbridge tells Fortune that “we are making progress in our efforts to reduce emissions.” The company argues that the consumption of oil transported by Line 3 should not be blamed on the pipeline but rather on “continued demand for crude oil to produce refined products used by consumers.”

That defense is certainly true, as far it goes. Energy companies pump out fossil fuels because the world is still using them; they account for about 80% of global energy supply, according to the International Energy Agency (IEA). And oil companies join automakers and manufacturers of products ranging from sneakers to computers in bearing the brunt of attention for their contributions to global warming. But the focus on industrial activity masks the culpability of some of the greatest climate offenders: the financial services industry, without whose backing the majority of heavily polluting energy projects would never get beyond the drawing board.

The world’s 60 largest commercial and investment banks poured a combined $4.6 trillion into fossil fuels between 2016 and 2021, including lending, debt underwriting, and equity issuance, according to research by Rainforest Action. Total investments for 2021, the most recent year for which figures were available, were actually higher than in 2016, when the Paris climate change agreement was put in place. JPMorgan Chase topped the list of the most aggressive supporters of fossil fuels, with Citigroup, Wells Fargo, and Bank of America next in line. That financing includes huge investments in so-called carbon bombs like Line 3—projects that will result in at least a billion metric tons of CO2 emissions over their lifetime. (The average car produces a single metric ton of CO2 in three months.) 

Many of these bombs are in Russia, where BlackRock has invested in two of the biggest oil and gas extraction projects—a Gazprom facility and a Lukoil facility – to the tune of more than $1 billion each, according to data collected by the German-based NGO Leave It In the Ground Initiative (LINGO). Overall, JPMorgan is the largest American backer of Russian carbon bombs, with over $9 billion at stake. (In the wake of the Ukraine invasion, BlackRock and JPMorgan say that they have ceased funneling money into Russian securities of all types and are encouraging indices that they invest in to do the same. In addition, they both say they’re actively

These investments pour billions into the coffers of financial companies every year, in the form of equity returns and interest on loans. Banks also reap substantial revenue from bond offerings for fossil fuel expansion. Since 2016 banks have underwritten $2.7 trillion in notes for coal, oil, and gas companies, generating $8.5 billion in fees, according to a report from Toxic Bonds. Here, too, the highest earners were familiar names: JPMorgan Chase, Citigroup, Bank of America, and Barclays. 

These statistics describe the movement of capital, rather than carbon. But cumulatively, the central role played by financial services firms in bankrolling global warming is stunning. If America’s 10 largest banks, plus big asset managers like BlackRock, Fidelity, Goldman Sachs, and Vanguard, were a country, the projects funded by their fossil fuel investments would make them the world’s fifth-largest emitter of CO2, just below Russia and ahead of Indonesia, a report by the Center for American Progress and the Sierra Club found. 

What’s more, those numbers likely understate the problem by an order of magnitude, because they don’t include Scope 3 emissions. Those are greenhouse gases not directly involved with the project itself—for instance, gases generated when oil is used by an consumer for energy or transportation. Some experts say that Scope 3 emissions represent nearly 90% of energy company CO2 output. 

The persistence of Wall Street’s oil addiction comes despite recent gestures toward a greener mindset. In 2020, BlackRock CEO Larry Fink raised hopes that his industry was ready to acknowledge its major contribution to carbon emissions and to exert pressure on other industries to reduce theirs. At the time he said, “We believe that sustainable investing is the strongest foundation for client portfolios,” and that BlackRock intended to focus on supporting companies with favorable environmental practices. Other investment CEOs followed suit with similar comments and commitments. 

But over the past 12 months, much of the optimism has faded. Facing a backlash from some clients, and realizing that limiting their climate footprint would require significant changes in how they do business, many big banks are rethinking their green tactics. What was presented as a bold plan to reduce long-term portfolio risk by de-emphasizing fossil fuels suddenly is now being treated as an ill-considered strategy. 

We contacted the major banks and investment firms involved in fossil fuel funding. Some pointed to past statements they made on the subject, but all declined to comment on the record. Those firms continue to go to great lengths to deflect attention from the numbers, talking a far greener game than they play.

The failure of sustainability investing may be most clearly reflected in the shortcomings of the Glasgow Financial Alliance for Net Zero, a consortium of investment firms committed to restructuring their portfolios to cut emissions in half by 2030 and achieve net zero by 2050. The pact was inked in 2021, soon after the IEA announced that unless investors and oil companies stopped new fossil fuel activities immediately, the Paris Agreement goals of limiting the planet’s average temperature increase to 1.5 degrees Celsius would be moot.

But at the COP27 Climate Change Conference in Egypt in November, industry insiders were dismayed by the lack of progress toward Glasgow’s pledges. After a year of inaction, one attendee noted, big banks would have to reduce the carbon emissions that they are funding by about 8% annually to meet the 2030 goal; instead, in many cases, their support for fossil fuel had actually increased.

The post-Glasgow investment surge is stunning. In the nine months after the formation of their group, 56 top global banks in the Net Zero Banking Alliance, a subsector of the Glasgow agreement, provided nearly $270 billion through loans and equity or bond underwriting to more than a hundred companies involved in expanding fossil fuel availability, according to Reclaim Finance, which tracks such investments. These companies are hoping to bring into production about 10% of the world’s proven oil reserves. Moreover, Reclaim estimates that they are planning to add 92 gigawatts of coal power, which equals the current coal plant capacity of Japan and South Africa combined).

Part of the reason that the fossil fuel frenzy is not abating, says Eva Cairns, head of sustainability insights and climate strategy at U.K. investment house Abrdn, is that policymakers are unwilling to make renewable energy more attractive by replacing subsidies for oil and gas with funding and tax breaks for decarbonization. “For investors with net-zero commitments, the gap between policy incentives and what they aim to or are expected to achieve is unfortunately widening,” says Cairns. 

Making matters worse, Russia’s invasion of Ukraine has roiled oil supplies and prices so much that drilling for fossil fuels is back in favor among politicians hoping to calm inflation-weary constituents. Energy stocks, meanwhile, were the best-performing stock market sector in 2022.

In this environment, insiders say, persuading internal investment teams and external clients to funnel more money into renewable energy is becoming more difficult. Indeed, in December, mutual fund giant Vanguard ended its participation in Glasgow’s Net Zero Asset Managers initiative, a campaign similar to the Glasgow bank alliance. Vanguard ranks second behind BlackRock in asset manager investments in fossil fuel expansion, according to Reclaim Finance. Vanguard said in a statement that while “such industry initiatives can advance constructive dialogue,” the company wanted “to make clear that Vanguard speaks independently on matters of importance to our investors.” 

Even avid environmentalists concede that the world can’t go cold turkey on fossil fuels; there has to be a transition period. And big banks have in varying degrees begun to finance green power. But the resources devoted to cleaner energy are still a mere fraction of those devoted to oil, gas, and coal. Since 2016, fossil fuel firms have raised $3.6 trillion in the debt markets, according to Bloomberg data, while renewable-energy producers raised only $160 billion. 

In the eyes of financial firms’ critics, the timidity of their decarbonization commitment shows that they are not taking the climate change threat seriously enough. “The financial sector has not yet acted in a manner that suggests an understanding of either the scale of the crisis or the sector’s role in causing it,” says Rebecca Self, founder and managing director of Seawolf Sustainability Consulting and former chief financial officer of sustainable finance at HSBC. 

Just as galling to green activists is the disconnect between banks’ and investors’ words and actions. Citigroup, for example, boasts on its website that its “sustainable progress is driven by our commitment to advance solutions that address climate change around the world in support of the transition to a low-carbon economy.” Citi does not mention in its ESG (environmental, social, and governance) reports that outside of China, it has been the world’s biggest backer of coal power over the past six years, having underwritten some $8 billion in loans. Although Citi finally announced plans to edge away from coal in 2022, the reforms disappointed reformers: Citi has stopped direct funding of new projects, but it will reduce credit exposure to coal producers and coal-using utilities only gradually, in a phaseout that won’t begin until 2025. Citi declined to comment on its coal investments. 

Financial services companies have argued that their investments give them leverage to encourage fossil fuel companies to shift to renewable sources. Though that may be true, the financiers do not appear to be taking advantage of that influence. Only four of the 30 biggest European and American asset managers have begun to restrict investments in coal. And none have yet pledged to stop funding oil and gas projects, even in the long term, according to an analysis by Reclaim Finance. Reclaim also found that, so far, no large investment houses have used their ownership stakes to pressure oil and gas companies into lowering production or shelving new projects. 

Indeed, faced with political pushback, some banks and investment houses are going out of their way to promise that they’ll never exert such pressure. Last year, after Texas’s comptroller began to implement legislation that prohibited state agencies from investing their $330 billion in retirement and investment funds with asset managers that boycott fossil fuel companies, multiple financial companies assured the state that despite their sustainability promises, they continued to support oil and gas. 

Since then, at least seven states have approved rules like those in Texas. In August, 19 Republican state attorneys general wrote to BlackRock to complain about the firm’s use of pension funds to “force the phaseout of fossil fuels.” In September, Dalia Blass, BlackRock’s head of external affairs, responded with a letter intended “to clarify misconceptions.” After acknowledging BlackRock’s belief that “climate risk poses investment risk,” Blass wrote that BlackRock does not “dictate to companies what specific emission targets they should meet.” She added, “BlackRock does not boycott energy companies or any other sector or industry,” and noted that it had approximately $170 billion invested in U.S. energy companies.

The rationale for supporting climate initiatives outwardly while flouting them in practice was perhaps best summed up by a banker who said the quiet part out loud to his peers at a conference in 2021 in Houston. “Do what you can to inoculate yourself,” Steve Kennedy, head of energy banking for Amegy Bank, said in a video obtained by a reporter. “Ignoring ESG would be a mistake for any of us, but it may not take that much to actually inoculate a company from people being too critical of what they’re doing.” Put another way, claiming to be clean with enough conviction may be enough to appease your critics while you continue earning money from dirty fuels. 

Somewhere over Europe, Tariq Fancy realized his life was absurd. His job required him to travel from Saudi Arabia to Spain to Switzerland, wooing clients to join BlackRock’s latest investments in sustainable, low-carbon companies. Yet Fancy was making those trips in a BlackRock-owned Gulfstream G650 jet—which burns 450 gallons of fuel an hour.

The jet wasn’t the problem, Fancy realized: He was. As BlackRock’s global chief investment officer for sustainable investing, he led a team that recommended investments in companies with strong ESG scores and warned BlackRock away from major polluters. Over time, he says, most of those warnings were overruled by attorneys or asset managers citing the mantra of “fiduciary duty”—a lawyerly way of saying that BlackRock’s singular responsibility is to generate as much profit as possible.

“The primary purpose of BlackRock is to maximize return and optimize profit,” says Fancy. “And in virtually every case, the ESG investments did not align with those goals.” Fancy quit BlackRock in 2019 and has become a prominent critic of the corporate sustainability movement: “I realized that I was the one out of step.” 

Tariq Fancy says colleagues overruled him when he counseled against investing in heavy polluters.

DESEAN MCCLINTON-HOLLAND FOR FORTUNE

The myopic position of BlackRock and other financial services firms persists because companies and executives are rewarded for it. On earnings calls, investors and analysts grill managers about short-term financial goals but rarely ask about sustainability. And managers who buck these incentives may get fired. Emmanuel Faber, CEO of French consumer goods giant Danone, waged a four-year battle to instill a strategy called “One Planet, One Health” that included measuring company performance with a carbon-adjusted earnings metric. But in 2021, after sales of flagship products like Evian water lagged, two institutional shareholders persuaded the board to oust Faber. As one investor put it, “Danone did not manage to strike the right balance between shareholder value creation and sustainability.”

Given these pressures, Fancy believes, financial firms will forgo their support for fossil fuel projects only when these investments become less attractive. And that will happen only when governments put a price tag on greenhouse gases through a carbon or pollution tax. “This is such a simple equation, and capital allocators understand it intuitively,” Fancy says.  “One portfolio manager at BlackRock told me, ‘I believe in climate change. If we had a price on carbon, I’d lower my carbon footprint overnight—and so would everyone else. But it makes no sense to do it alone and put myself at a disadvantage.’ ”

While financing fossil fuel projects may seem logical from a dollars-and-cents standpoint, continuing to follow that strategy saddles investors with long-term financial risk, some banking experts and regulators argue. Insurance provider Swiss Re forecasts that climate change may reduce global GDP by 14% by 2050. And Moody’s warns that unless financial institutions quickly reduce their multitrillion-dollar carbon footprints, these firms will have substantial stranded assets on their balance sheets. This will cause their stock prices to plummet, reduce profits and profitability, and limit their future investing opportunities.

Yet, for all the long-term risk, many financial companies aren’t even paying attention in the short run. The European Central Bank recently assessed EU banks’ preparations for climate change. Almost none had even a basic program to measure the cost of climate change to their business. A handful simply said they faced no climate risks at all. 

Until recently, the role that financial services companies have played in hastening climate change has been largely ignored by regulators, but that’s starting to change. In 2021, the Securities and Exchange Commission established a task force to investigate financial services firms for misleading investors about the extent to which their ESG funds were truly environmentally friendly. Since then, the agency has charged BNY Mellon’s investment arm with making misstatements and omissions about its ESG funds covering the period from July 2018 to September 2021; Mellon paid a $1.5 million penalty to settle with the agency. According to reports, Goldman Sachs and Deutsche Bank are now in the SEC’s crosshairs. 

And in Germany, Deutsche Bank’s subsidiary DWS was recently raided by police on allegations of lying to investors about the greenness of its funds. Following the raid, DWS’s chief executive resigned. The DWS affair came in the wake of new EU rules that went into effect in 2021, known as the Sustainable Finance Disclosure Regulation (SFDR). SFDR’s first phase requires most asset managers to categorize their investment products along an ESG continuum—dark green, light green or non-sustainable. 

In response to these rules, financial firms deleted the ESG label from some $2 trillion worth of funds, according to the Global Sustainable Investment Alliance (GSIA). Separately, eyeing the SEC’s growing interest in financial services greenwashing and anticipating new regulations, Morningstar recently removed the ESG tag on more than 1,200 funds, or about one in five. 

In the second phase of SFDR, which began on Jan. 1, the EU is proposing to compel asset managers to detail the carbon footprint and climate change impact of each of their investments. But after protracted lobbying from financial services companies, the EU has already backed off a bit. Among other changes, it has redefined natural gas—which is unquestionably a fossil fuel—as “transition energy” between fossil fuels and renewables, which means the ubiquitous energy source need not be included in filings.

Similarly, the SEC has proposed rules that would require publicly traded companies of all kinds to disclose how climate risks affect their business; calculate greenhouse gas emissions across their operations, including investments; and establish targets for reducing their carbon footprints. The public comment period for these regulations closed in July, and the SEC hopes to implement them in 2024 and 2025. But climate-policy activists anticipate that the strict requirements for reporting Scope 3 indirect emissions will be watered down, exempting some companies and postponing the start date for other rules. 

Proponents of sustainability bemoan the slow pace and the dilution of regulations. Without stronger standards on climate disclosure, they argue, it’s impossible to measure progress or to police companies that make dishonest claims. Moreover, solutions that would encourage investments in clean projects, such as taxes on carbon emissions, can be imposed only if greenhouse gas reporting is mandated. “Any steps that we need to take to reduce climate change must start with rigidly imposed transparency,” says Self, the sustainability consultant. “But where is the political will and urgency? We can’t wait three years for a weakened set of rules. Every forecast says that our action to stop climate change must be measured in months now, not years.” 

For their part, financial services companies seem comfortable slowing the process down. Banking trade groups consistently oppose new ESG regulations. In some cases, they claim that the proposed rules amount to illegal overreach; in others, they argue that financial services companies can help solve the climate problem, but not if they are forced to spend huge sums on new reports and procedures. 

The contortions that financial firms go through to justify their large contribution to the carbon economy were perfectly encapsulated in JPMorgan CEO Jamie Dimon’s 2022 annual letter to shareholders, published last April. Dimon reiterated his oft-stated stance that climate change is an important issue, not to be downplayed. And he conceded that governments and companies are “well short” of meeting net-zero goals. But he also took pains to note that oil and gas production was essential to the security of the U.S. and its allies and called for “immediate approval for additional oil leases and gas pipelines”—indicating that JPMorgan’s ranking as top fossil fuel financier was unlikely to change anytime soon.

As Dimon’s letter suggests, big financial players know what the right strategy should be. They just can’t disentangle themselves from the logic and the profits of the wrong one. 

This article appears in the February/March 2023 issue of Fortune with the headline, “Wall Street’s oil stain.”