Banks have plenty of room for growth as climate financers

Most of the money we use is created not by governments, but by commercial financial institutions – for centuries, banks have been crucial to the supply of credit and mobilisation of capital.

Banks and other commercial credit institutions are also important in the field of climate finance. However, they do not dominate the sector: as of 2021/22, they provided something less than one-fifth of the capital invested in green finance, according to the Climate Policy Initiative (CPI) think tank.

This is in part because climate finance includes both commercial projects and the creation of public goods like flood control works. This latter category includes infrastructure and services that are socially necessary, but banks generally struggle to fund because of heavy capital outlays and insufficient revenue potential.

That said, commercial financial institutions do form the largest share of private climate finance, according to CPI figures. Valerio Micale, an associate director at the CPI, stresses “the banks are really involved in the front line of climate financing”.

Banks have plenty of reasons to expand their climate financing efforts, whether to meet international standards, comply with their own net-zero targets or protect themselves from climate risks. However, attempts at collaboration towards these goals may face hostility from Republican politicians in Washington DC and many US states.

How much to green the world?

The CPI estimates between $1.5trn and $1.6trn in capital was devoted to climate finance projects in 2023, compared with $755bn in 2019, according to its Global Landscape of Climate Finance 2024 report. Private and public sector sources provided roughly equal shares of the overall climate finance figure, Baysa Naran, senior manager for the CPI’s Climate Finance Tracking Programme, says.

The CPI stresses this is far from adequate. To avoid warming beyond the 1.5°C threshold, the institute estimates the green transition would require $7.4trn in annual investment between 2024 and 2030. The CPI report, citing external data, says in 2023 there was $1.1trn in new fossil fuel finance and $1.4trn in “consumer fossil fuel subsidies” in 2022.

CPI data attributed $244bn a year on average in climate finance to commercial financial institutions, or almost 19% of the $1.3trn in funding available for green projects in 2021/22. Most of this went to funding specific projects. The vast majority of this commercial bank funding flows within advanced economies – in 2022, commercial financial institutions provided $204bn in domestic funding for climate projects in these jurisdictions. This was 39% of the domestic finance for the climate transition in advanced economies in that year, more than twice the share provided by corporations.

Professor Michael Wilkins, Imperial College Business School

Other studies produce different figures. A January 2025 BloombergNEF report says commercial credit institutions provided $776bn in “low-carbon energy supply” funding in 2023, of which $648bn was debt finance and $79bn project finance.

Naran points out the public-private mix varies greatly by region and sector and it has changed over time. Public sector financing predominated in Europe’s green energy sector a decade ago, but now it is profit­able enough for private capital to provide the larger share of funding. In China, the public sector also plays a large role in financing as a reflection of that country’s more statist economic model, Naran continues.

“[Parametric insurance products] allow credit to flow from banks to smallholders in agriculture by allowing these kind of products from insurers to actually provide credit mitigation to the banks, hence releasing capital”
_{Michael Wilkins
Imperial College Business School}

Michael Wilkins, executive director and professor of practice at the Centre For Climate Finance & Investment at Imperial College Business School, tells Insurance Day private finance tends to pool in advanced economies and most often goes towards energy, transport and infrastructure.

Private lenders provide little capital for projects to green agriculture, forests or water, or “natural capital”, as these sectors are less likely to produce consistent returns, Wilkins says. He adds private finance is also less likely to invest in adaptation – for example, flood control programmes – for much the same reason. These are public goods, which governments generally provide because they cannot generate sufficient profit to attract private investment.

However, Wilkins adds public-private partnerships could encourage private capital to enter spheres of activity it avoids at present. He points out this approach has been used for other social infrastructure like schools and hospitals.

In the developing world, most capital public sector funding often comes from development banks, as there are few commercial opportunities for green investment. Basan highlights in developing regions like the African continent, there is too much risk for banks to invest profitably and too little demand for commercial credit.

Daan Wentholt, a spokesman for Dutch multinational bank ING, says the bank has adopted more ambitious climate financing targets. The bank aims to provide €7.5bn ($7.75bn) in financing for renewable energy infrastructure by this year and Wentholt adds: “We have increased our target for volume of sustainable finance mobilised to €150bn a year by 2027.” This figure includes lending, but also ING’s other activities as an underwriter, securities marketer and adviser.

ING is also withdrawing finance from fossil fuels, stopping credit for coal power this year and “aiming for full phase-out and zero exposure by 2040”.

Barclays says it will “facilitate $1trn of sustainable and transition financing for clients between 2023 and the end of 2030” and directly as much as £500m in “global climate tech start-ups by the end of 2027”.

Bettina Storck, chief sustainability officer at Frankfurt-based Commerzbank, says it will “permanently allocate at least 10% of our new lending business as sustainable loans, of which green and social loans are used to finance sustainable projects and business models directly”. Commerzbank is providing €11.5bn in credit through its Centre of Competence Green Infrastructure Finance, she adds.

Regulatory standard-setters

Regulations play an important, if sometimes indirect, role in climate finance. Central banks and other regulators urge or require banks to calculate and manage their exposure to climate change risk. This may take the form of physical risk to assets or “transition risks” – the danger that regulatory changes will make polluting assets less valuable.

Central banks and regulators do not allocate capital directly, aside from the investment of their own reserves. However, by encouraging or obliging credit institutions to focus on climate risks, they can indirectly discourage fossil fuel exposure. Central banks can also encourage green investments by providing taxonomies of green assets.

For example, in 2020 the European Central Bank (ECB) began requiring banks to consider climate and environmental risks, including in credit and investment decisions. “Institutions are expected to consider climate-related and environmental risks at all relevant stages of the credit-granting process and to monitor the risks in their portfolios,” the ECB said. The Federal Reserve Board created a supervision climate committee in December 2020. The Reserve Bank of New Zealand (RBNZ), for example, tells Insurance Day it has provided supervisory directives to banks for managing climate risks.

Bettina Storck, Commerzbank

However, there may be limits to what central banks can do. The Swiss National Bank says its sole mandate is the preservation of stable prices. “Thus, it may not influence economic, political or social developments through its investment policy” and cannot adopt “a plan to reduce the greenhouse gas emissions related to its investments, for example”, it says. The RBNZ says: “Reserves management is a matter determined by a central bank’s mandate and therefore provides limited flexibility for purposes beyond those required of them under their enabling legislation.”

Storck says supervisors should craft “an independent and lean framework for transition finance” that would release more lending, which would simplify the rules for transition plans and establish such plans for individual sectors.

International and multilateral agencies can also influence finance through their net-zero planning. A Bloomberg report published in 2022 analyses decarbonisation scenarios issued by the International Energy Agency, the Intergovernmental Panel on Climate Change and the Network for Greening the Financial System. To meet these goals, the Bloomberg report suggests public and private funders would, over the course of this decade (2021 to 2030), need to provide four times the investment to renewable energy as they do to fossil fuels. In the 2030s, this ratio would rise to six to one and 10 to one in the 2040s.

“[Commerzbank’s leaders] don’t see any reason for adjustments within our sustainability strategy in light of the new US government. For us, there is no alternative to a consistent and sustainable transformation of the economy”
_{Bettina Storck
Commerzbank}

In a January 2025 report, Bloomberg found banks were actually providing somewhat more funding for fossil fuels: “Among banks, the low-carbon to fossil fuel Energy Supply Banking Ratio increased from 0.74:1 in 2022 to 0.89:1 in 2023,” Bloomberg reports. Funding specifically for “low-carbon energy” did exceed that for fossil fuels by 10% in 2023, the first time this has happened. A 2023 ECB survey found that banks offered a “climate discount” to green projects, while making credit scarcer for fossil fuel projects.

“The impact of climate change on bank lending conditions is likely to increase over time, as banks have to further adjust their risk management with a view to climate risks,” the ECB concludes.

Ákos Hajagos-Tóth, policy officer at the Transition Pathway Initiative Centre at the London School of Economics, says meeting these targets will be accomplished both by increasing clean energy investments and reducing capital flow into fossil fuels.

Storck says Commerzbank is not planning to cut off credit for the fossil fuel sector but is restricting credit specifically to companies that derive more than 20% of their profits from coal-related activities. “We follow the approach that the exclusion of a specific sector is only the last option because it doesn’t help accelerate the transformation of respective sectors,” she says.

Commercial financial institutions have adopted their own net-zero targets, whether in line with regulators or on their own account. Hajagos-Tóth points out many of the banks his centre covers mainly apply net-zero targets to their lending , which covers only 50% to 60% of an average bank’s income. They could extend these policies to their other activities, such as underwriting, portfolio investment, marketing securities or financial advisory services.

Promises and perils

Public institutions, commercial financial institutions and insurers have all formed international networks and alliances to promote decarbonisation and establish their own targets and goals. However, these have come under increasing stress from US policymakers in recent years.

The UN Environment Programme created its Finance Initiative in 1992. It creates guidelines for green finance and investment and has issued frameworks for green banking, insurance and investment. More than 300 banks adhere to the initiative’s Principles for Responsible Banking, published in 2019, and the initiative says one-quarter of the insurance sector has adopted its 2012 Principles for Sustainable Insurance.

The Finance Initiative created the Net Zero Banking Alliance (NZBA) in 2021. Its members are “committed to aligning their lending, investment and capital markets activities with net-zero greenhouse gas emissions by 2050”. Bloomberg found in 2023, banks in the alliance funded slightly more low-carbon than fossil fuel energy (1.09:1 ratio), excluding those North American institutions that had recently departed.

The Glasgow Financial Alliance for Net Zero (GFANZ) also emerged in 2021 at the initiative of former Bank of England governor Mark Carney, following the COP26 summit in Glasgow. It describes itself as “a stand-alone, private sector group that focuses on supporting efforts within the financial services sector to achieve the Paris Agreement objectives”. GFANZ develops new methods for climate finance and helps direct capital to countries in the global south, as well as advocating for green public policies.

There is also the Global Capacity Building Coalition (GCBC), which aims to mobilise finance for emerging and developing economies. The GCBC grew out of COP28 in late 2023 and includes multilateral development banks and private finance alliances like GFANZ.

The Trump administration, and the Republican Party more generally, may pose a risk to these alliances. In May 2023, Republican attorneys-general warned the Net Zero Insurance Alliance (NZIA) its plans for binding climate targets would fall foul of US antitrust law, which helped precipitate the NZIA’s collapse (but subsequent replacement with the Forum for Insurance Transition to Net Zero).

In July 2023, three Republicans in the US House of Representatives, including judiciary committee chair, Jim Jordan, alleged GFANZ and the Net Zero Asset Managers initiative were “potentially violating US antitrust law by co-ordinating their members’ agreements to ‘decarbonise’ their assets under management and reduce emissions to net zero”.

Shortly before Donald Trump returned to office in January 2025 half a dozen major US banks pulled out of the NZBA, followed by five leading Canadian banks. However, Hajagos-Tóth stresses this does not mean they will stop their own efforts to promote decarbonisation, and that banks that have left the NZBA have explicitly said they will continue to pursue green policies.

The RBNZ tells Insurance Day “global efforts to address climate change cannot be solely advanced or hindered by any single jurisdiction or state administration”. The spokesperson added: “It is a long-term issue that calls for sustained perspectives and perseverance.”

Wentholt points out ING, which is based in the Netherlands, is part of the NZBA, but adds: “We think the discussion should focus on the actions a company takes instead of alliances they are in.”

Storck says its leaders “don’t see any reason for adjustments within our sustainability strategy in light of the new US government. For us, there is no alternative to a consistent and sustainable transformation of the economy”. She adds Commerzbank, like ING, would “remain committed to becoming a net-zero bank by 2050” regardless of how the NZBA fares.

Algirdas Brochard, also a policy officer at the Transition Pathway Initiative Centre, says the Trump administration could destroy some climate funding channels through policy changes. He gives the example of the Inflation Reduction Act, a 2022 law that created a system of tradable clean energy tax credits.

The great facilitator

Insurers play a vital role in financing and implementing decarbonisation and other green projects. Insurance is of course necessary for virtually every form of production, transport or distribution activity, whether environmentally friendly or not – which is why net-zero alliances and climate campaigners pressure insurers to decline to underwrite fossil fuel projects.

Wilkins points out insurers play a major indirect role in connecting green projects to capital. By providing insurance cover, carriers make banks and other pot­ential financiers more willing to commit funding, thus expanding the overall volume of capital available. “They provide contingent capital by allowing some of these schemes and projects to go ahead, because capital is then released in the event that some of these risks actually emerge,” Wilkins says.

As insurers improve their policy options, Wilkins says their role as a facilitator of contingent capital will increase. He points out insurers have the best risk modelling capabilities. He gives the example of parametric crop insurance products in Africa, which “allow credit to flow from banks to smallholders in agriculture by allowing these kind of products from insurers to actually provide credit mitigation to the banks, hence releasing capital”. He concludes: “That is a classic way insurance can help with providing not only risk modelling, but also unlocking capital.”