Green Banking: Analyzing Amalgamated Bank and J.P. Morgan
How do you account for bank’s carbon footprint? With low operational emissions and significantly higher financed emissions in the fossil fuel sector banks have a measurable effect on climate change. This report examines the cases of Amalgamated Bank and J.P. Morgan Chase, noting Amalgamated's commitment to environmental standards and J.P. Morgan's substantial investment in fossil fuels despite a pledge to fight climate change. The analysis reflects on the potential of financial institutions to influence global decarbonization efforts, underscoring the complex relationship between banking practices and environmental sustainability.
Authors: Carina Gormley, Emmy Swift, Caroline Linne, Leah Marsh, and Brittany Gallahan
The Environmental Dilemma of Banking Today
The financial services industry is a principal player in decarbonizing the global economy (CDP Financial Services Disclosure Report 2020, 2020). According to a report issued by CDP, “Financial institutions can create a feedback loop to decarbonize and enhance resilience of the economy as a whole; engagement with portfolio companies is a key part of this” (CDP Financial Services Disclosure Report 2020, 2020). The banks themselves have relatively low greenhouse gas operating emissions (scope 1 and 2), however, their financed emissions can be 1,000 times greater (Azoulay et al., 2020). The world’s banks poured over $5.5 trillion over the last 7 years in the fossil fuel industry – meaning that they are accelerating the climate imbalances that these industries cause (Rainforest Action Network et. A., 2023). With fossil fuel market size projected to increase 56% over current levels by 2032 (Fossil Fuels Market Size To Hit USD 11.78 Trillion By 2032, n.d.), fossil fuel investment and underwriting continue to be “business as usual” for the industry, despite “no space for further exploration or extraction” (Bank Track, n.d.).
Our group analyzed whether a financial institution that refuses to finance fossil fuel projects and investments would be profitable and chose Amalgamated Bank. We also investigated potential greenwashing and whether Amalgamated Bank’s operations are truly environmentally friendly. To better understand the sustainability measures, we investigated the activities of a comparable United States Bank – J.P. Morgan Chase – a company famously high for in their investment in fossil fuel projects and companies, with 380 billion going toward fossil fuel projects form 2016-2021 (Rainforest Action Network, et. A., 2023).
Amalgamated and J.P. Morgan Chase: An Overview of Environmental Commitments.
Amalgamated Bank has a net revenue of $258 million as of 2022, is a certified B Corporation and is a founding member of the Partnership for Carbon Accounting Financials (PCAF) (Amalgamated Bank 2022 Annual Report, 2022). They have received the Fossil Free Certification, committing to high environmental and social standards (Amalgamated Bank 2022 CSR Report, 2023). They assert they are a conscious company interested in banking for a better future – investing in environmental, social, and governance projects that are positive for the planet.
J.P. Morgan Chase has a net revenue of $11.3 billion in its commercial banking sector as of 2022 (JPMorgan Chase, n.d.). This prominent bank faced criticism for its substantial financing of fossil fuel projects, with $39.2 billion provided in 2022 alone (Rainforest Action Network et. A., 2023).
J.P. Morgan has responded by pledging $2.5 trillion to combat climate change and support sustainable development from 2021 through 2030 (Sustainability | JPMorgan Chase & Co., n.d.). Despite this pledge, J.P. Morgan Chase is the #1 financier of fossil fuels since the Paris Agreement – a total of $434 billion since 2016 (Rainforest Action Network et al., 2023). Figure 1 outlines each banks’ commitments in further detail.
Is Caring about the Environment Profitable?
Demand for fossil fuels continues to escalate, but this interest is deemed largely political rather than profit driven (Sanzillo et al., 2022). While green investments have been complicated by fuel crisis downstream of the Russia Ukraine War (Shine, 2023), recent years have demonstrated investment parity between green investments and fossil fuels (Shine, 2023). These trends indicate general optimism for the potential profitability of transitioning from fossil fuel to green investments. Carbon efficient portfolios are outperforming traditional stocks (Sustainable Funds Outperform Peers in 2023, 2023; S&P 500 Carbon Efficient Index | S&P Dow Jones Indices, n.d.).
Banks rely on interest income, capital markets income, and fee-based incomes to drive their profits (CFI Team & Loo, n.d.). Positive indicators that banks are profitable include return on assets (ROA), the strength of bank size (BS), and debt-to-asset ratio (DAR) (White, 2022). Meanwhile, negative indicators of profitability include loan-to-deposit ratio (LDR) and return to equity (ROE) (White, 2022). According to NYU Stern, green investments can match or outperform brown ones long-term (Whelan et al., 2021). Sustainability equity funds have shown a 10.9% median return – outperforming traditional equity funds, which return around 8% (The Sustainable Investment Forum, n.d.).
Although different in the scale of their operations, Amalgamated and J.P. Morgan Chase perform similarly on ROA and ROE. Beta – a measure of the volatility of a portfolio- is higher for Amalgamated, indicating their portfolio is riskier (Kenton, 2022). Based on our research and conversations with financial experts, we hypothesize this could be driven by longer period investments in Amalgamated Bank’s portfolio. Another tool to look at profitability is a company's F-Score – that ranks companies out of 9 based on ROA, operating cash flow, change in ROA, accrual, change in long term debt, change in current ratio, total common equity, change in gross margin, and change in asset ratio (CFI Team, 2024). Amalgamated scored significantly higher at 8, while J.P. Morgan scored a 6 (Fintel, 2024). Additionally, traditional risk assessment tools do not include financial impact associated with climate risk which reduces the apparent value of environmentally conscious investment.
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“Amalgamated has outperformed all the major morney center US banks since Jan 1, 2020, this suggests that an environmentally conscious bank could easily outperform a traditional money center bank.”
— Andrew Domonkos, Real Estate Investment Banker
Analyzing Environmental Impacts
It is readily apparent from the harms caused by fossil fuels, and the mandate for finance to support a green transition (World Resources Institute, 2023), that divestment from fossil fuels is seen as one of the finance sectors’ most potent tools for reducing emissions (Nutall, 2023). Hundreds of banks have agreed to not invest or underwrite fossil fuel projects (Fossil Free Certification, n.d.; Sanzillo et al., 2022). Globally there is a growing trend of net-zero and carbon neutral commitments from companies. However, many of these commitments focus on the entities' operations and have little to no impact on their supply chain- including their financed emissions. As humans keep turning up the thermostat on our planet, we need to see drastic reductions in emissions to avoid the worst of what could be.
Organizational barriers to reducing financed emissions persist at many banks. These include a lack of communication and foundational integration of emission reduction strategies beyond the C-Suite and slow implementation of commitments (Beardshaw & Jais, 2022). Many banks have unsustainable business models that make them “too big to fail.” The costs of poor management and unsustainable employee incentives likely contribute to banks' conservative view of green innovation and divestment (Eccles & Serafeim, 2013).
Lack of quality data slows progress towards necessary commitments (Beardshaw & Jais, 2022). Despite being a founder of PCAF, the primary GHG accounting guidance for financed emissions (Azoulay et al., 2020), Amalgamated Bank lacks significant information about the emissions affiliated with the projects and assets of their portfolios. Average data quality for the financed emissions of Amalgamated Banks’ portfolio was ranked 4.4 out of 5, where 1 is considered highest possible data quality (Amalgamated Bank 2021 CSR Report, 2022). Amalgamated justifies the low PCAF score as a cost of prioritizing comprehensive data collection over quality in their assessment strategy (Amalgamated Bank 2021 CSR Report, 2022). Others note that double counting and assessing emissions based on share size are common problems with PCAF assessments (Azoulay et al., 2020). At present, comprehensive data collection and high data quality are not feasible for financed emissions calculations. Lacking quantifiable information about the environmental benefits of divestment may make it harder for individual banks or the industry to rationalize a shift away from fossil fuel investments. Broader utilization of platforms like Sustainalytics (Sustainalytics: Home, n.d.) or the US Environmental Protection Agency’s US Environmentally Extended Input-Output (USEEIO) Models (US Environmentally-Extended Input-Output (USEEIO) Models | US EPA, 2023) may help the industry shift towards better financed emissions data.
Amalgamated has made many promises to their stakeholders on their environmental involvement; however, they do not provide a list of assets in their portfolios to justify their claims. Our team went to speak to the bank representatives in person, searched rigorously for the S13 required filings with the SEC, and contacted representatives of the Bank Green Fossil Fuel Free Certification with no found data on companies in these portfolios. This sparked suspicion and we began to look more critically into the bank’s marketing strategies.
Greenwashing Concerns
With the European Union passing anti-greenwashing legislation and the public being swayed by dishonesty, greenwashing presents a challenge to every company, including banks. Amalgamated bank and J.P. Morgan Chase both participate in greenwashing (Mertenskotter, et. al, 2024). With guidance from the “sins of greenwashing” produced by Terrachoice, we identified some instances of greenwashing from each bank.
Amalgamated bank participates in both the sin of vagueness, sin of no proof, and sin of irrelevance. The sin of vagueness is the most prominent, showing up in most of their marketing materials. The materials they produce tend to produce more questions than they answer and lean on environmental terminology to avoid explaining what they are doing. Below is a snapshot of some of their Instagram posts that highlight these greenwashing sins in progress.
J.P. Morgan participates largely in the sin of vagueness. Similarly, to Amalgamated, they tend to present vague language in their marketing and reports. However, in their 2022 Environmental Social Governance Report, J.P. Morgan stated that they were “creating solutions that protect the environment and grow the economy”, this directly contradicts their high investment into fossil fuel projects (J.P. Morgan Chase, 2023). Pictured to the left is the direct screenshot from that report. Harvard Business Review studied the effects of greenwashing on the bottom line – stating that consumer satisfaction levels fall as goals begin to exceed actions (Ioannou, et. al, 2022). This drop was around 1.34% - with past studies showing a degree change can lead to 0.032 units of change in net earnings (Ioannou, et. al, 2022).
Reccomendations
The following recommendations address the issue of both investor risk assessment and consumer awareness and potential litigation of greenwashing:
Based on our analysis, our team recommends advocating for mandatory disclosure of financed emissions. The recommended method for this disclosure is through the Greenhouse Gas Protocol Scope 3 Category 15 disclosure. This should be paired with a policy for cross-industry requirements in improved transparency and standardization of emissions reporting (Laidlaw, 2023). Banks may be able to achieve more complete disclosure policies by immediately mandating that all assets and projects under management report their emissions back as part of their investment criteria.
MANDATE DISCLOSURE
STANDARDIZE CLIMATE FINANCIAL RISK REPORTING
A standardized metric to assess the emissions risk of a portfolio enables investors to include climate risk in their financing decisions. Current metrics like the Sharpe ratio offer a measure of risk in a portfolio but do not directly account for the risk directly associated with climate change (Gupta & Chen, 2022), so we propose a Sharpe ratio that accounts for emissions in the following context:
ELIMINATE SUBSIDIES
We also recommend that fossil fuel subsidies stop immediately. We assess that the true risks of these plans are not being seen due to the subsidies in place and the government funding could make renewable projects more attractive to investors.
MATURE THIRD-PARTY CERTIFICATION
(Source: Amalgamated Bank’s Instagram, 2023) Click to enlarge
Investments should be made to support third-party certifiers of banks so that public awareness campaigns can be appropriately funded—these groups, like Bank.Green can give context to companies and consumers on what to be aware of. Possible measures include the ratio of green investments and fossil fuel investments (Gottlieb & Gormley, 2024) within or across a bank’s portfolios; emissions (Scope 1-3) per dollar of assets under management (Pinkowitz et al., 2024); and metrics that reflect how much a firm is bridging the climate finance gap in key emissions areas with less access to funding (World Resources Institute, 2023).
These broad, governmental, and societal recommendations are paired with a direct recommendation to Amalgamated and J.P. Morgan. For Amalgamated bank, we recommend that they publish their portfolio and make their back-end information available to the public. This would dissolve any concerns of greenwashing and bulk up their blanketed statements that they mass produce in their marketing. For J.P. Morgan, we recommend that they take a portion of the promised funds to green initiatives to fully calculate their Scope 3 emissions. This will offer the transparency that consumers are interested in and give them more creditability in their “net-zero” goals. As banks continue to push a carbon neutral message to the consumers that fear the current state of our atmospheric composition, it will be important for leading institutions to do due diligence and overcompensate in data error instead of the inverse.
Conclusions
Banking is an instrumental lever for change, capable of catalyzing fossil fuel harms or scaling the global green transition. Banks largely divested of fossil fuels and green banks have found a successful path to profitability and even traditional banks are proposing “net-zero” strategies. In a society that values transparency and honesty, greenwashing can make consumers lose trust in a financial entity and push business elsewhere. Because of this, it is paramount that banks dive into their Scope 3 emissions and publish their portfolios and adjacent documentation. Governments should eliminate subsidies to fossil fuel projects, so the full risk is seen by investors and banks, while moving that money to climate assuring projects. Governments should also work to mandate publishing information so that the public can consumer consciously.
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