Fossil fuel companies get most of the blame for climate change, but their work (and carbon emissions) wouldn’t be possible without the banks that lend them money. At the COP26 climate summit in November, dozens of financial institutions made commitments to decarbonize their portfolios in the long term. But for now, lending is increasing (pdf), to the tune of at least $575 billion in 2020 alone.
One of the top purveyors, according to research by the Rainforest Action Network, was Citi, which delivered at least $237 billion in loans or underwriting to fossil fuel companies from 2016-20.
On Jan. 19, CEO Jane Fraser laid out the bank’s new strategy to reach net zero emissions by 2050. It’s more aggressive than those of other large banks, in that it targets a 29% reduction in total financed emissions from clients in the energy sector by 2030 (other banks have commonly set “intensity” targets, which measure emissions per dollar or per unit of production, and leave room for total emissions to increase). Fraser warned clients to get on board or risk being cut off from Citi loans.
But the bank has not clearly articulated what kind of climate negligence would constitute grounds for divorce—and has been clear, echoing the sentiment of BlackRock CEO Larry Fink, that if anything it wants to deepen its relationships with carbon-intensive clients and hopefully underwrite their transition to cleaner ways of making money.
To better understand Citi’s strategy, Quartz spoke to chief sustainability officer Valerie Smith on Feb. 2. The following interview has been edited for length and clarity.
“I would hate to see a rush to judgment”
QZ: To start, could you just explain what a CSO does?
Smith: We created the chief sustainability officer position in 2019 and I report to the global head of public affairs. Over the past three years, it has been a sea change in terms of the attention to ESG and climate, and the level of ambition and level of integration into the business.
My team and I work to develop and drive our sustainability strategy and key initiatives through the business, in really close partnership with the corporate and investment bank, and with risk. We spend a lot of time engaging with our clients, our investors, and stakeholder groups. I think that’s been a really important way for us to inform our strategy and key initiatives, with those external perspectives as well as the internal ones.
QZ: Is it ever difficult to kind of get everyone in the company rowing in the same direction on this? I’m wondering if your imperatives and priorities ever conflict with those of legacy commercial lending, for example, to fossil fuel companies?
Smith: I think Citi’s history in this space put us in a position to engage early and often with our different partners inside the business. ESG and climate have become central to our business and client engagement strategies, and a lot of that early friction is really dissipated. And that means we’re just able to move faster and ratchet up our level of ambition.
QZ: How did you arrive at the decision to set an absolute emissions target for the energy sector?
Smith: Our CEO on her first day said that we would be committing to net zero, and we started with setting targets for 2030 for the energy and power loan portfolios. We knew that we needed to be aligned with climate science and the IEA Net Zero scenario, which reflect the fact that to achieve a net zero economy, global energy emissions need to reduce in the near term.
The targets that we set, we believe they’re credible, they’re aligned with climate science, and they’re ambitious. And Citi really does have deep business in these sectors, and longstanding client relationships. We understand what climate science tells us needs to happen with emissions, and it really positions us well to go deep with our clients in terms of helping them to transition.
QZ: CEO Jane Fraser, in her note announcing the new 2030 climate targets, said that exiting client relationships would be a “last resort.” What would cause that to happen? If you have clients whose future business plans don’t align with that IEA scenario, at what point would you end that relationship? This week, for example, Exxon [to which Citi lent $7.5 billion in 2020] said it plans to increase its spending on oil and gas drilling by 45% in 2022, up to $24 billion.
Smith: We intend to take a couple of years for a deep client-by-client assessment and engagement, to understand each client’s unique transition plan and how that aligns with our decarbonization targets. We are extremely focused on the 2030 targets, but we don’t have blinders on with regard to other important issues like sustainable development and access to energy in developing countries.
We know that not every client will be able to come along with us through the duration of the journey. But I also believe that given our positioning in this sector, we need to meet clients where they are and then help to accelerate their journeys. Our goal is to realize our decarbonization targets, but also the decarbonization of the broader global economy.
QZ: Right, I just think people want to understand where the buck stops, or what, in your view, constitutes a good plan or a bad plan.
Smith: Our bankers and our clients are going to be learning together what constitutes a good transition plan, and that journey is one we will continue to report on over time. For every client, it’s going to be unique.
We all hope there will be clients that surprise us. There will be clients that maybe aren’t being covered in the media today as having transition plans, that actually are going to decarbonize. So I would hate to see a rush to judgment on, you know, binary considerations around transition plans. We need to be prepared to dig in with our clients and help to make those transition plans realized.