JP Morgan Chase & Co. is turning its back on a trend that’s been embraced by many of its Wall Street peers.
Transition finance — a term intended to describe the allocation of capital to activities that will ultimately help cut carbon emissions in the wider economy — exists in something of a regulatory grey zone. At the same time, financing corporate decarbonisation has been identified as a huge business area, with Apollo Global Management recently suggesting the energy transition may represent a US$50 trillion ($67.21 trillion) investment opportunity in the decades to come.
Against that backdrop, some of Wall Street’s biggest banks are designing transition finance frameworks to define eligible assets and activities. Lenders include Wells Fargo & Co. and Citigroup, according to public documents and people familiar with the process who asked not to be identified because they’re not authorised to speak on the subject.
JP Morgan, meanwhile, is opting out.
Linda French, JP Morgan’s global head of sustainability policy and regulation, says it’s far from clear that calling something a transition asset will unlock capital. Ultimately, she says, the approach ignores the fact that investors are less concerned with definitions and more interested in proof that capital allocations yield results.
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“To state what should be obvious, finance will only move when there’s an economically viable business case,” French said in an interview. “Taxonomies and disclosure frameworks on their own do nothing to finance flows, and even risk becoming a distraction.”
French says the problem with transition finance frameworks is similar to the hurdles that the narrower and more clearly defined arena of green assets has faced.
“Fundamentally, it’s a rehash of the green finance conversation: Once you’ve defined relevant economic activities, then finance will begin to flow to those activities,” she said. As an approach, it downplays the fundamentals of financial logic, she said.
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It’s a conversation that feeds into an increasingly tense backdrop for climate finance. Pure green investments such as solar and wind have largely proved a losing bet in recent years, with the S&P Global Clean Energy Index down almost 40% since the beginning of 2023. In the same period, the S&P 500 Index has gained more than 50%.
Then there’s the political environment. US President-elect Donald Trump has made clear he views green policies with deep skepticism — even calling climate change a “hoax” — and has pledged to wind back Biden-era incentives.
The stigma around green — and even worse, ESG (environmental, social and governance) — is part of the reason why the finance industry is trying to come up with new terminology. Transition finance, which in some cases can even include coal assets, is now the preferred nomenclature.
Wells Fargo began developing a transition finance framework last year, and said in August it will consider “a broad scope of activities”.
The goal is to define what can be included in its US$500 billion sustainable finance goal, and to guide bankers engaging with high-carbon clients, according to a person familiar with the bank’s thinking who asked not to be identified discussing private deliberations. A spokesperson for Wells Fargo declined to comment.
Citigroup also is working on its own transition finance framework, said a person familiar with the matter. A spokesperson for the bank hasn’t responded to a request for comment.
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The absence of a clear regulatory framework shouldn’t become a hurdle for the finance industry to move ahead, according to Lizzy Harnett, a research and impact expert at the Colorado-based environmental think-tank RMI.
“Banks wanting to finance the energy transition can’t wait for perfect standards and data,” she said. “Transition finance is hard to define, and there isn’t enough detailed guidance on what ‘good’ looks like, but it is positive that banks are getting started and increasing transparency through frameworks.”
The expectation is that banks will “learn by doing”, ultimately leading to harmonised industry standards, she said.
David Carlin, the former head of risk at the United Nations Environment Programme Finance Initiative, said transition frameworks “reflect an important step in operationalising the bank’s commitment to the low-carbon transition.”
But he also cautions that “without grounding in sound science and clarity of impact, transition frameworks are little better than the paper they’re written on”.
Though definitive rules don’t yet exist, regulatory efforts to define transition are moving ahead in jurisdictions such as Singapore and the European Union.
And in the UK, where a government-commissioned report published in October offered guidance on how to scale transition finance, several big banks have embraced the challenge.
Standard Chartered stands out as an early mover, having developed the first iteration of a framework in 2021.
The bank uses it to help identify transactions that can contribute to its US$300 billion sustainable finance goal, said Elizabeth Girling, head of sustainable finance products and frameworks.
According to StanChart’s definition, transition finance is “any financial service provided to clients to support them to align their business and/or operations with a 1.5°C trajectory”, a classification that spans everything from sustainable aviation fuels to the early retirement of thermal coal assets.
“The energy transition requires a global pivot to low- and no-carbon infrastructure,” said Ben Daly, global head of transition finance at StanChart. “This requires trillions of dollars of capital, and a transition framework is a helpful way to showcase and catalyse the investments being made today.”
Barclays, which unveiled its framework this year, says it would welcome clearer guidelines.
“The industry as a whole has been held back by a lack of clarity and consensus around what a transitioning activity looks like,” said Daniel Hanna, group head of sustainable and transition finance at Barclays. “One of the things that has held this back is concerns around greenwashing accusations.”
That’s in part because transition is by nature “dynamic,” Hanna said.
Other European banks developing their own transition finance frameworks include UBS Group, while UniCredit has already formulated its definition.
James Vaccaro, a sustainable finance expert at the Climate Safe Lending Network, said it’s fine for banks to have different definitions of what transition finance is.
Instead of trying to divine a “grand unified transition pathway”, Vaccaro said the bigger concern is ensuring transition labels are being credibly applied. For now, though, “nobody is opining or even debating who’s going to mark the banks’ homework, and what kind of detention they get”, he said.
Rather than design a transition finance framework, JP Morgan has built what it calls a Center for Carbon Transition. The goal, according to Wall Street’s largest bank, is to provide clients with “the insights and firm-wide expertise needed to navigate the challenges of transitioning to a low-carbon future”.
“This isn’t about ‘transition finance,’ it’s about whether companies investing in transition can access the finance they need,” said JP Morgan’s French. “And if the economics don’t work for companies to invest in transition, then what are we even talking about?”
Charts: Bloomberg
