A Call for Sustainable Investment Banking

By | July 27, 2020

This post is the latest in our special issue: “Climate Change and Financial Markets – Risk, Regulation, and Innovation.” To learn more about the special issue and the work of the Global Financial Markets Center around climate change and financial markets, please read the special issue’s introduction here. And to review all The FinReg Blog posts that touch on climate change, go here.


So far, most private sector initiatives in sustainable finance have been incremental and stemmed from large owners and managers of financial assets. However, sustainability could and should be addressed at the source. If investment banks were to integrate environmental, social, and governance (ESG) factors in their activities, over $10 trillion of new sustainable capital could be issued every year—that’s radical change. In this short intervention, I wish to substantiate my argument by summarizing, and building upon, my recent publication titled Dirty Banking: Probing the Gap in Sustainable Finance.

My starting point is what I can’t help but call out as a remarkable dissonance between the self-congratulations of the sustainable finance movement and the abysmal ESG track-record of our financial system. In 2019, a report by the NGO Amazon Watch shared unequivocal and disheartening findings showing that the world’s largest banks and asset managers are instrumental players in providing financial capital to the companies responsible for the destruction of the Amazon Rainforest.

While we celebrate, year after year, investors’ money piling into often ill-defined ESG investment products, our financial powerhouses keep channeling swaths of money towards backwards economic endeavors. In 2018, the Global Sustainable Investment Alliance reported that the market for sustainable investments reached $30.7 trillion, a 34 percent increase since 2016. Although this rapid growth is celebrated as a sign of sustainability going mainstream, it comes with at least three significant caveats:

  • First, the evidence suggests that the intrinsic sustainability of investments labeled as sustainable is at least questionable. Last summer, the Financial Times reported on Vanguard’s intention to clean up two of its ESG funds (worth roughly $930mn) by removing 29 stocks that were “erroneously” included in the funds’ investment universe—the stocks included gun manufacturers and private incarceration companies.
  • Second, and with this first caveat in mind, sustainably managed assets still account for less than one-fifth of the total market for tradable debt and equity securities[1].
  • Third, and with these first two caveats in mind, although the growth in investments labelled as sustainable may be remarkable, new debt and equity issuances still significantly outpace the growth of sustainable assets.

This third observation and its implications are what I wish to focus on for the remainder of this note. Every year, investment banks offer intermediation services that provide $10 trillion in new financing to governments and corporations. Although the banking sector occupies one of the most powerful positions in the financial industry, our understanding of its role and responsibilities in transitioning towards a more sustainable economic system remains limited. In particular, there is a critical dearth of both academic and practitioner debates on the role played by investment banks in manufacturing brown (high carbon) investments and making those available to asset managers and asset owners.

So far, most efforts and attention in sustainable finance have been directed towards large owners and managers of financial assets—pension funds and mega-asset managers such as BlackRock, Vanguard, and State Street. However, these actors are positioned downstream of the investment banking sector. Unlike investment banks, which negotiate new financial arrangements (such as initial public offerings, loans and debt underwriting), the bulk of asset managers’ activities consists of buying and selling securities on secondary markets. Arguably, once financial arrangements are made by investment banks, asset owners and managers merely exchange financial exposures to sustainability risks amongst themselves but have a limited capacity to impact the underlying sustainability of the firm issuing securities. In contrast, investment banks hold immense and untapped transformational potential to demand and integrate ESG factors when they negotiate new financial arrangements. For instance, investment banks could make a mining company’s debt issuance conditional on better practices in mining tailings disposal. Similarly, they could price a technology company’s initial public offering (IPO) with consideration for its data security and customer privacy policies.

To empirically gauge investment banks’ practices, Prof Wójcik and I filtered through close to half a million of debt and equity underwriting deals over the period 2005–2017, using the list of 153 companies excluded by Norway’s $1 trillion sovereign wealth fund, the Government Pension Fund Global (GPF-G). This list represents companies that have been publicly flagged for major ESG misconduct and companies providing contentious products, such as tobacco, coal, and nuclear weapons. Our findings suggest that investment banks do not shy away from underwriting these kinds of companies.

For instance, with the help of investment banks, coal companies have raised nearly $280 billion in new debt and equity capital between 2005 and 2017—the deals generated $2.76 billion in net revenues for the banks (see Figure 1).

Figure 1. Annual debt and equity capital raised by coal and tobacco companies, and investment banks’ net revenues. Source: Adapted from Urban and Wójcik, 2019.

To complement our analysis, we looked into the GPF-G’s equity portfolio to assess whether the Norwegian fund could, through their investments in banks, be indirectly exposed to the companies they blacklist. As shown in Figure 2 below, in 2017 the GPF-G held $169 billion equity investments in financial companies, $30 billion of which were invested in banks that underwrite the debt and equity of the 153 blacklisted companies.

Figure 2. GPF-G’s equity portfolio by industry, end of 2017. Source: Adapted from Urban and Wójcik, 2019.

Asset owners committed to sustainable investment practices should be alarmed at the thought that 16 percent of their portfolio (i.e. financial companies) might work against the efforts that they dedicated to integrating ESG factors in the remaining 84 percent (i.e. non-financial companies)[2]. To address this issue, we are currently working on developing a methodology to assess financial intermediaries’ sustainability on a transaction-basis. We are exploring the possibility of replicating at scale the approach described in our Dirty Banking study by combining material ESG data[3] and transaction datasets on corporate lending and investment banking. This would allow us to map the sustainability of $10 trillion/year of new finance, as well as calculate transaction-based and material ESG scores for financial intermediaries. The latter would help support asset owners in making sure their investments in banks are aligned with their sustainable investment practices and further help support their active engagement initiatives.  The metrics would also offer insights to regulators and policymakers by helping them measure and manage their supervisees’ impact on sustainability, at home and globally.

After presenting this research at numerous conferences, I realized that our work tends to trigger a common response amongst its critics: Why should investment banks care? After all, they are only intermediaries, they do not hold the assets on their balance sheet. Equally, why should an asset manager like BlackRock care? BlackRock does not own the assets and it does not hold them on its balance sheet either. Yet there is hardly a month that goes by without some headlines about BlackRock’s sustainability practices. Now, why is JP Morgan not treated the same way? Why is its investment banking division never mentioned in the media for facilitating access to capital to coal companies?

Ultimately, I think the incentive for banks is reputation. Banks need to care because they have to manage their image. One simple but important aspect of managing their image is to act and communicate consistently across operations. Large financial conglomerates are not going to be able to promote green investment funds to their high net worth clients while continuing to underwrite the debt of coal companies for much longer. Ultimately, stewardship could really pay off and a handful of banks could reap significant first mover advantages by spearheading stronger sustainable investment banking practices.


Dr. Michael Urban is a Research Associate in Finance and Geography at the Oxford University Centre for the Environment. This post builds upon his recent publication, co-authored with Professor Dariusz Wójcik: Urban, M.A.; Wójcik, D. Dirty Banking: Probing the Gap in Sustainable Finance. Sustainability 2019, 11, 1745. Available here.

 As mentioned, we are working hard to expand this line of research and are very interested in exchanging ideas, particularly with policymakers and practitioners (asset owners, asset managers and investment banks). Should you wish to engage on this topic with us, please, do not hesitate to get in touch directly at michael.urban@ouce.ox.ac.uk.

[1] Based on estimates from BIS data on total USD value of debt securities outstanding and estimates on the total equity securities traded on the world’s main stock exchanges.

[2] Assuming an industrial allocation matching that of the MSCI World Index.

[3] We follow the Sustainability Accounting Standards Board’s (SASB) definition of materiality: “sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry”

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