Secretive tax havens allow fossil fuel financing to be hidden so bank exposures are unreported, says Franziska Mager of the Tax Justice Network.
Climate transition risks – where fossil reserves and assets rapidly lose value in the switch to a low-carbon economy – pose significant threats to financial stability, and central banks must prepare for the disruptive effects these changes can have.
But there is a looming threat that often slips under the radar: “greenlaundering.” This practice allows banks and possibly other financiers to mask their continued backing of fossil fuel companies, even as they tout their green credentials. The risk is not just environmental: greenlaundering conceals systemic financial dangers that central banks cannot afford to ignore.
Unveiling hidden fossil fuel financing
Our recent report, based on painstaking research and data compiled by a coalition of climate justice organisations, lays bare a glaring mismatch between the fossil fuel finance issued by major banks and banks’ fossil fuel exposure according to climate and sustainability reports.
Financial secrecy not only continues to enable money laundering, drug trafficking and human rights’ abuses. We show that below the surface of climate targets and exclusion policies there is a vast, largely untraceable flow of finance circulating through fossil fuel company subsidiaries and ventures in secrecy jurisdictions, a type of tax haven characterised by laws and structures that promote secrecy for companies and individuals. Financial regulators cannot fully appraise the direction, role and ultimate use of this financing, which presents a major risk to financial stability.
Regulators need to improve their grip on the weaponising of secrecy by fossil fuel companies and banks’ feigned ignorance over the practice of structuring fossil fuel business through secretive subsidiaries and offshoots.
According to our research, jurisdictions known for financial secrecy disproportionately attract fossil fuel investments beyond what is in line with the size and type of their economy. Overall, we found that over two-thirds of the fossil fuel financing provided by the world’s 60 largest banks is granted to subsidiaries in secrecy jurisdictions.
Regulators need to improve their grip on the weaponising of secrecy by fossil fuel companies and banks’ feigned ignorance over the practice of structuring fossil fuel business through secretive subsidiaries and offshoots.
Greenlaundering in practice
Take, for example, the cases of Glencore and Aramco, both companies with fossil fuel assets. When we tried to uncover the role of the subsidiaries of these companies that have received bank financing, we kept hitting closed doors wherever we turned. We describe this as a “hall of mirrors”, which makes it nearly impossible for the public or regulators to identify all subsidiaries that are relevant to the companies’ financing structures.
Even when a subsidiary can be linked to a fossil fuel company, its location in a secrecy jurisdiction makes it difficult or even impossible to obtain information about the firm’s owners or financial situation. This is a concerning pattern for anyone trying to assess the financial health of a fossil fuel multinational.
Banks, on the other hand, play dumb. By way of example, in 2022 BNP Paribas promised to restrict support for energy companies involved in the Arctic. And yet in 2023 it extended a US$300mn credit line to Norway-based company Aker Solutions.
Aker Solutions is a subsidiary of the conglomerate Aker ASA, another subsidiary of which, Aker BP, is heavily involved in Arctic oil production which accounts for 13% of its total oil production. Other examples abound, and the Bureau of Investigative Journalists recently revealed how Citigroup helped raise $3.5bn for the UAE’s state oil company without affecting the bank’s official climate targets.
Loopholes in reporting regulations
Banks and corporations can exclude entire subsidiaries or shift funds through complex internal markets so that various types of fossil fuel financing never make it into official reports. No intentional obfuscation or misleading can be substantiated on a case-by-case basis, and banks’ stated fossil fuel exclusion policies still hold – on the surface at least.
Lacking transparency standards and differences in emerging regulatory frameworks between regions create a fertile ground for greenlaundering to thrive.
As we detail in our report, fossil fuel finance can easily escape existing exclusion policies, masking the true extent of banks’ fossil fuel exposure and thus scope 3 emissions, those which banks are not directly responsible for but produced along the value chain – in this case, financing and investment in fossil fuel companies.
Lacking transparency standards and differences in emerging regulatory frameworks between regions create a fertile ground for greenlaundering to thrive. Regulation meant to enhance transparency is insufficient and unstandardised. For example, the EU’s corporate sustainability reporting directive (CSRD), designed to prompt companies to disclose their environmental impact, is not designed to take on the role of internal capital markets and subsidiary activities. As a result, it can easily be flouted.
Central banks and regulators need to require detailed reporting on all fossil fuel financing, including subsidiaries and indirect funding channels, and exert increased pressure on banks’ self-stated exclusion policies. Once the full scope of fossil fuel financing is uncovered, they must implement stricter regulations to prevent greenlaundering. This will involve closing loopholes, improving transparency and holding financial institutions accountable for their entire portfolio, not just the parts they choose to disclose.
Inaction is not an option. As greenwashing evolves into greenlaundering, it threatens both the stability of the financial system and the global fight against climate change. It’s up to central banks to avoid the risks lurking beneath the surface.
