In a letter ahead of the G20 summit, experts from organisations including Finance Watch, the European Federation of Ethical and Alternative Banks and Financiers (FEBEA), and the Association of Ethical Shareholders Germany warned that “the climate crisis is creating a feedback loop where financial institutions are financing activities that are accelerating irreversible climate change. This in turn increases their exposure to climate-induced financial crises.”

The publication of the letter comes after former bank of England governor Mark Carney, who currently acts as co-chair of a group of financial firms that has pledged to tackle climate change, was lambasted by the United Nations for dropping out of an initiative that mandates the phasing out of fossil fuels.

Carney cites anti-trust concerns for the decision, which comes as an energy crisis and a changing political landscape in the US make it harder for banks and investors to turn their backs on fossil fuels.

A recent report by Finance Watch found that the 60 largest global banks have around $1.35 trillion of exposures to fossil fuel assets that risk becoming stranded in the transition to a carbon-neutral economy, while top banks in the UK have around $97 billion of exposures to fossil fuel assets.

Julia Symon, head of research & advocacy at Finance Watch says: “We are calling on global policymakers to take a precautionary step to protect taxpayers from looming risks related to fossil fuel financing and the possible chain of failures in the financial industry. The losses will be inevitable as governments take steps to transition away from the fossil-based economy.”

The open letter, which has been signed by 129 individuals and 61 organisations, recommends that fossil fuel investments should be recognised as “high risk”, pointing out that “the current practice of not treating banks’ fossil fuel exposures as higher risk is effectively a subsidy to the fossil fuel industry”, which recent estimates reveal to be worth around $18 billion a year.

Daniel Sorrosal from the FEBEA comments: “The current financial instability is nothing compared to the financial catastrophe that will unfold when the fossil fuel sector collapses in the transition to net zero. Even the greenest of banks could be engulfed in the chaos. G20 countries have a responsibility to defuse this ticking time bomb, and safeguard the globe’s financial system.”

As greenwashing concerns mount, regulatory intervention is seen as a key policy tool to force banks to hasten their retreat from the fossil fuel industry. In a panel discussion at COP27 in Egypt, Carney said that policy makers should “align financial regulation with net zero” by making net zero transition plans mandatory.