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Why We Need the Fossil Free Finance Act

On March 30, 2023, Senator Ed Markey and Representatives Ayanna Pressley and Rashida Tlaib reintroduced the Fossil Free Finance Act in the 118th Congress. The bill requires the Federal Reserve (Fed) to address the systemic risk that climate change and the energy transition present to our financial system. Under the legislation, the Fed would need to mandate that the biggest banks stop financing the climate crisis and instead lend and invest responsibly, in line with science-based emissions targets that would keep global warming within 1.5°C. That’s the threshold that the Intergovernmental Panel on Climate Change has defined as necessary to avoid the worst impacts of the climate crisis.

Why is this bill important? 

The Fossil Free Finance Act is a critical tool for directing the Federal Reserve to do its job and protect the financial system from climate risk. Since the initial introduction of the Fossil Free Finance Act in the 117th Congress, U.S. financial regulators have acknowledged that climate change and the energy transition are an emerging risk to the financial system. The physical impacts of climate change threaten the value of the mortgages and businesses that secure most bank loans. Yet, even as efforts to address the climate crisis accelerate in the U.S. and globally, banks continue to pour hundreds of billions of dollars into financing fossil fuel assets that may soon become obsolete and non-performing. As the Inflation Reduction Act’s green financing provisions and aligned state laws bolster the transition, fossil fuel volatility will only worsen, posing new risks to the banks that finance the industry.

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation, have all proposed guidance on how banks with more than $100 billion in assets should manage their climate risks. Unfortunately, the regulators have dragged their heels on taking the action needed to actually make sure that banks address these risks. Eighteen months after identifying climate change as a financial risk, none of the federal banking regulators have actually required banks to act in ways that reduce their risks. The sudden collapse of Silicon Valley Bank shows how a lagging regulatory response can threaten the safety of individual banks and have negative implications for the whole financial system. The risks posed by banks failing to adapt to the energy transition are similar: sudden revaluations of assets, collapsing deposit bases, and general lack of oversight and controls. As climate change worsens and the energy transition accelerates, these risks will only grow unless they are proactively addressed.

Congress is now considering options for making regulators actually discharge their mandates. Failure to make sure that regulators adequately address climate risk will increase the chance of a new crisis. The Fossil Free Finance Act would remove discretion from the regulators hands and make sure they do what is necessary to address the risks that banks face, and the risks they pose to the financial system.

What does this bill do?

This bill requires the Fed to use its existing regulatory authorities to protect individual banks and the financial system, which the Fed is tasked with overseeing, by reducing the amount of exposure that banks have to risky activities that produce greenhouse gas emissions. 

Net Zero Plans for Biggest Banks: The Fed would do this by requiring the largest banks, those with more than $50 billion in assets, to submit and follow a plan for achieving zero financed emissions by 2050. That’s a key target that governments and private actors are increasingly pursuing in order to protect people from the most devastating impacts of the climate crisis.  

Financed emissions are the greenhouse gas emissions produced by a bank’s clients as a result of the bank’s lending, investment or other support. Adopting and following emissions reduction plans will keep banks from taking undue risks to squeeze a few last quarters of profits out of high emissions assets that will become prematurely worthless as the world transitions to a low carbon future.

Milestones: To avoid a fire sale from banks trying to meet their financed emissions reduction obligations at the last minute, the plans would need to include certain intermediate milestones, including: 

  • No financing of new or expanded fossil fuel projects within sixty days of enactment
  • No financing for thermal coal projects or companies after 2024
  • No financing of any fossil fuel projects after 2030
  • A 50% reduction in the bank’s financed emissions by 2030

Environmental Justice: The bill also mandates that the Fed require the plans to account for the needs of the communities who are suffering the most from environmental racism. It limits the use of false or unproven solutions, like carbon offsets or carbon capture and sequestration technology. The plans must also prioritize removing funding from projects that cause disproportionate harm to vulnerable communities, as well as providing financing for companies to help workers affected by the transition to a low carbon future.

Penalties: Updated plans must be submitted every two years. If banks do not submit plans that meet the law’s requirements, or fail to follow the plans they submit, the Federal Reserve is instructed to fine the bank and its executives and to require the bank to sell assets to bring its business in line with the plan’s requirements. 

Shadow banks: The bill also adds financed emissions as a criterion for subjecting large, nonbank financial companies, like insurers, private equity funds, and asset managers, to enhanced oversight by the Fed. These entities, commonly known as “shadow banks”, are often lightly regulated, contributing to the 2008 financial crash. The designation process was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to help close this regulatory gap. By adding financed emissions as a consideration, the bill makes sure that non-bank financial institutions cannot just take over risky high-emissions finance from Wall Street megabanks.

Reports: To help with Congressional oversight, the Fed is required to report on its progress toward achieving the bill’s goals every two years. It’s also required to analyze the impact of the transition on workers and communities, and recommend ways that either the Fed or Congress can cushion that transition.

Support: This bill is endorsed by almost 70 organizations including Public Citizen, 350.org, Americans for Financial Reform, Evergreen Action, Friends of the Earth, Giniw Collective, Greenpeace USA, Hip Hop Caucus, Positive Money US, Rainforest Action Network, Seeding Sovereignty, Sierra Club, STAND.earth, Third Act, US. PIRG, Zero Hour and many state and local groups. A full list of endorsing groups is available below.


Why does the Federal Reserve have a role in addressing the climate crisis? 

The Federal Reserve has an important mandate for addressing the financial risks created by climate change and the energy transition. The Federal Reserve is the only U.S. banking regulator with a full picture of Wall Street megabank operations. That role makes it the most important regulator when it comes to preventing financial crises. Its job is to protect the economy from excessive, unsafe risk-taking by these megabanks, and designated shadow banks. 

Does this bill change the Federal Reserve’s mandate or give it new powers?

No. The Federal Reserve could implement the requirements in this bill based on its current mandates to oversee bank safety and soundness and mitigate risks to financial stability. Banking regulators have long had the authority to limit concentrations of credit exposure and require banks to transition away from unsafe lending practices. This bill directs the Fed to use those powers to address the risk that financing emissions poses to individual banks and the financial system. 

Indeed, the Federal Reserve’s Principles for Climate-Related Financial Risk Management for Large Financial Institutions recognize the financial and risk management role that climate commitments play. The Federal Reserve already expects banks that make climate commitments to keep them consistent with their internal strategies and risk management frameworks. 

How can banks and the Federal Reserve measure and reduce financed emissions?

Many banks have already committed to reach net-zero financed emissions by 2050, including Wall Street megabanks like Bank of America, Citi, and Morgan Stanley. The most popular method for measuring emissions, endorsed by these three institutions, is the Partnership for Carbon Accounting Financials, with over 150 members. The Securities and Exchange Commission’s proposed climate disclosure rule would also require publicly trade companies, which includes numerous Wall Street megabanks, to calculate and disclose their financed emissions. 

Why does this bill only cover the largest banks?

This bill uses $50 billion in assets as a threshold because that is what Dodd-Frank used for defining a bank big enough to potentially pose a risk to the entire financial system. Failure of a bank like this is much more dangerous for the financial system and requires additional safeguards like the ones required in this bill. Although a 2018 law raised that threshold to $250 billion, recent developments with Silicon Valley Bank show that this decision was ill-considered and increased the risk faced by banks in the $50 billion to $250 billion range, as well as the entire financial system.

Can smaller banks and shadow banks (e.g., insurance companies, private equity funds and asset managers) start financing emissions to pick up slack from megabanks?

The four largest Wall Street megabanks, all overseen by the Fed, financed nearly a trillion dollars in fossil fuel production in 2020. Only these banks have the scale and sophistication to back the largest, most dangerous fossil fuel projects. Their size also lets them offer lower costs and a broader range of services, making more risky projects viable. Smaller banks might fund some of the projects that megabanks would have to refuse under this legislation, but they would not be able to grow fast enough to absorb all of the financing provided today. Any that did would likely become subject to the provisions of the FFFA, putting a cap on their ability to take on risks and threaten the broader economy.

Shadow banks are bigger, but they still will not fill the financing gap left by megabanks. They don’t have access to cheap financing in the form of deposits, making credit from them more expensive. The riskiest nonbank financial companies, such as private equity firms, also use loans from large banks to improve the returns of their deals, which this bill would deny them, making many high emissions projects unattractive. Large investment banks would also be unable to underwrite or otherwise facilitate financing transactions for nonbank financial companies engaged in emissions financing, a role these large banks often play. 

For shadow banks that would still choose to finance large-scale emissions, this bill’s designation criteria will serve as a deterrent and backstop. Shadow banks have resisted designation and have even broken up their operations to avoid it, so it’s unlikely they will increase emissions in a way that makes designation more likely. And shadow banks that do trigger designation as a result of their financed emissions will need to make emission reduction plans similar to those of megabanks.   

How will changing the availability of bank financing affect fossil fuel production and other high emissions projects?

While it’s true that profitable fossil fuel projects will continue to draw investment, losing bank financing will have a significant impact at the margins. Even before the COVID crisis induced a Federal Reserve bailout of the industry, most fossil fuel companies were unprofitable, relying on debt financing to keep the pumps running. By shrinking the pool of available credit, the bill would eliminate many of these loser companies. Meanwhile, small banks and shadow banks will also require higher returns for even the portion of investment they can absorb, especially when they cannot rely on megabanks to provide a backstop or cheap leverage. This higher cost of financing will limit much of the risky fossil fuel expansion we see today. 

What impact would this bill have on communities who are economically tied today to fossil fuel production? 

The clean energy transition is already underway. As it continues, tens of thousands of fossil fuel industry workers will need to find new employment with the clean energy sector or elsewhere in the economy. The Inflation Reduction Act recognizes that further clean energy investment will accelerate this trend, and provides funding to help affected communities transition. Funding that transition will be harder if the trend away from fossil fuel sector jobs is compounded by additional hardships from a financial shock like the 2008 crisis, which would shrink the economy and increase unemployment. This bill limits the danger of this worst-case scenario by keeping the pace of the transition on a science-based trajectory. The bill also provides benefits to help cushion the transition for communities and workers tied to the fossil fuel industry, both by encouraging banks to finance activities that smooth the transition for these communities, and by using its own lending powers to help states and municipalities finance a just transition.

Full List of Endorsing Organizations

198 Methods


350 Conejo San Fernando Valley

350 Hawaii

350 Minnesota

350 New Jersey/Rockland

350 New York City

350 Santa Fe

350 Wisconsin

Americans for Financial Reform

Bold Alliance

Cascadia Climate Action Now

California Reinvestment Coalition

Center for Oil and Gas Organizing

Climate Families NYC

Climate First!, Inc. 

Climate Hawks Vote

Climate Organization Hub

Coast Range Association

Coastside Jewish Community

Dayenu: A Jewish Call to Climate Action

Divest New Jersey

Earth Ethics, Inc.

Elders Climate Action

Evergreen Action

Extinction Rebellion San Francisco Bay Area

Fossil Free California

Fridays for Future Digital

Fridays for Future US

Friends of the Earth

Giniw Collective

Global Witness

Green America

Greenpeace USA

Hip Hop Caucus

Lakota People’s Law Project

Mazaska Talks

Mid-Ohio Valley Climate Action

New Mexico Climate Justice


Oil and Gas Action Network

Oil Change International

One Earth Sangha

Port Arthur Community Action Network

Positive Money US

Public Citizen

Rainforest Action Network

Resilient Palisades

Rise and Resist Environmental Group

Rivers & Mountains GreenFaith

Seeding Sovereignty

Sierra Club


Texas Campaign for the Environment

The Romero Institute

The YEARS Project

Third Act

Third Act Virginia

Turtle Island Restoration Network


Zero Hour