How should banks embrace decarbonisation?
Following a recent assessment of UK banks’ climate transition plans, Net Zero Investor spoke with experts about the most appropriate path for banks looking to decarbonise.
Last year, HSBC, Barclays, Standard Chartered, Lloyds Banking Group and NatWest lent a combined $17.6bn to companies with large upstream oil and gas expansion plans, including ExxonMobil, Saudi Aramco and Shell, according to research by ShareAction.
All these banks were assessed as part of the Bank of England’s recent Climate Biennial Exploratory Scenario (CBES) report. Despite the large amounts lent to oil companies, the UK banks and insurers analysed were considered overall to be making “good progress in some aspects” of climate risk management.
Bill Blain, market strategist at Shard Capital and former head of debt capital markets at HSBC (the largest European bank funder of oil and gas expansion projects in 2021) explains the apparent contradiction of banks making net-zero commitments while also funding upcoming oil and gas projects.
He says: “Banks aren't lending to oil and gas firms because they're inherently evil. They're lending to these sectors of the economy because they're still important and we still need them. If you're strictly ESG-only investments, and you ban oil and gas tomorrow, what happens to the global economy?”
Shock to energy mix
The war in Ukraine, and its resulting shock to European energy supplies and subsequent inflation, is given by Blain as an example of what happens when oil and gas is suddenly pulled out of a market causing wider macroeconomic effects. He argues that an immediate withdrawal of bank financing of oil and gas would have a comparable impact.
There is consensus in the worlds of banking and finance that climate change is both real and action needs to be taken to abate it. But when it comes to combatting this, and how banks can play a role,
opinion differs on what the priorities should be.
For Silvia Merler, head of ESG & policy research at Algebris Investments, the phaseout of coal – the most polluting fossil fuel – is a clear starting point: “While having a significant footprint, conventional oil and gas are likely to remain a bridge fuel in the transition towards full decarbonisation, at least in the short term and more so considering recent geopolitical developments.”
Blain disputes even a complete phaseout of coal from bank financing, noting that metallurgical coal is essential to manufacturing steel, which in turn can be critical in the construction of renewables such as wind turbines.
Although policymakers argue that applying divestment would be beneficial, it might cause emissions to grow when there isn’t global solidarity and the appropriate transition plan.
Divestment vs. engagement
Banks exercising a total divestment from oil and gas firms would have severe, potentially unintended, impacts.
Siamak Soudani is an assistant professor in accounting and management control at ESCP Business School, and previously worked as a financial controller for oil and gas firms in the UAE. Of the consequences of a total divestment from banks on energy supply, he says: “Although policymakers argue that applying divestment would be beneficial, it might cause emissions to grow when there isn’t global solidarity and the appropriate transition plan, for example eliminating fossil fuel subsidies and putting a price on carbon.
“Divestment of energy supply, particularly from firms listed in the public stock exchanges, causes a short-term hit to their share prices and would disincentivise CEOs and other corporate leaders from financing higher-carbon assets. Additionally, divestment constricts capital from investing in new fossil fuel infrastructure by pushing up the cost of capital for oil and gas projects.”
The alternative to divestment from fossil fuel companies is engagement, with Soudani pointing out that in December 2020, ExxonMobil announced its carbon ambition of reducing the intensity of operated upstream greenhouse gas emissions by 15-20% over the next five years.
Banks may even need to be looking at the situation through a wider lens than merely carbon-emitting energy sources. This can involve discussing the issue and bringing together different perspectives through engagement.
Romain Miginiac, portfolio manager of GAM Sustainable Climate Bond fund and head of research at Atlanticomnium, says of engagement: “It should be the key focus for banks. This is not just about renewables, but more holistically about shifting their overall business models. Beyond renewables, this includes supporting low-carbon mobility, such as electric vehicle charging stations, sustainable fuels, or circular economy solutions for the petrochemical industry.
“Supporting clients through their transition and ramping up pressure on corporates to set credible, science-based net-zero pathways is paramount.”
The CBES report from the Bank of England found that a recurring theme across banks’ submissions was a “lack of data on many key factors” that banks need to understand to manage climate risks.
Of his own experiences with the data on decarbonisation and science-based targets, Blain says: “It's difficult to get information about exactly how an area such as renewables is performing, whether they're meeting their economic predictions, and it's extremely difficult to really compare different technologies with each other.”
