At the end of October, just ahead of the COP27 climate conference, Lloyds Banking Group – the UK’s biggest domestic bank – announced it would no longer finance new oil and gas fields. For those not working in financial services, this might seem like common sense: the net-zero commitment that more than 90% of the world’s economy is theoretically committed to should mean a rapid wind down of the fossil fuel industry. It also came more than a year after the International Energy Agency’s (IEA) announcement that there is no room for new oil and gas fields beyond 2021 for a 50% chance of reaching net zero by 2050.
Yet Lloyds’ pledge made it the first UK bank to commit to no new greenfield oil and gas project financing, and even then, the pledge is imperfect: project-level financing is only a fraction of the financing provided by banks to new oil and gas, with more significant flows being sent directly to the energy company. According to the IEA, 90% of energy investments are financed directly from the balance sheets of companies.
But even with this major hole in its exclusion policy, Lloyds’ policy puts the bank in the top 10% of banks for oil and gas exclusion policies, shows Energy Monitor’s analysis of the Oil and Gas Policy Tracker, which is compiled by the NGO Reclaim Finance.
“Even if a bank like Lloyds continues to direct corporate finance towards fossil fuel companies, the new exclusion policy is still significant,” says Jeanne Martin from the responsible investment non-profit ShareAction, which has engaged with Lloyds on the subject of oil and gas investment for a number of years.
“It demonstrates that banks are paying attention to things like the IEA net-zero report,” Martin adds. “It also sends a big market signal that banks’ appetites to finance this kind of activity is reducing, which in turn will send a signal to the companies building and operating fossil fuel assets that they might struggle to find financing in the future.”
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As things stand, French state-owned group La Banque Postale (LBP) is the only major bank in the world to have committed to ending all collaboration with the oil and gas sector by 2030, including both corporate and project-level financing.
However, LBP and Lloyds are not major players in oil and gas financing. They respectively provided $200m (€189.98m) and $1.3bn (£1.06bn) in financing in 2021, figures dwarfed by the $61.7bn provided by US bank JP Morgan. Of the banks that provided $10bn or more in oil and gas financing in 2021, only three have relatively comprehensive oil and gas exclusion policies: Dutch bank ING ($10.8bn) and French banks BNP Paribas ($14.7bn) and Credit Agricole ($9.9bn).
ING’s policy excludes financial assistance to new oil and gas projects, but has no policy of restricting corporate finance to energy companies. Credit Agricole excludes financial assistance to certain unconventional oil and gas projects but continues to provide financing to conventional projects, as well as corporate finance to energy companies. BNP Paribas, meanwhile, excludes financial assistance to certain unconventional oil and gas projects, and excludes financing to companies where oil and gas expansion accounts for more than 25% of global resources under development.
The two largest European backers of oil and gas – British banks Barclays and HSBC – have only very limited financing restrictions to certain unconventional oil and gas sectors, with their policies both only scoring 1/30 according to Reclaim Finance’s metrics (compared with 28/30 for LBP).
“The majority of financial institutions do not have any exclusion policies for oil and gas,” says Maude Lentilhac, from Reclaim Finance.
Even among those that do, Energy Monitor’s analysis of Reclaim Finance’s data shows that just 6% of banks have any kind of exclusion policy for conventional oil and gas, and just 13% have any kind of exclusion policy for corporate financing of fossil fuel companies.
Saurabh Trivedi, research analyst with the Institute for Energy Economics and Financial Analysis, adds that there is currently “no formal scrutiny” on financial institutions to ensure that their policies stand up in practice.
An example of this lack of scrutiny can be found in the Net Zero Banking Alliance (NZBA), a consortium of 122 global banks with $72trn in assets. It was founded in 2021 as a commitment to align lending and investment portfolios with net-zero emissions by 2050. Yet, as of November 2022, only 50% of the member banks have released their decarbonisation targets, and most NZBA members have set climate targets that “fall short of what’s needed to prevent the worst impacts of climate crisis”, says ShareAction.
Private finance is crucial
Achieving net zero by mid-century will require a rapid wind down of the global fossil fuel industry. For this to happen, several different fronts in the fossil fuel ecosystem must be targeted.
One is consumer demand, which is what many oil and gas-producing companies and countries advocate. If demand for oil and gas falls, then the market would be flooded with oil and gas. Prices would fall, and the whole industry would undergo accelerated decline. For this to take place, new clean energy systems and technologies like electric vehicles will need to gain a greater foothold. Policies like the EU’s 2035 ban on combustion engines in cars will help drive this transition.
Then there are the oil and gas companies themselves, which can adopt energy transition strategies to diversify away from fossil fuels. While many Western oil majors – at least on paper – have net-zero pledges, in general, the industry is moving in the opposite direction. The world’s oil and gas companies are on a massive expansion course, investing $160bn into exploration between 2020 and 2022, according to the latest Oil and Gas Exit List from the German think tank Urgewald.
Public finance streams are also an important target, and particularly so for big new extraction projects or midstream facilities in developing countries, where banks may be wary of the risks involved with directing private finance alone. This is because public finance is often given at lower rates of return and with lower interest rates, and boosts investor confidence, even in riskier projects.
Private finance, though, is a crucial part of the conversation in all these different areas, whether in providing the bulk of the capital for new extraction projects, or by indicating to policymakers that it makes economic sense to plan for continued fossil fuel demand in the coming years.
“Banks tend to provide the majority of fresh financing to large oil and gas companies, which is why we think they are a really important industry to tackle,” says ShareAction’s Martin. “Without banks, businesses are not able to continue operating and expanding in fossil fuels.” Indeed, when the UK announced earlier in 2022 that it wanted to boost oil and gas production in the North Sea as part of its energy security strategy, the Treasury launched a charm offensive to encourage banks to fund new extraction from discovered oil fields, reported the Telegraph.
Reclaim Finance’s Lentilhac agrees that private finance is a “critical lever” in the fight against climate change. The 2022 Banking On Climate Chaos report from the Rainforest Action Network (RAN) indicates just how powerful this lever is, with the world’s 60 largest banks financing $4.6trn in the six years that followed adoption of the Paris Agreement in 2015. Some $742bn in 2021 alone, with the overall figure for that year $20bn greater than in 2016.
The report shows that JP Morgan, Citi, Wells Fargo and Bank of America – which all score 1/30 under Reclaim Finance’s oil and gas exclusion metrics – were the most active supporters of fossil fuel companies in 2021. Together, they account for one-quarter of all financing identified over the past six years.
Reclaim Finance’s Oil and Gas Policy Tracker suggests that nearly 50% of banks have some kind of unconventional oil and gas financing exclusion policy. Yet RAN’s report shows how much further these policies need to go, given that unconventional oil and gas funding was higher in 2021 than in 2016, when the vast majority of the policies in question did not yet exist.
Lessons from the coal sector
Current high oil and gas prices have meant 2022 market conditions for the oil and gas sector have been rosy, with many oil majors reporting bumper profits this year. Glacial progress on mitigation at COP27 also indicates that many policymakers are not as motivated to address ever-increasing fossil fuel consumption as many climate scientists suggest they should be.
Yet evidence from the previous two pandemic years – when commodity prices were low, and the global climate conversation was focused on ‘building back better’ – shows that when financial institutions turn their backs on fossil fuels, real impacts are felt.
In 2020, Reuters was reporting how financing for coal projects was “drying up at ever increasing rates”, worrying delegates at Asia’s largest coal conference about the prospects for their industry. The impacts of this trend were seen in practice when Adani Enterprises’ plans to develop Australia’s controversial Carmichael mine collapsed after the project failed to obtain financial backing.
“In the coal industry, when banks began committing to stop directly financing new mines, it proved to be extremely powerful, as it signalled that they had less appetite to finance this kind of activity going forward,” says ShareAction’s Martin. “There continues to be a lot of anecdotal evidence from big core giants struggling to find fresh financing to finance new assets.”
The success of high-profile initiatives like the Powering Past Coal Alliance, as well as the inclusion of a pledge to “phase down” coal power in both the COP26 and COP27 cover texts, shows this is an industry considered to be in decline by both policymakers and financiers. The hope for campaigners like Martin is that policies announced by the likes of Lloyds Bank will mean a similar policy-financing nexus can soon emerge around oil and gas.