Earlier this month, Citi’s chief executive Jane Fraser said the bank might have to drop some clients if they don’t fit in with its climate targets. The message, sent at The Wall Street Journal’s CEO Council Summit, was basically “Green up or die.” If this sounds like arm-twisting, it’s because it is. On the other hand, it can equally successfully be argued this is a form of positive discrimination for the greater good. Whatever perspective one chooses, banks have their sights on the oil and gas business. At least officially.
In Europe, which is far ahead of the United States on green commitments and is trying to impose them on even less-willing businesses, the pressure is centralized. Faced with the threat of higher capital requirements if they keep serving polluting businesses, European lenders are raising prices for such businesses, denying their loan requests and, in some cases, directly dropping clients, Bloomberg reported recently, citing the director of the economic and risk analysts department at the European Banking Authority.
For the banks, it’s all about risk management. Lenders are being told by report after report that they risk losing a lot of money under this or that grave climate scenario. So they are managing the risk by cutting their exposure to businesses linked to the grave scenarios. Regulators are adding urgency to this drive, too. Just a month ago, the European Central Bank urged eurozone lenders to “urgently” update their climate change risk management plans following a review that revealed shortcomings, the Financial Times reported.
The Basel Committee also urged banks, not just in Europe, to prop up their defenses against pessimistic climate change scenarios even as banks begin to introduce climate change-related stress tests. A debate has begun about just how far regulators should go with regard to climate risk management. Still, so far, watchdogs have refused to punish banks lending to the oil and gas industry with higher capital charges. But it could be just a matter of time.
When Jane Fraser became chief executive of Citi, she pledged the bank would spend $1 trillion on financing the transition to a low-carbon economy. “At the end of the day, that will mean there are some choices as to which clients we will be serving and which ones we won’t be,” she said at the WSJ event. “One-size-fits-all won’t work for that.”
Meanwhile, the prices of all fossil fuels are rising because demand is rising. Coal plants in Germany, Bloomberg reported last month, are more profitable than gas plants because of the difference in prices.
“We’re starting to see again the familiar signs of conventional thermal power sources having to step in to fill the gap left by intermittent renewable generation,” Victory Hill Capital Advisors said in a note addressing the situation in the UK, as quoted by Bloomberg. “Should this trend continue into December and January, it is likely that power prices will again rise to seasonal highs as national grid calls on more gas and coal to meet demand.”
This is the hard reality that neither banks nor regulators would be willing to acknowledge in their public communications. Investors want ESG commitments. Banks want to make their investors happy, so they make ESG commitments, whatever the realities of the energy market. But they also keep doing business with the dirty industry, commitments and all.
Citi has issued more than $10 billion worth of bonds for the oil and gas industry since the start of the year, a Bloomberg calculation shows. It has also provided about $10 billion in loans to that industry. JP Morgan is even more unapologetic. The major has underwritten some $2.5 billion in bonds by companies, including Gazprom and Continental Resources, and that’s just in the several weeks since the bank joined the Glasgow Financial Alliance—an initiative aimed at making banks net-zero.
In total, Bloomberg reports, global banks have helped oil and gas companies issue some $250 billion in new debt since the start of the year—a figure that is in line with annual fossil fuel financing for the last five years. And to all those insisting that banks suffer for their fossil fuel lending behavior, Wall Street has a response that is hard to argue with.
“You can’t just walk away, because the world is still heavily reliant on fossil fuels for the vast majority of our energy demand,” Marisa Buchanan, global head of sustainability at JP Morgan said, as quoted by Bloomberg. “It is really important that our clients take steps to innovate and decarbonize, but we also need to bring capital to the table for the commercialization of those solutions.”
In other words, banks are not like the International Energy Agency, which is not a business and which can afford to call for the end of oil and gas investments only to then call for more investments in oil and gas a couple of months later when energy shortages bite. Banks must plan for the long term and mitigate risks they face in the best way they can. Pressure to green up will continue to grow on the oil and gas industry, that’s for sure. Yet, the client-dropping that European banks are being forced to perform might not spread as globally as its proponents would like.
By Irina Slav for Oilprice.com