Are big banks moving from big oil?
With Lloyds the first major UK bank to announce a stop to investment in new oil and gas projects, Christopher Marchant examines if this marks the beginning of a momentous shift away from ‘‘brown' investment or is a mere anomaly.
In October this year, Lloyds Banking Group updated its policy to preclude making any further investments in new ‘greenfield’ oil and gas projects. This may be seen as a mark of progress as the role of banks in financing industries that are directly leading to climate change comes under increased scrutiny.
For all the merits of Lloyds’ decision, according to the Banking on Climate Chaos report, penned by a number of advocacy groups such as the Rainforest Action Network and Bank Track, Britain’s largest domestic bank invested $12.65bn in fossil fuels between 2016 and 2021. This placed it behind dozens of private banks that have put in far more (JP Morgan Chase tops this table, having invested $382.4bn in fossil fuels during this time period).
Tony Burdon, chief executive of Make My Money Matter, an advocacy group for greater ESG-friendly pensions investments, explains there is still potential impact of such a move by Lloyds: “Banks have a deep relationship with oil and gas companies and they have done for decades. With this relationship, they can try to help oil and gas companies to stop expanding further oil and gas provision, while helping those companies align to a 1.5°C transition pathway based on proper science.”
However, Lloyds remains in the minority of large banks worldwide to make such a pledge, and such oil and gas investments already only represent 0.2% of its current overall lending. Burdon expresses hope that NatWest will follow in the footsteps of Lloyds and make a similar announcement, with the bank acting as a sponsor of the COP26 climate summit last year.
However, he also believes that HSBC and Barclays are “too wedded” to the oil and gas industry to make such a move in the immediate future, having invested $130.4bn and $166.7bn respectively into fossil fuels from 2016-2021, according to the Banking on Climate Chaos report.
A potential necessity of oil and gas exploration
In the International Energy Agency’s (IEA) 2021 ‘Net Zero by 2050’ report, the IEA claimed that there is no need for investment in new fossil fuel supply in a net-zero pathway, a viewpoint underpinning the actions taken by Lloyds and other private banks to cease funding such activities. However, according to Paul Jourdan, founder and fund manager at Amati Global Investors, this position is simply not the case.
“There is a much-repeated fallacy embedded in the proposition. Switching off supply without first providing adequate substitutes does not reduce that demand in any way. Rather it brings on an immediate crisis of unimaginable proportions, because every single aspect of our modern lives still depends on fossil fuels. Any route to net zero which envisages this as the solution will fail badly”, says Jourdan.
Meanwhile, for Katerina Kosmopoulou, partner at asset manager J Stern & Co, while believing that ultimately renewable energy from solar, wind, thermal and other sources will allow for sustainable, economic and dependable energy supply at scale, she argues that fossil fuels, natural gas in particular, will have to remain a key part of the energy mix going forward. As an example, she points to the inclusion of gas in the EU Taxonomy as a sustainable transition energy source.
Pulling out of carbon on the global stage
While Lloyds currently stands alone in the UK as a major financial institution saying no to oil and gas exploration investment, on the European continent there have been more of such developments. For instance, in France, Banque de Postal has committed to refraining from financing oil and gas energy projects. Looking further afield, in March 2021 Hong-Kong based insurer AIA committed to pulling out of all coal investments by 2028.
Netherlands-based ING Bank has for a number of years been seen to be leading the way on the decarbonisation agenda with its ‘Terra’ approach of aligning its loan portfolio with the climate goals of the Paris Agreement. Based on an IEA roadmap, the bank has set the goal of reducing funding to upstream oil and gas by 12% by 2025 and 19% by 2030 (compared to 2019 levels), and will no longer provide dedicated financing for oil and gas fields sanctioned after December 2021.
“Although banks have a relatively limited impact on climate with their own operations, they play an important role within society by facilitating payments, managing assets and financing economic activities. Particularly by making choices in the latter, banks can contribute to combating climate change”, says Michiel de Haan, global head of energy at ING.
Engagement vs divestment
Lloyds’ actions towards greenfield oil and gas developments represents divestment, or at the very least no new investments in the area. Such activities can have a clear world impact, and in August this year OPEC secretary general Haitham Al Ghais blamed a lack of greenfield investment in oil and gas for the high prices at the petrol pump.
Burdon of Make My Money Matter can also see the impacts of engagement, with pension funds that have significant percentage levels of investment in a firm such as Shell carrying the potential to have a “massive impact” on changing the direction of the oil and gas giant. He also points to an ideal in-between on the matter as the policies of Aviva Investors, which will engage with its investments for up to three years, then begin divestment if climate goals at that stage have still not been met.
Andres Casallas Ramirez, director of sustainable finance at carbon finance consultancy and project developer South Pole, is keen to avoid over simplification of the issue: “It is not a matter of either/or [engagement or divestment]. On the one hand, engagement may yield real economy decarbonisation if the assets are retired.
“However, many barriers remain, including lack of shareholder pressure, energy charter treaty, greenwashing, asset spin-offs etc. On the other hand, divestment can lead to assets ending up in the hands of private firms with limited levels of transparency and social license to operate.”