European banks are quietly continuing to tighten their oil and gas policies in significant ways, in contrast with the US where debate is raging about the acceptability of limits on fossil fuel financing. The latest example, following recent announcements by the UK’s HSBC and France’s Credit Agricole and BNP Paribas, is Danske Bank. Beyond existing exclusions on upstream oil and gas projects, the Danish bank will now exclude companies altogether that are engaging in oil and gas expansion in an effort to align with the International Energy Agency’s net-zero 2050 scenario, it says.
One Step Further
Danske Bank’s announcement is “a very important step” because it goes beyond just limiting oil and gas project finance, says nonprofit BankTrack’s Maaike Beenes. Danske is now going one step further and, beyond projects, will exclude oil and gas companies intending to “expand supply of oil and gas” from any form of long-term financing or refinancing, it states in its newly published Climate Action Plan. The only exceptions would be for those companies’ renewable energy or carbon capture and storage businesses, provided they are ring-fenced — which involves legal separation to make funds unavailable for other purposes.
The moves reinforce a milestone seen last year when the Netherlands’ ING set a “new normal” for banks, at least in Europe, when it decided to exclude all — and not only unconventional — upstream oil and gas projects. In less than a year, half of Europe’s largest banks took similar decisions, says activist shareholder ShareAction’s Xavier Lerin. While “mostly symbolic” because project finance only accounts for a small part of banks’ oil and gas business, these commitments “send a strong signal to markets and governments that banks are losing appetite for new oil and gas.”
“We’re now really hoping that like ING last year, Danske Bank will be the new example this year,” says Beenes. She expects that “quite a number” of European banks will follow suit and come out with new policies ahead of their shareholder meetings around April-May.
It is unclear whether the energy crisis and Ukraine war are affecting banks’ oil and gas policies, according to ShareAction’s Lydia Marsden. “For now, banks are still making new commitments to wind down oil and gas financing, and our banking survey published at the end of last year found that the number of banks announcing some form of restriction on direct financing of new oil and gas of any type had doubled in just eight months.”
Beenes, however, believes that the need to replace Russian gas in Europe may explain why several banks have set less stringent restrictions on gas upstream projects, and no explicit limits on midstream projects, which include the LNG value chain. But instead of increasing gas financing, this mostly means banks may not immediately decrease it, or not as fast as oil financing, she says. BNP Paribas, for example, announced it will cut upstream oil production commitments by 80% between now and 2030, versus only 30% for upstream gas commitments.
Banks, which tend to be short-term minded, are currently making good money on gas but “they also know that things are changing, and that this is going to happen quite quickly,” according to the Climate Bonds Initiative’s Sean Kidney. It explains why banks — and gas offtakers — are reluctant to get involved in long-term contracts beyond six to seven years, he points out. It may also explain why France’s Societe Generale, a big LNG financier, is sticking to its exclusion of new North American LNG projects decided early last year before the Ukraine war, nonprofit Reclaim Finance’s Lucie Pinson tells Energy Intelligence.
|FINANCING OIL AND GAS: RATINGS BY NGO RECLAIM FINANCE|
|(0 = weak transition policy; 10 = strong transition policy)|
|La Banque Postale||France||Oct’21||9||10||9|
|National Australia Bank||Australia||2022||4||0||0|
|Note: Ratings on international banks on their exclusion policies for: oil and gas projects, companies with oil and gas expansion plans and oil and gas phaseout commitments. Ratings range from 0 (no or extremely weak policy) to 10 (full exclusion of oil and gas, including oil- and gas-fired power plants). Ranking of 6 or more for projects indicates exclusion of all upstream projects. Situation as of end January 2023; date indicates most recent policy update. Source: Reclaim Finance|
In contrast to Europe, the US situation — which she calls an “almost complete standstill” — is “very worrying,” argues Beenes. “A couple of years ago, we were a bit concerned that the US banks were massively jumping on the net-zero wagon without adopting sectoral policies because it was pushing action too far into the future; now they are under so much political pressure that they seem to be afraid even on net-zero targets.”
The political landscape is much less polarized in the rest of the world but banks are generally moving “very slowly” outside of Europe, Pinson says. “The transition of the global banking system to a net-zero future is indeed a complicated and nuanced process,” says the Net-Zero Banking Alliance’s Adrienne Cleverly.
Pointing to Policy
The key to accelerating banks’ transition to net-zero is regulation, Kidney insists. “I’m a little bit tired of complaining about the banks. I’m more concerned about what governments are doing to ensure that regulations are biased strongly towards the kind of investments we need to make, and to kill the inherent structural support for fossil fuels in all our economies.” Trends, however, are encouraging, says Kidney. “We hit a milestone one year ago, in December, when the net revenues from sustainable business for the big global banks overtook the net revenues from fossil fuel business.”