Fossil fuel projects: loans and project financing

According to a recent study, since the adoption of the Paris Agreement in 2015 until the end of 2021, financing of the fossil fuel and related energy sectors by the 60 largest banks has reached $4.6 trillion. The world’s largest commercial banks, despite loud promises, continue to issue long-term loans and financing for fossil fuel projects, including the extraction and use of fossil fuels for energy purposes. Fortunately, these loans no longer make up a significant portion of their portfolios today.

Fortunately, these loans no longer make up a significant portion of their portfolios today. In this period, the scale of financial support for the coal, oil, gas and related energy sectors remained almost unchanged.

It was $723 billion in 2016 and $830 billion in 2019.

Subsequently, Financing fossil fuel projects has declined due to the pandemic, reaching a “modest” value of $742 billion last year.

Fossil fuel projects account for 8% of the largest banks’ loan portfolio

In 2021 alone, 60 banks provided more than $185 billion in loans to 100 companies in the fuel sector, including companies like Saudi Aramco and ExxonMobil. Particularly troubling is the fact that capital-intensive projects have been financed, coupled with high and above-average environmental damage.

The largest loan portfolios in this area belong to American, Canadian and Japanese banks.

At the same time, the International Energy Agency announced last May that it would limit global temperature rise to 1.5 degrees Celsius by 2050.

To achieve this goal, it is necessary to refrain from financing renewable projects based on fossil fuels. Moreover, in order to limit global warming, carbon dioxide emissions must start to decline after 2025.

A gradual decarbonization of investment at most banks seems feasible given the relatively low proportion of high-carbon loans in their loan portfolios. Reclaim Finance estimates their average share at 8% among 60 global banks. In the case of Morgan Stanley, this is only 4%. In fact, that’s over a hundred billion dollars feeding fossil fuel projects right now.

Among the largest financial markets in the world, only public companies in the UK had clear legal requirements in this regard. The annual reports of surveyed banks did not show much promotion of pro-environmental financial products such as green bonds, green transformation finance or related advisory services.

Evidence of the weak commitment of banks to climate protection is a careful analysis of their annual reports. Researchers from the University of Gothenburg analyzed the financing of fossil fuel projects in 2015-2019 by the ten banks most responsible for lending to such activities. In 2020 alone, these banks committed $426 billion to finance high-carbon projects.

Changes in credit policy of banks : current realities and trends

It seems that the real breakthrough came in 2021, when fossil fuel financing some banks, including Wells Fargo, Morgan Stanley and Citigroup, were lower in value ($74 billion) than loans and bonds related to pro-climate projects, Autonomous Research points out.

A change in the approach of some banks can be seen in 2020, when financial institutions such as JP Morgan Chase, MUFG or Barclays submitted declarations to achieve climate neutrality of their portfolios by 2050.

This policy has given the above-mentioned three financial institutions higher positions in the ESG (Environment, Social Responsibility, Corporate Governance) rating of non-financial factors in the MSCI index, becoming a kind of signal to investors about the positive impact of these companies on the environment.

In light of current trends, the implementation of the climate commitments made at the COP26 conference in Glasgow.

The goal of this alliance is to develop operational measures from 2030 to achieve climate neutrality of their investment portfolios by the middle of the 21st century. Wells Fargo has announced half a trillion dollars in funding for sustainable investment projects, and JP Morgan plans to commit $1 trillion by the end of this decade.

At the same time, less than 20% of the shareholders of these two banks and Citigroup agreed in April this year to adapt their investment policy to climate goals. The latter bank and HSBC continue to finance oil production in the Amazon, while Deutsche Bank and Credit Agricole have organized the issuance of bonds by companies that produce pipes for the construction of oil pipelines.

Fortunately, a growing number of small US banks are willing to redirect capital away from the traditional energy sector. According to Accenture research, 67% of financial institutions declare such intentions.

Most of these investments will have to be financed by banks.

Banks that support green transformation

In turn, the Dutch ING announced the termination of funding for new fossil fuel combustion projects, which does not mean further funding for other activities of companies that implement them. Other global banks are less ambitious, though perhaps more realistic, such as Barclays announcing a 15% cut in funding to gas, oil and coal producers, as well as producers of energy derived from these minerals.

From the list of the 60 most environmentally toxic banks presented in the Banking on Climate Chaos 2022 report, we can mention the French La Banque Postale, which intends to stop financing the exploitation of oil and gas by the end of the decade, and Credit Agricole and Nordea Bank, which aim to stop lending to coal projects by that time.

The mission to achieve climate neutrality of the loan portfolio as soon as possible in accordance with the goals of the Paris Agreements is carried out by the British fintech bank OakNorth.

Germany’s KfW Development Bank, which offers loans to companies in the steel industry.

However, there are legitimate fears that the recovery from the crisis after the pandemic and sanctions related to the situation in Ukraine will delay the fulfillment of the climate obligations of the global financial sector, including banks.

Germany’s KfW Development Bank also expected to support green transformation by financing major projects that demonstrate the potential for significant reductions in carbon emissions.

If you need funding for a major project, please contact Gatelink Capital LP at any time.

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