Earlier this year, the Go Fossil Free campaign, a project of campaign group 350.org, marked its latest milestone: investors managing more than $14trn had announced full or partial divestments from fossil fuels. Barely a month goes by without another bank setting policies that restrict lending to fossil fuel projects or companies. And even within the sector, some of the world’s largest extractive firms – whether oil majors such as BP, or miners like Rio Tinto and BHP – are shrinking, selling or shuttering their fossil fuel businesses.
And waiting in the wings, some campaigners fear, are sources of capital that are less amenable to public pressure, whether because they are privately held or from parts of the world with less well-developed climate activism.
“Some traditional sources of private capital are not open to business for these kinds of assets,” says Rory Sullivan, director of Chronos Sustainability, a UK-based consultancy. “But I am not sure there is evidence that companies wishing to fund coal [projects] are struggling to find investors.”
Johan Frijns, director of Netherlands-based BankTrack, says: “At the end of the day, that is the crucial question.” There is likely to be a time lag between the introduction of bank policies and the flow of finance, he suggests. “We will be happy when we see a real decline, in real terms, and banks reduce their exposure to the sector.”
In the meantime, bank exclusion policies are riddled with holes, some campaigners argue, not least that many focus on project financing, while continuing to allow lending to the corporate entity. Netherlands-based Rabobank scores a ’10’ from campaign group Real Finance’s Coal Policy Tool assessment for its project-level exclusions, but it only gets a zero on categories relating to companies developing new projects or to setting thresholds on corporate revenues from coal mining or coal-fired power.
Similarly, many of these thresholds are relatively high, campaigners say, allowing banks to continue to lend to companies that derive large proportions of revenue from fossil fuels. Barclays has pledged not to lend to mining and power companies that currently derive more than 50% of their revenue from thermal coal, but this commitment would not stop the bank financing diversified groups.
According to a report from the Europe Beyond Coal campaign, utilities Fortum/Uniper and Enel – some of the largest carbon emitters in the EU – state the share of revenues they derive from coal is 2–4%.
“We are seeing banks do more of the good, such as environmental finance commitments,” says Veena Ramani, senior programme director, capital market systems at Ceres, a US-based investor coalition. “That is great, but we are not seeing less of the bad. Lending to the fossil fuel sector is continuing to rise.”
However, looking at overall bank lending can hide real progress in some parts of the world, argues James Vaccaro, sustainable banking veteran and executive director of the consultancy RePattern. He cites South Africa, where Standard Bank and First Rand have introduced policies restricting their lending to the sector (while not pulling out altogether). Developers “are struggling to get financing packages together, it is pushing up the cost of capital, and the financial models start to break”, he says.
Grieg Aitken, finance research analyst at campaign group Global Energy Monitor, makes a similar argument. He points to a number of industry statements acknowledging the challenges faced by some companies and developments.
“Eighty-five per cent of the [bank] market now don’t want to finance coal power plants,” said Dharma Djojonegoro, CEO of Indonesia’s PT Adaro Power, last year, with Japanese and Singaporean banks following their European peers, forcing the company to look to the Chinese market. A total of 72% of coal-fired plants under construction outside China rely on Chinese funding, shows data from Refinitiv.
These policies are “making life really difficult if you are in the coal industry”, agrees a senior natural resources banker at a major European institution. They have real teeth and give environmental risk teams within banks the power to block deals, he argues.
Frijns at BankTrack also points to successes in discouraging bank lending to some of the most carbon-intensive extraction, such as Canada’s tar sands, or to environmentally risky activities such as Arctic oil and gas exploration.
“We are achieving victories, but it’s nowhere near where I want it to be,” he says.
The bigger picture
Tom Sanzillo, director of finance at the US-based Institute for Energy Economics and Financial Analysis, argues that focusing solely on bank lending is missing the bigger picture – namely of a fossil fuel industry that has been shrinking dramatically over recent decades. In 1980, the oil and gas sector made up 29% of the value of the S&P 500 equity index: today, it is 2.3%, he says. “That is a massive destruction of shareholder value and a massive flight of institutional investors from the oil and gas sector.”
Sanzillo sees industry under enormous pressure from oversupply and a secular shrinkage in demand, as the once-iron link between GDP and energy use breaks, the global economy shifts from manufacturing to information technology, and as renewables, electric vehicles and plastics recycling eat away at demand. Meanwhile, a multipronged climate movement has helped to raise political and regulatory barriers to the sector’s expansion, and has fed public aversion to fossil fuels, as well as exert pressure on banks and investors.
Sanzillo describes the transformation in the US where, a little over ten years ago, the banking sector was poised to provide some $500bn in funding to expand the coal fleet to meet demand from utilities – with the blessing of public utility commissions.
“They walked away from all of them,” he says. “That is a very good example of divestment.”
He adds: “Yes, banking institutions are still making the stupidest loans they could possibly make. It is too slow. The pressure needs to be stepped up, but the progress has been pretty substantial and it has been relatively fast.”
Despite this success, there are good reasons for continuing to exert pressure on the banking sector, given its wider significance, says Vaccaro.
“Banks are not like other investments… they are too big to fail,” he says.
A national banking sector heavily exposed to fossil fuels will act as a major obstacle to a government implementing aggressive decarbonisation policies, he argues.
“It is just political calculus: if it is some anonymous foreign hedge fund taking the hit, they won’t care.”
Aitken says: “I think private sector finance can drive change, but the issue is how ‘activisty’ banks will choose to get.” He believes that, with few exceptions, they will avoid taking a stand on the issue. “The Citi CEO’s sentiments here are standard,” says Aitken, referring to an article by Michael Corbat, CEO of Citi, arguing against divesting from the fossil industry in favour of working with the sector to promote a low-carbon transition that is “dictated by government policy”.
Bank shareholders and their prudential regulators need to take a more holistic view of climate risk, says Vaccaro. Referring to the disclosures recommended by the Task Force on Climate-related Financial Disclosures (TCFD), he argues that “the TCFD doesn’t care about banks’ impact on the climate: it is concerned with their financial loss from either physical climate risk… or from the transition, from the inevitable policy response”, says Vaccaro. “Alongside that, we need to be able to ask how much carbon [a bank] has on its books.”
He continues: “Economists in central banks are not looking at the macro-systemic issues, and therefore they aren’t regulating climate impacts.” Central banks should consider using capital requirements to force the financial institutions they oversee to hold greater financial buffers against carbon-intensive lending, he suggests – a measure that would both provide a hedge against systemic climate risk while also making it more expensive for the sector to raise capital.
Aitken agrees: “It is going to take regulation and/or much stronger instructing from central banks to push things at the required faster pace. We have seen this in France in the last few years, which explains why the major French banks are more advanced than most on coal, and a little bit further down the road than most with the introduction of some gas finance restrictions.”
Current levels of bank lending to the fossil fuel sector is based on a failure of banks and regulators, particularly in the US, to address the systemic risks posed by climate change, agrees Ramani at Ceres. She praises a recent report from the US Commodity Futures Trading Commission, which stated explicitly that climate change poses “a major risk to the stability of the US financial system”. However, she believes financial regulators in the US and elsewhere need to move faster.
“Banking regulators should… continuously be paying attention to the robustness with which these banks are addressing climate change in their risk management,” she says, citing recommendations from a recent Ceres report.
Incentives and economics
More positively, banks and investors are encouraging companies to develop transition strategies and are providing capital for investments in renewables. Here, too, it is regulation and technological advance, rather than environmental concerns, that has provided the spur to action.
“It is a case of investors following incentives, including the price of technology and the regulatory and support regimes that allow those technologies to compete,” says Sullivan at Chronos.
“When the incentives are right and the economics are right, then capital will go in the right direction,” he says.
Kingsmill Bond, energy strategist at Carbon Tracker, a financial think tank, argues this shift is well under way. He points to analysis from the International Energy Agency on the relative cost of capital for leading oil and gas companies compared with the top power companies by renewable energy ownership.
“The answer is technology change… People will exit the incumbents because they are losing money,” he says.
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