No O&G Financing Would Be Road To Hell For America, Banks Say
Lenders can still finance new oil and gas development, but emissions goals mean the balance of their operations is shifting, banks claim.
When the chief executives of the big US banks were giving evidence to the House financial services committee earlier this month, the Democrat Rashida Tlaib asked if they had a policy of not providing financing for new oil and gas production. Jamie Dimon, CEO of JPMorgan Chase, said: “Absolutely not. And that would be the road to Hell for America.” Tlaib hit back by calling JPMorgan Chase customers to close their accounts over that.
Environmental groups such as the Sierra Club argue that there is an irreconcilable contradiction between banks’ claims to support the goals of the Paris climate agreement, and their continued lending for new oil and gas development. US Republican politicians have argued that the banks’ emissions goals have meant they have failed to support fossil fuels sufficiently, driving up prices and undermining energy security.
Banks can, in fact, still finance new oil and gas production while meeting their goals for emissions reductions. But the new frameworks of commitments and pressure from policymakers and regulators are creating tensions that still need to be worked through.
The banks’ approach to addressing the threat of climate change took a big leap forward last year, with the launch of the Glasgow Financial Alliance for Net-Zero, which includes the Net-Zero Banking Alliance, with 117 members including all the leading US and European banks. The NZBA banks, which account for about 40% of total global banking assets, are committed to “aligning their lending and investment portfolios with net-zero emissions by 2050.”
Wood Mackenzie stated that environmental campaigners argued that such a commitment meant the banks should immediately stop all financing for new fossil fuel production. At a time when the world is crying out for increased supplies of energy, particularly natural gas to replace flows from Russia, that argument has raised alarms about whether the industry is being starved of the financing it needs to meet future demand.
The tensions broke out into the open earlier this month with reports that leading US banks, including JPMorgan, Morgan Stanley, and Bank of America, had threatened to quit GFANZ. A particular pain point has been the potential interaction of membership with the new US rules on climate disclosures proposed by the Securities and Exchange Commission. Those rules would, among other provisions, require companies to set out their plans to meet any targets.
The banks’ concerns were heightened by an update in June to the UN’s Race to Zero campaign, which prescribes mandatory climate criteria for the Net-Zero Banking Alliance. The new guidance for Race to Zero for members to ‘phase down and out all unabated fossil fuels’, and a requirement for members to ‘restrict the development, financing, and facilitation of new fossil fuel assets.’ It also explicitly referred to the International Energy Agency’s 2021 Net Zero scenario, which envisions no new oil and gas fields being needed.
Apparently, in response to those concerns from banks, the UN issued revised guidance earlier this month. It now requires members to commit to phasing unabated fossil fuels “down and out”, in line with “appropriate, global science-based scenarios” for limiting global warming to 1.5 °C. But it does not require a particular timetable or insists that banks follow the IEA’s Net Zero scenario specifically.
Kavita Jadhav, a research director in Wood Mackenzie’s corporate research team, says the revised language brings the Race to Zero into line with the original guidance from GFANZ, which very clearly did not insist on stopping all financing of new oil and gas development.
“For GFANZ, this is definitely a good thing. Membership had been starting to mean ‘all or nothing’ in terms of financing fossil fuels, and that was just not realistic. Now it is going back to something that is more practicable. An approach that reflects real-world constraints is critical both for GFANZ to retain its current members, and to bring in the remaining large financial institutions that have not yet joined,” Jadhav said.
The revised guidance does not mean that membership of GFANZ will not affect banks’ operations. The requirement to align with a scenario for 1.5 °C of warming will constrain them, even if they have more flexibility in how they comply. The big US and European banks have also set intermediate targets for 2030, which will shape their decision-making.
JPMorgan, for example, has a 2030 target for its clients in the oil and gas industry of a 35% reduction in operational carbon intensity, and a 15% reduction in end-use carbon intensity, by 2030. Bank of America’s 2030 targets for energy are a 42% reduction in Scope 1 and 2 (operational) emissions intensity and a 29% reduction in Scope 3 (supply chain and end-use) emissions intensity.
These targets mean that although the banks can continue financing new oil and gas development, they may be more selective about what they support and work with clients to help achieve emissions reductions.
“The reduction in investment in upstream in recent years is not because of a lack of finance. It’s because of a chronic lack of stable returns, which has finally led to improved corporate capital discipline,” Erik Mielke, Wood Mackenzie’s head of corporate research, said.
The new guidance from the UN should allow enough leeway for banks to support badly needed investment in new oil and gas supply, while they work to curb emissions. One change that could have a rapid positive impact is finding ways to streamline the requirements for data collection and record-keeping created by climate goals.
Already two pension funds left their GFANZ alliance because of resourcing problems. Reducing that administrative burden could help encourage members to stay in, at the risk of raising doubts about whether their climate strategies are having the desired effects.
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