An increase in banks’ exposure to the oil and gas sector as companies raise billions of dollars of additional liquidity loans is sitting uncomfortably with lenders’ ESG strategies, highlighting the competing pressures on banks.
Banks are supporting requests from companies, including oil and gas majors BP and Royal Dutch Shell for large short-term loans to tide them over the coronavirus crisis and oil price slump, but such lending is apparently at odds with banks' climate commitments and draws critical attention from pressure groups pushing banks to cut fossil fuel lending.
These additional liquidity facilities do not include sustainability language. Banks see them as temporary facilities to cover extraordinary times, and as such, insist that they are compatible with their ESG strategies and targets.
“For most banks, these liquidity facilities are a net increase in short-term exposure to clients. It’s a temporary increase, but it doesn’t change the fundamentals of any ESG policy and strategy,” a loan syndicate head said.
Sources add that regulators and governments are leaning on banks to keep lending to preserve jobs and senior management feel a "moral responsibility" to provide capital to transitioning clients in brown sectors that have already passed relationship banks’ ESG assessments.
Pressure groups, however, see the extension of billions of dollars of new financing as a potential systemic risk and are calling for lenders to tie the provision of loans to ESG criteria to accelerate the pace of change.
“There is a real risk that the additional loans banks are making to the oil and gas industry will help prop up a sector that has so far largely failed to show any real climate action, as well as increase the climate-related risks banks themselves are exposed to," said Sonia Hierzig, joint head of financial sector research at ShareAction, a charity focused on responsible investment.
"Loans designed to help businesses overcome the coronavirus crisis are in this way contributing to yet another systemic crisis,” she said.
Despite stronger climate ambitions in the past six months, no oil and gas companies are yet aligned with "net zero" or Paris Agreement targets to limit global warming to 1.5 degrees, according to the Transition Pathway Initiative, which is backed by investors managing US$19trn of global capital.
Britain’s BP raised a US$10bn two-year credit facility in early April in a deal that was underwritten by BNP Paribas before being syndicated to 20 banks. BP previously raised a US$10bn facility in March.
Royal Dutch Shell also agreed a US$12bn revolving credit at the end of March, after raising a US$10bn revolving credit in December 2019.
“If a bank is going to provide such an emergency loan, they should make it absolutely clear that this is tied to a number of stringent conditions. Oil and gas companies should be asked to demonstrate not only that they are committed to a 2050 net-zero ambition, but also that they have the right short-term targets in place to inspire confidence that they are already on a transition pathway aligned with climate science today,” Hierzig said.
French oil and gas group Total also drew US$6bn of its US$11.585bn undrawn credit lines as of the end of 2019 to strengthen its liquidity position, though this was existing liquidity rather than new money.
The rise in exposure could be short-lived as loans will be refinanced in the bond market or cancelled. It will also be offset by a drop in capital expenditure and consequent reduction in funding requirements, bankers say.
Total, for example, has reduced net investments for 2020 by 25% since February to less than US$14bn.
Bank officials also advise looking at the bigger picture.
"I think we have to signal to the public that our risk-weighted assets allocated to the fossil fuel sector with no credible diversification plans will go down in the next years," said Joerg Eigendorf, head of communications, social responsibility and sustainability at Deutsche Bank. "We will also increasingly combine a loan in these sectors with sustainable obligations by clients."