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‘Net zero’ banks continue to finance oil & gas expansion, ignoring climate scenarios, and posing huge risks to investors

The International Energy Agency is clear: net zero means no new oil & gas projects. Yet, banks continue to pump billions into companies expanding these operations, representing a lose-lose situation for both them and their investors.

Europe’s largest banks have ploughed some US$400 billion into companies expanding oil & gas production since 2016.

This is not only bad news for the climate, but also presents a huge risk for banks and their investors.

Bank’s continued love affair with oil & gas flies in the face of the warnings from the International Energy Agency (IEA) – the world leading energy authority – which just last year warned there was no room for new oil & gas fields if we are to keep the world to 1.5C warming.

Not only this, it also flouts these bank’s own public commitment to the Net Zero Banking Alliance (NZBA) – an alliance of banks pledging to meet net zero emissions by 2050.

In fact, NZBA members provided at least £33 billion in financing to the top upstream oil & gas expanders since they joined the alliance last year. More than half of this was provided by four founding signatories: Barclays, BNP Paribas. Deutsche Bank, and HSBC.

The worst offenders

As detailed in our latest report ‘Oil & gas expansion: a lose-lose bet for banks and their investors’, these founding members still top the charts when it comes to financing oil & gas companies exploring new reserves and expanding production.

HSBC for example, provided US$59 billion to top expanders such as Exxon Mobil, Pemex, and Saudi Aramco. Barclays meanwhile pumped $48 billion into companies with the biggest expansion plans. Exxon Mobil, Shell and BP received the most financing.

BNP Paribas, which has pledged to reduce lending to exploration and production activities, has also been exposed for its role financing oil & gas expansion companies – providing US$46 billion since 2016 and increasing financing by 16 per cent in 2021 compared to pre-pandemic levels. French peers Credit Agricole and Société Générale are also among the largest financiers.

Despite many banks making net zero commitments in 2021 or before, many have actually increased their fossil fuel expansion financing in 2021. These include Credit Suisse, ING, Intesa Sanpaolo, UBS, Nordea, and Danske Bank.

The IEA net-zero roadmap – a minimum standard for banks

In the IEA’s net zero scenario report, published last year, it made clear that there is no room for new oil & gas fields after 2021 if the world is to achieve net-zero emissions by 2050.

This was a ground-breaking announcement. But it should also be a minimum level of ambition for banks.

The NZE scenario only gives us a 50 per cent chance of keeping warming to 1.5C. It also makes unrealistic assumptions about the prospects of carbon, capture and storage (CCS) technologies, which are still unproven at the scale required to meet this ambition.

Yet the majority of banks are still not even close to the IEA’s recommendations.

This is a worrying signal to investors and the public about the legitimacy of European banks’ climate credentials.

Investors should not be fooled by lofty net zero claims

As banks continue to line up to make ambitious commitments to support the transition towards net zero, the devil will be in the detail. And sadly, banks don’t yet have the policies to reach their ambitions.

Just a handful of banks restrict financing for oil & gas projects, and even less restrict for companies that are expanding oil and gas production.

Out of 25 banks analysed, only Commerzbank, Crédit Mutuel, Danske Bank, La Banque Postale and NatWest have started restricting financing for oil & gas projects.

And just three banks Commerzbank, Crédit Mutuel, and La Banque Postale have also committed to restrict financing for companies with expansion plans.

This is an important distinction.

Our analysis found that some 92 per cent of finance to oil & gas companies comes from general-purpose corporate loans. These can be directed into any subsidiary or project the company likes.

As such this money can continue to go into helping the company expand its oil & gas production.

Project finance restrictions alone are meaningless.

It is time investors upped the pressure on banks’ fossil fuel addiction

The IEA is not the only authoritative body warning about the impacts of fossil fuel expansion. Last year the world’ leading climate science body - Intergovernmental Panel on Climate Change (IPCC) – reemphasised the climate threat, warning only rapid and drastic reductions in emissions this decade will prevent climate breakdown.

There is an increasing spotlight on oil & gas expansion.

What’s more, we’ve found that over 50 per cent of planned expansion comes from unconventional sources, including fracking, Arctic drilling, and oil sands.

These fuels come with higher environmental and climate impacts. But they also come with higher financial and reputational risks too.

If oil & gas demand decreases as climate action ramps up, prices will fall, and assets will become stranded.

If demand doesn’t fall, and the world surpasses the 1.5C guardrail, then the economy will have the face the several physical impacts of climate change.

Either way, value will be destroyed for energy companies, banks and their investors.

It is a lose-lose situation.

We urge investors to make full use of their shareholder rights at banks to prevent these risks from becoming a reality. We expect to see an increase in investors voting for robust shareholder resolutions, engaging with banks at their AGMs and voting against inadequate company transition plans that do not align with 1.5C.

In doing so, they will not only be protecting their own future, but that of our planet and society.

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