Banks have gone from oil industry backers to some of the loudest critics of the industry and the most ambitious target-setters in a few short years. Some of the biggest lenders in the world have joined the Net Zero Banking Alliance and have made pledges to limit their business with oil and gas. Some, however, are fine doing business with the "dirty" pariah industry.
Bloomberg reported this week that Wells Fargo provided $28 billion in funding to oil and gas companies last year. This made the Wall Street major the biggest oil lender for the year, followed by JP Morgan Chase with $27.9 billion in financing for oil and gas projects, and RBC Capital Markets, which provided $20.3 billion to the industry.
All three banks—along with all other lenders to oil and gas—have made net-zero commitments and outlined some specific steps they will be taking to get there. But Wells Fargo was late to the net-zero party. In fact, it took its time before it joined it.
This is quite uncharacteristic in today's reputation-ruled, social media-vulnerable corporate world. Yet Wells Fargo's energy team appears quite unconcerned about targets and pledges for one simple reason: the transition that everyone seems to be so enthusiastic about in the banking world is not happening overnight.
"There's this idea or dynamic that it's a light switch," Scott Warrender, head of the energy and power team at Wells Fargo told Bloomberg. The green revolution? "Our view — and in reality — it will play out over a much longer time frame.”
Wells Fargo is by no means alone in this view, judging by the latest data from nonprofit organization Reclaim Finance. The organization says on its website that its purpose for existence is to "publicly expose financial institutions who hinder climate-related regulations, and whose practices violate human rights and destroy the environment." It also has an oil and gas policy tracker "to detect greenwashing by the finance sector."
Using this tool and with the help of other transition-focused organizations, Reclaim Finance found that less than half of the 150 banks and other financial institutions that dominate the global financial industry have actually implemented policies that exclude funding for oil and gas projects.
The revelation echoes an earlier one made by ShareAction, another nonprofit organization, which promotes "responsible investment". According to ShareAction's data, European banks led by HSBC, Barclays, and BNP Paribas continue to provide financing for oil and gas exploration despite government efforts to reduce economies' reliance on fossil fuels.
The nonprofit slammed lenders for this behavior, saying that either way, it will end badly for them: "If oil and gas demand decreases in line with 1.5C scenarios, prices will fall and assets will become stranded," ShareAction senior research manager Xavier Lerin said in February as quoted by the BBC. "On the other hand, if demand does not fall enough to limit global warming to 1.5C, the economy will suffer from severe physical climate impacts."
Judging by banks' continued business with oil and gas, the threats listed by Lerin are not exactly top of the agenda. And there is a good reason for this. Despite a much-publicized scientific consensus on climate change and a sense of urgency continuously fed by various organizations and their officials, bankers like Wells Fargo's energy team seem to be aware of the more immediate realities.
These realities include a growing thirst for oil and an even faster-growing appetite for affordable energy. These are things that need to be responded to right now, and even the International Energy Agency recognized this when it called on OPEC to increase investment in new oil and gas production just months after saying new investment in oil and gas would not be needed because of the net-zero transition.
Noting that global spare oil production capacity was dwindling, the IEA said in its October 2021 Oil Market Report that "Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road."
Such a statement considerably undermines arguments about stranded assets that the environmentalist lobby is putting forward as a means of spurring shareholders into action to green-up the companies they participate in.
Even with threats about catastrophic climate change effects, it has proven impossible to reduce the world's need for energy. Since the most readily—and continuously—available energy continues to be that derived from fossil fuels, it is only natural for banks to continue financing its production.
According to the Bloomberg report, the banking industry, unlike many others, has not been subjected to a lot of shareholder pressure with regard to funding oil and gas industry activities. Yet this could change: environmentalists are pushing increasingly harder against banks' continued business with the oil and gas industry.
Many U.S. oil and gas independents are already struggling with finding the money they need to keep drilling because of some banks' newfangled aversion to the industry. Large lenders are making pledges that include shrinking their exposure to oil and gas. Just how well this will end remains to be seen.
By Irina Slav for Oilprice.com
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