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Peak oil? Not so fast. Global oil demand has reached a new high and is expected to continue rising next year, according to the latest report from the International Energy Agency. The majority of this growth came from China, which has set a carbon neutrality target for 37 years in the future. In addition, the demand was fueled by increased air travel by tourists and stronger-than-expected growth in high-income economies.
At Moral Money, we focus on the evolving relationship between banks committed to achieving net-zero goals and their energy giant clients who are still investing in new oil and gas projects. Every now and then, a major investment bank will announce a new green policy that seems to revolutionize their business practices. However, upon closer inspection, we find that these policies often have limitations. They typically only affect a specific type of financing and provide generous exceptions for energy giants with transition plans that may not be effective in reducing carbon emissions at scale.
Nevertheless, there are moments when a bank breaks away from the pack, as I will explore below. (Kenza Bryan)
The Absence of a “Domino Effect” in Bank Divestment from Oil and Gas
Despite being embroiled in the largest money-laundering scandal in recent history, Danske Bank is regarded as a model institution from an environmental perspective. In January, the Danish bank became the only major bank to rule out loan and underwriting deals with energy giants involved in expanding oil and gas production. This effectively prevented it from conducting business with upstream providers in Norway, Sweden, and Denmark, the bank’s main operating countries. Environmental activists were thrilled. Danske Bank risked losing DKr3.2bn (£370mn) of balance-sheet exposure to the oil and gas sector in 2020, but went ahead with the decision anyway. So why haven’t other banks followed suit?
The answer is straightforward. “It’s clear we will miss out on income,” said Samu Slotte, Danske Bank’s global head of sustainable finance. “We are sacrificing an opportunity because, of course, these companies are financially viable.” Danske Bank was also in dire need of positive PR after agreeing to pay $2bn in penalties for defrauding US banks in relation to weak anti-money laundering practices in its Estonian branch. Furthermore, the bank was operating in a political environment that was supportive of climate action. In 2020, the Danish government announced its intention to stop offering new permits in the North Sea and to completely phase out fossil fuel extraction within its borders by 2050. According to Slotte, this political context played a role in Danske Bank’s decision. “Being headquartered in Denmark, we want to support both the Paris Agreement and Danish society in its decarbonization efforts.”
In other parts of the world, financiers do not feel they have public support to move faster on climate action than their clients. Strategic ambiguity is crucial. For example, banks like BNP Paribas, HSBC, and Barclays refer to the International Energy Agency’s scenario for a net-zero world in their fossil fuel financing policies, which restrict certain types of lending to fossil fuel clients. However, they avoid endorsing the IEA’s recommendation that no new oil and gas fields should be approved for development beyond those already committed to as of 2021. This reluctance is driven by a prisoner’s dilemma faced by banks that are trying to navigate the industry’s transition away from fossil fuels. Just as being the last business to enter a sector can be costly, being the first one to exit can also have consequences.
Danske Bank’s internal logic was that by divesting from oil and gas, it could mitigate the refinancing risk of being the only bank left in a joint deal if other banks withdraw. Typically, banks join forces to finance the industry through long-term revolving credit facilities and reserve-based lending deals.
However, Danske Bank’s decision was not solely based on financial considerations. It was also an explicitly ethical choice. By publicly stating that expansion plans are a red flag regardless of an energy company’s net-zero targets, Danske Bank took a stronger stance than most governments have adopted.
Robin Baker, a visiting research fellow at the Oxford Institute for Energy Studies, argued that environmental groups should focus more on reducing oil and gas consumption rather than production. Baker suggested that cutting production would disproportionately hurt the poor and proposed that banks should instead focus on financing the transition of developing countries rather than divesting from fossil fuels. For activists, setting a red line on oil and gas expansion will always be the priority. “It’s the first criteria we look at, and very few banks address it,” said Maude Lentilhac, a policy analyst at the campaign group Reclaim Finance. “Financial institutions have recognized the issue of coal expansion, and there has been a domino effect in divestment from coal. It’s still too early to say for oil and gas.” (Kenza Bryan)
Smart Read: A company owned by the United Arab Emirates will pay a lobbying firm at least £100,000 per month for the next six months to defend the country’s role in hosting this year’s UN climate summit. This move comes in response to criticism from environmentalists and diplomats. Read more from Patrick and our colleagues.
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