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ESG Investing / Asset Servicing
Massive challenge for transition financing in oil and gas
Lucrative industry remains critical enabler of economic development, employment
Bayani S. Cruz 7 Jun 2021

The historic setback for the oil and gas (O&G) majors to climate-change activist shareholders and a ruling from the district court in The Hague on May 26 forcing them to adopt major reforms to their greenhouse gas emissions targets highlight the enormous challenges involved in transitioning their carbon-based businesses into renewable energy ones. 

Yet despite the challenges, and the enormous damage the fossil fuel industry does to the environment, the industry is still a very lucrative and bankable one. The world’s 60 largest banks have poured a total of US$3.8 trillion into fossil fuels between 2016 and 2020 based on an aggregate of their roles in lending and underwriting of debt and equity issuances, according to the Fossil Fuel Finance Report 2021- Banking on Climate Chaos.

The good news is that bank financing for 2,300 companies active across the fossil fuel lifecycle dropped by 9% to US$750.74 billion in 2020 from US$823.68 billion in 2019. Before that, it grew from US$709.23 billion in 2016 to US$740.40 billion in 2017 and US$780.92 billion in 2018, according to the report.

The challenge for these banks, however, is finding ways to help their clients transition from fossil fuel businesses to renewable energy ones.

An indication of the size of the challenge is the fact that direct emissions generated by the O&G sector comprise about 10% of global CO2 emissions, and when combined with end uses in other sectors, such as power and transport, the total amount of emissions triples. About 50% of the O&G emissions emanate from the footprint markets of Asia, Africa and the Middle East, according to the Transition Finance Imperative Report published by Standard Chartered Bank.

The value of Standard Chartered’s fossil fuel portfolio, for example, has been dropping – from US$8.81 billion in 2018, to US$8.03 billion in 2019, to US$7.10 billion in 2020 – reversing a trend that saw it increasing from US$2.56 billion in 2016 to US$4.92 billion in 2017, according to the Fossil Fuel Finance Report 2021- Banking on Climate Chaos.

But, according to the same report, in terms of percentage change in fossil fuel financing from 2016 to 2020, among the world’s top 60 largest banks, 33 have increased their financing in the fossil fuel sector, with Standard Chartered ranking third among them, with an approximate increase of 160%, behind Postal Savings Bank of China, 1,200%, and China Minsheng Bank, 550%.

China Minsheng Bank’s fossil fuel portfolio increased in value to US$10.87 billion in 2020 from US$10.22 billion in 2019 and US$2.64 billion in 2018. Before that it has decreased from US$1.67 billion in 2016 to US$723 million in 2017.

Postal Savings Bank of China’s fossil fuel portfolio decreased to US$2.19 billion in 2020 from US$3.06 billion in 2019. Before that it increased to US$1.478 billion in 2018 from US$1.03 billion in 2017 and from US$168 million in 2016.

“To reach net-zero carbon emissions from our financing by 2050, we are working on our short-, medium- and long-term strategies to materially reduce our financed emissions from the O&G sector,” says Bill Winters, group chief executive, Standard Chartered, in the bank’s Transition Finance Imperative Report. “We are doing so while acknowledging that the sector remains a critical enabler of economic development and employment.”

Standard Chartered’s portfolio in the O&G sector amounts to US$4.718 billion in loans and advances to customers as of December 2020, accounting for 1.67% of total group loans and advances to customers during the same period.

“We will partner with our clients on their transition journey, recognizing they are all at different starting points,” Winters points out. “Different markets, regions and companies will transition at different speeds due to policy and access to technology and capital.”

While O&G majors like Exxon, Royal Dutch Shell and Chevron are publicly-traded international oil companies without government ties, they are already experiencing extreme public and policy pressure. Many of them have aggressive transition targets and will move at significant scale and speed to transition. They currently account for about 15% of total O&G emissions.

National oil companies with ties to government are experiencing moderate levels of public and policy pressure, and must balance global climate goals with national agendas. These companies account for about 55% of total O&G emissions.

Small independents and mid-cap O&G firms, which are dispersed along the value chain, are subject to varying public and policy pressures, depending on geography. Many are only beginning their climate journeys in line with a broader agenda to drive energy access. These companies account for about 30% of total O&G emissions.

With varying levels of government, shareholder and activist pressure, the trend in the energy industry, and among its banking sector financiers, is away from fossil fuels, despite the oil and gas sector’s lucrative nature and economic clout.

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