It’s an open secret in energy circles that the eventual death of oil and thermal coal will not come from environmentalists or even directly from renewables, but rather when the big banks decide to stop financing them, making them “unbankable”. And the U.S. oil and gas sector came dangerously close to suffering that fate after Wall Street banks began disavowing oil and gas loans at the height of the ESG (environment, social and governance) craze.
In 2019, Goldman Sachs becomes the first major U.S. bank to exclude the financing of new oil exploration, drilling in the Arctic, as well as new thermal coal mines all over the world. The banks environmental policy has declared climate change as one of the “most significant environmental challenges of the 21st century” and is committed to helping its clients manage climate impacts more effectively, including through the sale of weather-linked catastrophe bonds. The giant bank has also pledged to invest $750 billion over the next decade in areas focused on climate transition.
Wall Street banks tend to move in parallel, and Wells Fargo, JPMorgan Chase, Bank of America, Citigroup, and Morgan Stanley soon followed suit marking the extinction of their massive oil and gas lending businesses. According to BankTrack, 14 international banks have now ended direct funding for new coal-fired power plants around the world.
But the lure of those juicy oil and gas dollars amid an energy boom has proven hard for Wall Street banks to resist, leading many to throw their ESG pledges out the window.
One year later Wells Fargo & Co.. became one of the last major US banks to make a net-zero pledge, the bank became the largest fossil fuel lender: Wells Fargo’s 2021 tally in the sector topped $28 billion, accumulating $188 billion in oil and gas loans since late 2015. Last year alone, banks arranged about $555 billion in bonds and loans for the oil, gas and coal sectors.
Wells Fargo’s fossil fuel loans remained at the top of the industry. Wells, America’s fourth-largest bank, has earned the dubious distinction of being one of the nation’s most outrageous financial institutions after it emerged it had systematically opened millions of fake accounts for its customers. .
Play the long game
Few bankers enjoy being in a virtually doomed line of work. But Bloomberg reports that companies like Wells just won’t stop lending to hydrocarbons while we’re consuming so much of it.
Indeed, Wall Street banks are now playing the long game with oil and gas companies, as their climate milestones are decades away.
“There’s this idea or this dynamic that it’s a switch. Our point of view – and in reality – it will take place over a much longer period,Scott Warrender, who leads Wells Fargo’s energy and power team, told Bloomberg.
“For many years, we have been a leading financial partner for traditional energy companies, such as oil and gas producers and electric utilities, as well as for the emerging renewable energy sector. We will continue to support our customers in this industry as they provide the fuel that powers today’s society and respond to market changes,” said a Wells spokesperson.
“Now that we’re making money again, will investors stay away? As the long-suffering industry turns lucrative again, it will be harder for them to leave,Derek Detring, who worked eight years ago as Wells’ energy banker, told Bloomberg.
Historically, bankers have not come under much pressure from shareholders to be more proactive on climate. But that is changing. Last year, Wells joined the Glasgow Financial Alliance for Net Zero, a group of banks and fund managers representing $130 trillion in assets. The big banks, in addition to committing to eliminate emissions, have agreed to start accounting for carbon in their vast portfolios. In December, the group of investors Interfaith Center on Corporate Responsibility asked Wells and other banks to adopt a policy by the end of 2022 to ensure that loans and subscriptions do not contribute to the development of new fossil fuels.
But that didn’t scare Wells out of business. Last year, its largest fossil fuel syndicated loan was a $3 billion deal with Enterprise Products Partners LP (NYSE:EPD). The owner of the Houston pipeline agreed in January to buy Navitas channel partners and its 1,750 miles of pipeline in the Permian Basin for $3.25 billion in cash.
Wall Street downgraded on the energy sector as it lost money on loans. But with oil prices soaring amid a global energy crisis as well as the Ukraine crisis, most of these companies are now inflating their profits – and Wall Street is poised to pounce, especially now that interest rates are on the rise. on an upward trajectory.
In other words, just because ESG appears to be “front and center” doesn’t mean it will stay that way forever.
Nonetheless, Wells Fargo has pledged to engage $500 billion in sustainable finance this decade, while JPMorgan’s green goal is $1 trillion.
By Alex Kimani for Oilprice.com
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