Lloyds’ decision to stop financing new oil and gas projects aligns with the International Energy Agency’s net zero pathway and was welcome by campaigners, who said more UK banks should follow suit.
- Lloyds Banking Group, Britain’s largest bank, has announced it will no longer directly finance new oil and gas fields.
- While its overall exposure to the sector is small, the move may prompt other lenders to follow suit.
- The decision highlights the contrasting approaches to sustainability between the UK and the US, where ESG investing is meeting strong political opposition.
Lloyds Banking Group (LON:LLOY) has committed to stop funding new oil and gas exploration and production. Many major global banks that have made net zero pledges continue to finance new oil and gas projects, even though both the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change (IPCC) have warned that the development of new oil fields is not aligned with a net-zero by 2050 scenario.
UK based NGO Share Action said it is a lose-lose scenario for such banks, as declining fossil-fuel use will result in oil and gas assets becoming stranded assets (uneconomic under new regulations, pricing etc). In the US, however, there is a fierce debate around ESG investments and how they are negatively impacting the domestic oil and gas industry.
Lloyds’ move has few implications for its overall business
As Britain’s largest bank, Lloyds is being hailed for ending its support for new oil and gas fields. Oil and gas, however, forms a very small part of its loan portfolio, which is not surprising given the fact that the UK economy is dominated by services industries.
According to the Office of National Statistics, the top four sectors contributing to GDP are agriculture, construction, manufacturing and services. Lloyds claims it is among the top three lenders to key UK economic sectors, which include agriculture, real estate and healthcare.
ING was the first European bank to stop lending to energy companies for new oil and gas fields. South Africa’s Nedbank was the first to commit to a total phase-out on loans to the fossil fuel industry, but researchers at Reclaim Finance have pointed out that even though Nedbank’s deadline is 2045, the bank has established no interim targets, which are key to demonstrate how it plans to reach its final goals.
Major UK and European lenders still lending to fossil fuel E&P
Major European and UK banks that have committed to net zero goals still provide loans for oil and gas exploration and production (E&P), according to Share Action. The NGO found that 25 of the top European and UK banks have provided $400 billion in financing to large oil and gas expansion projects since the Paris Agreement was signed. Significant among these are HSBC (LON:HSBA), Barclays (LON:BARC) and BNP Paribas (PAR:BNP).
Of these banks, 24 are signatories of the Net Zero Banking Alliance, which is part of the Glasgow Financial Alliance for Net Zero (GFANZ). It comprises 43 banks from 23 countries which have committed to align their operational and attributable emissions from their portfolios with pathways to net zero by 2050 or sooner.
There are a growing number of reports that some banks are planning on exiting the NZBA due to concerns about legal liabilities arising from US anti-trust laws, although GFANZ has said no bank has withdrawn.
Financing new oil and gas fields is a lose-lose scenario
Share Action argues that financing oil and gas expansion is a lose-lose scenario for banks, because if demand decreases in line with net zero goals, it will leave banks with stranded assets due to the fall in energy prices. If demand does not decline, then economic harm from climate change will destroy value for banks and investors.
Estimates suggest that clean energy investment alone needs to triple to $4 trillion by 2030, which will only happen if financial flows are realigned. Financial institutions are increasingly committing to net-zero goals, but they need to find a way to translate rhetoric into action.
For some major global investment firms, the question of lending to the fossil fuel industry is present as an almost existential threat. The world’s largest asset manager, Blackrock (NYQ:BLK), has had to defend itself against backlash in the US for its perceived stance on ESG investing.
Growing climate action divide in the US risks net zero
Blackrock is not the only financial firm to face resistance for being pro-ESG in the US. Morgan Stanley (NYSE:MS), US Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC), Citicorp (NYQ:C) and Goldman Sachs (NYSE:GS) have been targeted by lawmakers from Republican-led States advocating for support to the local oil and gas industry.
The major drivers behind the censure of these banks was their perceived anti-fossil fuel, pro-ESG stance. Major concessions to the fossil fuel industry were necessary to pass the climate change measures in the Inflation Reduction Act, demonstrating the power of anti-sustainability lobbies, especially in Republican States.
Limiting funding to the fossil-fuel industry, in particular, has been labelled anti-free market by these States. By limiting the number of banks operating locally, however, these States are contradicting themselves. Limiting the number of financial products available to its investors and citizens, and reducing the pool of lenders could actually raise borrowing costs, according to a study by the University of Pennsylvania and the Federal Reserve Bank of Chicago.
US action on climate change will be critical to global net zero goals
Resistance to action on addressing climate change in an important market such as the US risks the country’s own and global net zero commitments. The US is the second highest emitter of greenhouse gases in the world, after China.
But the tide appears to be turning as policy makers in other major US markets, such as New York City, call for more to be done on climate action. A spotlight being shined on sustainable investment and what it means could actually help in the long run, and also have an impact in the near term, via the midterm elections.
