News that HSBC (NYSE:HSBC) has agreed to stop financing new oil and gas fields adds another signal to fossil fuel groups and governments that banks’ appetite for financing new oil and gas fields is diminishing. As external focus on financed emissions and biodiversity impact, PCAF has launched its latest approach to measurement and disclosure of financed emissions.
- HSBC resolves to cut asset finance for new oil and gas, but avoids limits on shale gas.
- Banking inaction on totally of finance impact is slowing action on climate and biodiversity.
- Impact of financed emissions is driving focus on investor responsibility and performance.
The new commitment from HSBC followed a March 2022 shareholder resolution asking HSBC to update its oil and gas policy, coordinated by ShareAction and institutional investors.
HSBC’s new energy financing policy
The bank’s new energy policy sees a commitment by HSBC to refuse finance for new oil and gas fields and new metallurgical coal mines. It will also see the introduction of strict requirements for new clients relating to oil and gas exploration, and sees a commitment to set an absolute thermal coal on balance sheet financed emissions target of 70% reduction by 2030.
Jeanne Martin, Head of the Banking Programme at responsible investment NGO ShareAction, said that the announcement sent a strong signal and urged other major banks, such as Barclays and BNP Paribas to follow suite. However, she warned: “HSBC’s announcement only applies to asset financing, and doesn’t deal with the much larger proportion of finance it still provides to companies that have oil and gas expansion plans.
“We expect to see HSBC come forward with new proposals that will address this as soon as possible. The public and investors expect the banking sector to play its part in tackling climate change. If the bank’s executives don’t step up, they can expect concerned shareholders to force them to act.”
Loopholes on climate action
There are a number of issues with the new policy though. HSBC has said it will restrict financing to companies that have ‘substantial exposure’ to some types of unconventional oil and gas and geographical areas that are often associated with high environmental, social, and financial costs.
There is however no definition of what constitutes ‘substantial’ or any identification of how this could impact HSBC’s relationships with its existing client base. At the same time, while there is little question that shale gas extraction has a range of environmental issues, from water and chemical pollution to the issue of path dependency – and the new commitment doesn’t apply to shale gas.
Given that, according to research from Rainforest Action Network, HSBC was Europe’s fifth largest fracking financier (and 20th globally) between 2016 and 2021, leaving shale gas out of its commitments leaves a major hole in its climate related energy policy. Today HSBC only has a due diligence process in place for shale gas.
HSBC says it will assess its oil and gas clients’ transition plans against specified criteria including exploration and development plans. But the bank has not set out any red lines for clients – for example on whether new exploration and new oil and gas fields would be permitted – and its assessments do not have any binding consequences.
Importance of action on financed emissions
It is now widely accepted is that it will not be possible to address the interconnected sustainability crises the world faces without action in the banking sector. Financed emissions are those emissions generated as a result of financial services, investments and lending. While they are officially covered by Scope 3 emissions reporting on the grounds that such figures help us understand what an institution is funding, there remains big debate about methodological approaches and few banks have addressed all types of emissions impact through finance.
For example, research published in February 2022 research found that European banks provided over $400 billion to 50 leading companies expanding oil and gas production between 2016 and 2021, with HSBC, Barclays and BNP Paribas the worst offenders. The report found that 92% of this financing was in the form of general purpose corporate finance, with only eight per cent project finance or dedicated financing.
This means that to be credible on climate action, banks’ policies need to cover both fossil fuel projects and the companies building and operating them. It is no longer enough to refuse financing for new oil and gas extraction given the myriad ways that finance can be raised.
Biodiversity action required alongside climate but bank action lags
The latest analysis from Share Action, In Debt to the Planet, assessed the climate change and biodiversity strategies of Europe’s 25 biggest banks. It found that banks’ fossil fuel policies are full of loopholes and their financing is not aligned with 1.5C pathways.
Encouragingly, it found that the number of banks announcing asset finance restrictions on new oil and gas fields has doubled in eight months. However, only three (Commerzbank, La Banque Postale, and Santander) had a specific restriction on financing to companies expanding oil and gas regardless of supply segment. That makes a huge difference in how external understanding of financed emissions is built.
PCAF launches update to carbon accounting standard covering financed emissions
The Partnership for Carbon Accounting and Financials (PCAF) has launched the 2nd version of its Global GHG Accounting and Reporting Standard. Part A of its Standard, on financed emissions, outlines the ways in which emissions should be disclosed and accounted for across:
- Listed equity and corporate bonds
- Business loans and unlisted equity
- Project finance
- Commercial real estate
- Motor vehicle loans
- Sovereign debt
Responding to industry demand for a global, standardised GHG accounting and reporting approach, PCAF developed the Global GHG Accounting and Reporting Standard for the Financial Industry, focusing on measuring and reporting financed emissions.
Published in November 2020, the standard provides detailed methodological guidance to measure and disclose GHG emissions associated with six asset classes: listed equity and corporate bonds, business loans, and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans.
Since then, PCAF signatories asked to expand the standard to include more methods covering other financial activities. From 2021 onwards, PCAF started the work on three parts under the umbrella of the Global GHG Accounting and Reporting Standard for the Financial Industry:
Part A – Financed Emissions: update of the first version standard on measuring and reporting financed emissions by adding a method for sovereign debt and guidance to account for emission removals;
Part B – Facilitated Emissions: development of a standard for measuring and reporting the GHG emissions associated with the capital markets transactions;
Part C – Insurance-Associated Emissions: development of a standard for measuring and reporting the GHG emissions associated to re/insurance underwriting.
It’s not just the capital markets alone that are being targeted but country performance too. For Part A, 22 PCAF participants volunteered to develop a method for sovereign debt and guidance to account for emission removals: ABN AMRO, AIMCo, Amalgamated Bank, Banco Pichincha, Bank of America, Barclays, Blackrock, Boston Common Asset Management, CDC, CTBC Holding, Deutsche Bank, Federated Hermes, FirstRand, FMO, Hannon Armstrong, HSBC, Landsbankinn, Morgan Stanley, Produbanco, Robeco, Triodos Bank, and the UN-convened Net-Zero Asset Owner Alliance.
With clarity increasing rapidly about what best practice is within disclosure of financed emissions, there doesn’t look like there will be many places left to hide.