While some European banks have reduced lending to fossil fuel companies, banks from Japan, Canada and China have amped up fossil lending, study finds
Fossil fuels extraction and the continued funding of its projects is a huge obstacle to the energy transition story. Phasing them out in a timely manner will be very important in order to reach the climate targets set out during the Paris meet. And this can only be achieved with regulatory limits on the fossil fuel lending carried out by big banks, according to a new report titled ‘The challenge of phasing-out fossil fuel finance in the banking sector’.
Published in Nature Communications, the study used a systems lens to explore over $7 trillion of syndicated fossil fuel debt, and shows that syndicated debt markets are resilient to uncoordinated phase-out scenarios. But if regulation is ensured, the scenario changes rapidly. If banks keep moving out of the sector, or stop lending to fossil fuel companies, then the phase-out becomes a reality, as a tipping point can be reached.
Now, how fast one reaches the tipping point is dependent on the stringency of the enforced regulations, finds the study. Naturally, the tipping point is realised faster when big, important banks with networks across regions begin the phase-out.
Break the syndicate
The biggest impetus to the continued lending to fossil fuel companies is the syndicated deals between banks. Primarily, this occurs because the loans are so big that it’s not financially viable for individual banks to finance those deals alone. So, they rope in other banks to spread the risk, amping up financial support for fossil fuel companies.
This nexus increases the impact of each bank’s contribution to the fossil fuel industry. In fact, the study found that syndicated loans accounted for 66% of global fossil fuel finance in 2018, while bonds contributed 29% and equity instruments were around 5%.
With capital markets pricing climate-related financial risks to reduce the substitution of bank loans with direct market finance, bank loans can play a defining role in the future of fossil fuel financing, found the study.
Furthermore, the lending relationship in a syndicate of global banks mobilises finance for the fossil fuel industry across countries. If banks in countries with strong climate curbing policies decide to phase out, then fossil companies can look for lending in international syndicates elsewhere, found the study. For example, in Australia, when domestic banks pulled out of the coal lending market, Chinese and Japanese lenders stepped in.
No decline in lending
Between 2010 and 2021, $7.1 trillion of bonds and loans were extended by 709 banks, most of them syndicated, according to data from Bloomberg, which was used for the study. It found that there has been no systematic decline in fossil fuel lending over the past decade.
According to the study, banks provided $592 billion of bonds and loans for oil, gas, and coal companies in 2021, compared to a yearly average of $584 billion between 2010 and 2016. However, the top 30 banks dominate the sector – providing 78% of all lending processed between 2010 and 2021.
Then again, some European banks like Swiss (UBS, Credit Suisse), German (Deutsche Bank) and Norwegian (DNB ASA) have gradually taken steps for fossil finance phase out. Their fossil lending has reduced by over 40% since the Paris Agreement, found the study.
But big banks from other countries, especially Canada and Japan, have ramped up their fossil fuel lending, thereby offsetting the lending decrease by the European banks. Scotiabank, BMO Capital Markets, Sumitomo, Mitsubishi UFJ and Mizuho have increased their annual fossil fuel lending by more than 25%, found the study.
In order to limit this increased lending, and move the ticker towards phase-out, strong action by financial regulators is recommended by the study. It could be through capital requirements rules, developed by standard setting bodies like the Basel Committee on Banking Supervision and networks of central banks and prudential regulators e.g., the Network for Greening the Financial System and the Financial Stability Board.
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