By Garrett Delk, Pickering Energy Partners
The financing landscape for fossil fuel companies is rapidly evolving. The Science Based Targets Initiative (SBTi) recently released a draft of their position on fossil fuel financing which seeks to further reporting requirements by financial intuitions and pressure capital flows away from the expansion of new or existing unabated fossil fuel production capacity. This initial draft will lay the groundwork for an eventual standard for the financial services sector coined “Financial Institution Net Zero” (FINZ), expected to be published in 2024.
The new draft focuses on financial institution support for fossil fuels activities at three levels:
- Company: i.e., financial flows towards known and unknown use of proceeds such as an equity interest or bond of an existing oil and gas company
- Project: i.e., financing or facilitation provided for a specific project such as a new oil pipeline
- Portfolio: i.e., total greenhouse gas (GHG) emissions and financial exposure from all fossil fuel activities
And lays out four steps for financial institutions (FI) to implement the criteria:
- Disclosure: FIs shall publicly disclose their exposure to fossil fuels across all the financial services they provide, including facilitation, asset management and trading.
- Arrest: FIs shall establish a policy to immediately cease new financial support to companies and projects that add to the unabated capacity of fossil fuel assets.
- Transition: FIs shall engage existing fossil fuel company counterparties to achieve 1.5° transition using quantitative and qualitative criteria and public transition plans.
- Phase Out: FIs shall set clear goals to phase out financial support to any projects and/or companies that are unable or unwilling to follow a 1.5°C transition within a pre-defined timeframe.
PEP Insight & Recommendations
The SBTi’s partnership with the Carbon Disclosure Project (CDP) is of note as 10,000 organizations across the globe disclose through CDP, including more than 9,600 companies representing over 50% of global market capitalization. Given the prominence of the CDP, the feasible impact on emissions reduction and net zero reporting is high. As these criteria increasingly become table stakes for financial institutions, the bar is being raised for energy companies to simply maintain access to financing options.
Pickering Energy Partners believes the SBTi draft attempts to reach net zero targets and emissions reductions by setting an alarmingly dire, inflationary and unrealistic precedent — cutting off financial flows to an industry vital to the current and future success of modern economies. Additionally, PEP feels SBTi reporting criteria does more harm than help to both the fossil fuel and financial services industries.
While PEP disagrees with the SBTi’s position on fossil fuel financing, there are important takeaways for public and private energy companies to note to protect continued access to financing. Throughout the draft, there is a focus on both qualitative narrative and quantitative data points. PEP feels the best way for energy companies to disclose is through a sustainability report that is either externally published or held internally for audiences such as banks, insurance companies or investors.
Additionally, PEP recommends target setting only be considered once a company is confident that:
- You will be able to reach realistic targets, and
- That you can report the same metric consistently over the course of time.
Once targets are published, external stakeholders will continually look for updates and backpedaling will only harm access to future capital and damage reputational equity.
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Garrett Delk is Associate, ESG Strategy & Integration.