BY DAN ROMITO, PICKERING ENERGY PARTNERS
ESG’s impact on the equity markets is nothing new, especially in the energy sector. What is relatively new, however, is the indirect attempt by motivated equity shareholders and partnering NGOs to penalize the broader energy space by inherently affecting the financial sector. Index investors, acting in concert with activist investors and climate action groups, are increasingly influencing U.S. and European banks to accelerate their respective climate actions by reducing their lending to the oil and gas industry. Hydrocarbon companies must monitor shareholder activism in the financial sector as those respective engagements carry a more significant ripple effect than conventional shareholder activism in the energy sector.
Over the last five years, investor activism in the energy sector has been comparatively muted. However, the financial sector has experienced the highest number of activist engagements over the previous two years, and the vast majority of engagements have centered on overall hydrocarbon financing. Financials’ current epicenter of activism lies in Europe – where banks and insurers face immense pressure to decarbonize and divest from fossil fuels. Many believe U.S. banks will begin experiencing similar demands in 2024 based on what they already endured throughout the first half of 2023.
Fossil fuel detractors’ collective strategy does not necessarily target just the energy sector. Instead, their philosophy is to place immense pressure on the groups that finance and insure them. Ironically, the so-called energy “transition” will require a colossal amount of incremental capital, and the populations best qualified to innovate, commercialize and scale functional renewable technologies reside in the fossil fuel industries. That economic logic is being ignored, and the prevailing thesis on the utility of renewables remains incorrect and biased. An uncompromising mindset now drives regulatory policy obsessively fixated solely on fossil fuel divestment instead of feasible solutions that minimize the adverse impacts of the energy “addition.” Unfortunately, commercializing and scaling reliable, functional and affordable energy sources remains a lesser priority to these groups.
This mindset has been quickly penetrating the investor landscape over the last year. The financial sector experienced the filing of nine proposals at top U.S. banks and seven proposals with significant insurance companies calling for “greater accountability in climate lending.” Shareholders of major U.S. and Canadian banks are continually pressured by climate action groups to act on global net zero targets by requiring a reduction in fossil fuel lending and to publish interim emissions reduction targets for 2030.
In part, these changes are being driven by the SBTi (Science Based Targeting Initiative) that explicitly calls for financial institutions to cut off the energy sector from financial flows, support and services covering (but not limited to) debt and equity investment, insurance underwriting, asset management, securities underwriting, facilitation and trading.
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Dan Romito is Partner, Consulting – ESG Strategy & Integration.
