By Garrett Delk, Pickering Energy Partners
The Federal Reserve recently announced an exercise it asked U.S. banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo, to participate in during 2023, which saw lenders predicting the impact of climate change on their loan portfolios. In its first analysis, the report showed a broad spectrum of approaches, with many banks relying on external vendors to address climate data and modeling gaps.
Many stipulations of the analysis asked by the Fed, including assessing impacts of potential rising temperatures and physical risks from severe weather events, are the same requirements laid out in the SEC’s climate disclosure rule. At the completion of the exercise, Jerome Powell said the central bank would not try to use policy for climate goals and should stick to managing risks to the banking system. In contrast to the Fed’s climate-agnostic stance, the European Central Bank (ECB) and the Bank of England (BoE) have actively encouraged banks to integrate climate risk management and support the energy transition. A more clearly defined cross-Atlantic dichotomy in energy financing is coming into view, a trend that will benefit U.S. energy and financial industries.
As exemplified by a confidential Citigroup document, climate-related risks likely pose only a minor hypothetical risk to its financial stability, suggesting a divergence in the perceived immediacy and severity of climate risks to banking stability compared to other financial crises like recessions. Additionally, used terms such as “climate risk management” and “energy transition” ultimately mean a phasing out of all financial support to projects and companies that are unable or unwilling to follow a net zero/1.5°C transition by 2050. However, banks, insurers, and asset managers are all exiting industry climate associations, respectively, the Net Zero Banking Alliance (NZBA) and Net Zero Insurance Alliance (NZIA), which use the same phase-out language. As we’re quickly approaching 2030, a benchmark year for privately set climate goals, many of which are likely to be missed, banks are plausibly (and correctly) adding up that net zero targets by 2050 will not be achievable.
Further, for the foreseeable future, geopolitics looks to ensure that energy security remains a high priority, which will require long-term investment (and potential profit) from banks and asset managers. Despite headlines of activist protests pushing the contrary, the overall pragmatic stance on energy financing in the U.S. as opposed to the EU ultimately means more opportunity for U.S. lenders and energy companies. U.S. regional banks are ratcheting up lending to oil and gas clients, grabbing market share as bigger European rivals back away. One U.S. regional bank was recently among three lenders that replaced Barclays on a $325 million loan to a small-cap U.S. fracking company. That’s as the UK bank places curbs on high-carbon clients as part of its climate policy. For U.S. fossil-fuel borrowers, the development means they will be able to continue to access credit at prices that remain competitive and varied.
Sources:
- https://www.sec.gov/news/press-release/2024-31
- https://insideclimatenews.org/news/25042024/citibank-headquarters-new-york-climate-activists-arrested/
- https://www.wsj.com/articles/shareholders-pressure-barclays-to-pull-back-on-financing-for-fracking-d2a889a7
- https://www.bloomberg.com/news/articles/2024-04-14/us-regional-banks-dramatically-step-up-loans-to-oil-and-gas
Article by Member Company Pickering Energy Partners
Energy Workforce partner Pickering Energy Partners provides insights on ESG due diligence, disclosures and reporting. Garrett Delk is Associate, ESG Strategy & Integration.
