End to HSBC oil and gas financing: a defining moment?

If the world achieves its aim of reaching net-zero by 2050, what will historians cite as the key turning point? Will it be Greta Thunberg’s strident activism, which has captured the imagination of large swathes of civil society? The role that the various COP conventions played – which gave rise to the Paris Agreement – will no doubt be recognised, but arguably the most significant action in achieving net zero could actually have been taken not by an energy company – but by a bank following HSBC’s recent landmark oil and gas financing decision.

On 14 December, HSBC, one of the world’s largest banks, followed in the footsteps of another banking leviathan, Lloyds, announcing that it would no longer directly finance new oil and gas fields. Was the HSBC oil and gas decision a gamechanger?

Becky Jarvis, interim programme director at environmental pressure group, Bank on our Future, said while HSBC has some way to go to extend this commitment to exclude corporate finance, “the announcement from one of the world’s biggest fossil fuel banks proves that the oil and gas industry’s days are numbered. Jarvis added, “The momentum is fast shifting away from oil and gas – and towards clean energy.”

It is a view shared largely shared by ShareAction, a charity that champions responsible investment.  Lydia Marsden, ShareActions’s senior research officer of banking standards called the announcement by both HSBC and Lloyds, “a significant moment”, which “fires a warning shot to other banks to follow suit.” But she also said that the HSBC oil and gas announcement “set a new minimum level of ambition for all banks committed to net zero.”

To illustrate her point, she cited a recent ShareAction report entitled, ‘In Debt to the Planet,’ which is focused on the efficacy of the climate policies of Europe’s 25 largest banks. The study found that only three of the banks surveyed had introduced corporate restrictions on oil and gas expansion. The report also revealed that Europe’s largest 25 banks provide 92 percent of all oil and gas financing in the region.

Marsden added that whilst the banks’ appetite for financing new oil and gas fields is diminishing, “commitments at the level are just one piece of a much larger puzzle.” She explained, “They only cover one type of financing, leaving room for oil and gas fields to be financed in other ways. Our research has shown that the majority of finance goes to the companies developing these oil and gas fields rather than to specific projects or assets. No UK bank has made commitments to curb the much larger proportion of finance that is provided to clients (oil and gas and/or energy companies) with oil and gas expansion plans.”

So, in “what other ways” can banks finance oil and gas fields? Jeanne Martin, ShareAction’s Head of Banking programme, said that “most of the financing going towards new oil and gas activities will be in the form of general corporate finance.”

She explained, “We found that only 8% of the financing going to top oil and gas expanders over the period 2016-2021 was in the form of asset level financing… So if a bank provides general corporate financing to oil and gas expanders, there is a high risk that this money will be spent towards activities supporting the exploration of and development and extraction of new oil and gas fields.”

Security of supply

However some believe oil and gas still plays a critical role in every nation’s energy security strategy, and that it form a central pillar of what they call the Energy Trilemma – the need to ensure stable, affordable and secure supply during an accelerated Energy Transition. Currently, according to Offshore Energies UK (OEUK), a trade association representing the UK’s offshore energies industry, in 2021 UK oil and gas production was enough to meet 56 percent of the UK’s needs.

Rob Turner, Sector Leader for Energy and Resources at PwC UK, said, “It is clear that private capital is exercising more caution to invest based on guidance from financial institutions alongside their own ESG commitments. That does mean that certain lenders and certain institutions are reducing their exposure to hydrocarbons. However, it is also the case that in order to deliver stable supplies of energy, global energy supply is still reliant on hydrocarbons – you only need to look at the surge of LNG supplies to Europe this last year to see that.”

He added: “To ensure the energy transition progresses at an effective pace, whilst maintaining the security of existing supply, we would expect to see careful investment into global oil and gas production continue. To achieve the extent of rewiring required, in what is such a short window of time, international energy companies have a vital role due to the scale and capabilities of both their workforces and financial resources.”

Tom Ellacott, the senior vice president of Wood Mackenzie’s corporate research team, believes that many banks are already taking a more flexible and nuanced approach to lending in light of the Energy Trilemma. He said, “The goal for many banks is twofold. On one hand, they will continue to fund economically resilient oil and gas projects. On the other hand, financial institutions also have net zero targets and therefore a mandate to incentivise oil and gas companies to accelerate the decarbonisation agenda.”

The problem, however, for many energy companies seeking lending from banks is that ESG can be a very complex landscape for energy companies to navigate. Recent research from Columbia University’s Centre on Global Energy Policy revealed that there are more than “600 ESG ratings and rankings available,” while “the ecosystem…is currently defined by inconsistencies and a lack of standardization.”

How, therefore, do energy companies seeking funding from banks negotiate this complicated area? Speaking to Gas Outlook from Spain, Ellacott, said that “oil and gas companies need to prioritise establishing a trajectory to net zero Scope 1 and 2 emissions.”

He explained, “Energy companies must publish interim emissions targets on their journey to achieving net zero direct emissions, including direct emissions reduction goals for this decade. Companies will also have to lay out how they plan to manage Scope 3 emissions risk, which will require building new low-carbon profit centres.”

Over time, he predicted that more energy companies will “take this important sustainability step. Already decarbonisation laggards face higher cost of capital – a risk premium which will only expand as the energy transition unfolds.”