Asset owners urged to call for more rigid policies, as ShareAction reveals continued flows to fossil fuel giants.
Banks could face a stormy AGM season, driven by investor concern over their ongoing financial support for oil and gas firms, which are already braced for a slew of shareholder proposals demanding greater transparency over their net zero transition plans.
In the US, investors have filed resolutions asking major banks to scale back fossil fuel development financing. Among the banks targeted are JP Morgan, Bank of America and Citi. UK-based responsible investment NGO ShareAction said investors were “increasingly prioritising” engaging with the banking sector on climate, with a specific focus on fossil fuels.
The US scenario is likely to be repeated elsewhere, said Kelly Shields, Senior Officer for Banking Standards at ShareAction, which has found that leading European banks have financed upstream oil and gas expansion to the tune of more than US$400 billion since 2016.
“As the appetite from investors increases to tackle this important issue, we expect to see resolutions in the UK, Europe and beyond that focus on aligning with credible 1.5C pathways, which as we demonstrated in our report means robustly tackling oil and gas,” said Shields.
Asset managers and asset owners were becoming increasingly aware of banks’ financing activities in the oil and gas sector, she added, particularly after the International Energy Agency’s (IEA) Net Zero by 2050 report published last year gave “clear guidance” on the need for no new oil and gas projects.
“There is still more progress to be made, and one sticking point is that many investors lack oil and gas policies themselves,” said Shields “However, there are encouraging signs – AkademikerPension, a US$23 billion Danish pension fund, announced just last week it was dumping US$300 million in oil and gas bonds and has been actively engaging with banks on climate issues.”
ShareAction’s report, which analysed the oil and gas policies of 25 European banks, said financing oil and gas expansion was a risky bet for banks. “Every field that gets developed increases transition risks and physical risks for the sector and other parts of the economy,” the report said.
Almost all the banks are members of the Net Zero Banking Alliance (NZBA), part of the Glasgow Financial Alliance for Net Zero heralded at COP26 last November. ShareAction calculated that in-scope NZBA members have provided at least US$38 billion in financing to the top 50 upstream oil & gas expanders since the launch of the alliance in April 2021. Under the terms of membership, banks are due to set targets later this year.
The NGO recommends that banks benchmark their position against peers and align with leading practice “as soon as possible”. Investors are encouraged to actively engage with banks on oil and gas expansion during the 2022 AGM season and beyond, by making clear, ambitious, and timebound requests where possible.
ShareAction’s report contrasts banks’ oil and gas policies with their gradual withdrawal from coal. While half of major European banks are now taking steps to exit coal financing, only five – Commerzbank, Crédit Mutuel, Danske Bank, La Banque Postale, and NatWest – have started restricting funding for oil and gas projects.
“We have put together a list of suggested engagement questions in our report including asking banks whether they have financing restrictions for oil and gas expansion and unconventional oil and gas,” said Shields. “We encourage investors to increase their engagement with banks leading up to AGM season, to vote for shareholder led climate resolutions and against inadequate company transition plans.”
ShareAction said investors should make full use of their shareholder rights and actively engage with banks on the topic during the 2022 AGM season and beyond. The questions it suggests include whether the bank has implemented financing restrictions in relation to oil and gas expansion based on the findings of the IEA’s roadmap at a minimum. Investors should also determine whether the restrictions are implemented at both asset and corporate level and if they apply across lending and capital markets activities.
Other questions include whether the bank has requested that its oil and gas clients publish their transition plans and whether the bank has implemented financing restrictions in relation to unconventional oil and gas such as fracking.
Separately, banks may also come under fire over annual pay bonuses that are estimated in the UK to be as high as £4 billion. As the economy has rebounded from the early days of the pandemic, bank profits have soared, prompting large bonus awards.