2023 financial services industry outlooks
12 October 2022
13 January 2023
World banks continued to finance fossil fuel-oriented projects despite the Paris Agreement in 2015. Between 2016 and 2021 alone, sixty of the world's largest banking institutions provided roughly US$4.6 trillion in loans to oil, gas and coal companies. However, this trend has started to change in Europe since last year.
The banking sector has long been criticised for prioritising short-term profit and ignoring long-term climate goals. According to a Bloomberg estimate, banks made over $16.6 billion between 2015 and 2020 by providing funding to companies whose activities contribute significantly to global warming. That's more than double compared to the $7.4 billion in financing for renewable energy over the same period.
Behind the criticism is a greater awareness of climate change and sustainability among customers, investors and the general public. This poses a reputational risk for banks, especially if they fail to deliver on their targets and promises (so-called "greenwashing"). In addition, there have been recent proposals to increase ESG regulation; these new standards would mean greater transparency, for example in the obligation for banks to regularly report on the environmental and social impact of their activities, as well as the climate risks in their bond and loan portfolios.
As a result, European banks are starting to restrict financing for new oil, gas and coal projects. For example, BNP Paribas (Europe's largest bank by assets) has reduced its fossil fuel financing by 65.4% to USD 14.7 billion in 2021 (from USD 42.7 billion in 2020). Some companies such as ING, HSBC, and Lloyds have even stopped financing new projects in the sector altogether. In contrast, the major banks in North America have collectively increased their financing of this sector by 22.7% in 2021. Of the $742 billion the world's sixty largest banks financed in the fossil fuel sector, nearly half was provided by North American banks. However, even these banks are likely to face tighter regulation, and it is also expected that the Biden administration (which has climate change as a major issue on its agenda) will put pressure on the banking sector to limit financing for the sector.
Meanwhile, major oil companies in Europe such as BP, Shell and TotalEnergies have committed to becoming green businesses over the next three decades. They plan to do this through the divestment of their existing businesses and the purchase of companies in the renewables sector. Last year alone, Shell bought India's renewable energy group Sprng Energy from Actis for US$1.55 billion. TotalEnergies acquired 50% of a US wind and solar farm developer for US$2.4 billion and BP announced that it had acquired a 40% stake in a large-scale Australian renewable energy project for an undisclosed sum. These acquisitions are still relatively small given the size of these oil behemoths. But the value of such deals is expected to increase over the next few years.
However, oil company divestments can give the impression that sellers have reduced emissions when in fact they are simply moving to private companies with lower standards. In 2021 alone, divestments worth $192 billion have taken place, and regardless of the intention of the selling companies, the result is that millions of tonnes of emissions will effectively disappear from the public eye into the hands of private companies. The low-carbon economy of the future will require mergers, acquisitions and divestments with environmental safeguards enforced by banks, companies and investors.
The ESG phenomenon has also arrived in the banking sector in the Czech Republic. The main driver of this trend is the impact of the European Union legislation and taxonomy. In 2021, banks operating on the Czech market openly declared their commitment to strengthening environmental and socially responsible business in the Czech Republic by signing the CBA Memorandum. They will therefore send their clients questionnaires on CO2 consumption in the future, and it may happen that in case of high emissions they will reject the company's loan application. In addition, the European Union recently introduced a reporting obligation that will require all Czech companies with more than 250 employees to regularly report on the environmental impact of their business, starting in fiscal year 2025. These steps confirm that ESG is not a temporary "fashion trend" but rather a new standard for all industries.