Two months ahead of the US midterm elections, US red-state governors are riding a wave of legal attacks at pro-ESG banks and asset managers. The governors state that fund managers have a fiduciary duty to maximize profit for their investors, and that socially responsible investment (SRI) policies limiting exposure to fossil fuels betray this commitment.
Will we see a similar trend in Europe? Unlikely. Europe now faces transformational demand for alternatives to Russian gas, which has changed the ESG discourse firmly to favour co-existence over exclusion.
In the US, the states of Texas and West Virginia are boycotting several European banks – including BNP Paribas, Credit Suisse and Danske Bank – based on their ESG policies towards energy investments. Similar moves in Idaho, Louisiana, Kansas and Wyoming mean that the list could get longer as climate change becomes a more partisan issue in the country.
Unlike in the US, Europe’s oil and gas producers have a leading role in the conversation around transition
It is not impossible to imagine a similar situation in Europe. Politically powerful fossil-fuel companies are profiting from the continent’s sharply changed energy needs. The case of fossil-fuel divestment is a more difficult one to make when the Nord Stream pipeline stops flowing.
This is also what European governments are choosing. In the UK, new prime minister Liz Truss announced recently that the government would grant additional North Sea licences to boost domestic oil and gas production. The European Union recently published a statement in support of further oil and gas exploration in Norway, while France is betting on its historical ties to Algeria for a natural-gas import deal.
But these decisions are pragmatic responses to Putin’s economic war of aggression rather than politically driven partisan point-scoring.
Inclusive
The crisis has forced European states to adopt a new rhetoric around the energy transition that guarantees fossil-fuel investment. A year ago, when the financial sector was preparing for COP26 in Glasgow, oil and gas companies were formally excluded from the event, as they were not seen as having a legitimate or ‘appropriate’ role to play in the transition to net zero. Today, those companies are very much part of the conversation.
The energy-security agenda justifies engagement and investment into more local – or at least non-Russian – energy sources. Public funds are being poured into regional resources – including oil and gas, renewables and nuclear – and will need support from the private sector. This gives banks and investors the flexibility to remain on track with their transition plans without excluding fossil fuels from their balance sheets.
Unlike in the US, Europe’s oil and gas producers have a leading role in the conversation around transition. The region’s energy-security priorities mean that their relationship with the banking industry will likely be a far less confrontational one.
