Energy crisis jeopardizes – and galvanizes – Europe’s sustainability leaders
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Energy crisis jeopardizes – and galvanizes – Europe’s sustainability leaders

Wind energy versus coal fired power plants
Photo: iStock

European banks have raced far ahead of their US peers on sustainability. But the continent is now facing an energy emergency, creating pressure from some corners to reverse investment declines in oil and gas. Can Europe’s banks remain frontrunners in sustainable finance in today’s fragile geopolitical environment?

As winter approaches in Europe, Russia’s war in Ukraine is threatening the continent’s resolve not just in regard to democracy but also the environment.

Banks’ energy transition strategies are in danger of being delayed by the funding needs of commodities traders and carbon-intensive energy utilities. Gas shortages have forced governments to switch back to coal in Germany and elsewhere. And some in Europe – notably in the UK – are pushing for more investment in, and therefore financing for, new fossil-fuel infrastructure.

For many European firms, after decades of cuts in global banking, sustainable finance is now vital to their efforts to find a new role in global finance.

“We want all the global finance activity to be sustainable finance at some point – that’s the end game,” says Pierre Palmieri, Societe Generale’s head of global banking and advisory.

But the energy crisis has now placed the timeline for such aspirations under extreme strain.

BNP Paribas, which is widely seen as a leader in environmental, social and governance (ESG) issues, is actually the world’s biggest lender to offshore oil and gas, according to a recent report by Rainforest Action Network and four other non-governmental organizations. Between 2016 and 2021, the bank financed $36.5 billion in this sector, ahead of both JPMorgan ($35.2 billion) and Citi ($34.5 billion).

We want all the global finance activity to be sustainable finance at some point – that’s the end game
Pierre Palmieri, Societe Generale

Over this period, the French bank also funded more than $142 billion in the broader fossil-fuel industry, according to the report. That’s just looking at public data on bonds and loans. The one European bank to surpass it in this sector was Barclays ($167 billion).

However, the US banks are in a different league altogether in financing fossil fuels. JPMorgan helped fund almost $100 billion more ($382 billion) than its nearest rivals, which were all US firms: Citi ($285 billion), Wells Fargo ($271 billion) and Bank of America ($232 billion).

Over the last two years, fees from fossil-fuel clients have become a smaller percentage of total fee income for many banks, especially in Europe. However, this is partly because 2020 was such a big year for debt issuance by oil companies that subsequent years would inevitably fail to equal it.

Mr. Pierre Palmieri /  SOCIETE GENERALE 31 JUILLET 2013.
Pierre Palmieri, Societe Generale. Photo: Philippe Couette

Looking forward, all big European banks still have the scope in their climate policies to channel billions of euros to companies developing oil and gas in regions such as Africa and the North Sea. This, along with ramped-up investment in terminals for liquefied natural gas (LNG), is now more compelling economically and politically.

Upstream oil and gas companies are enjoying record demand for their products and now have relatively small liquidity needs – unlike early 2020 when European banks jumped at the chance to meet their ballooning funding requirements. However, higher demand for borrowing has come from commodities traders and energy utilities, especially in Europe. Energy utilities in the region have been in dire need of extra liquidity to meet cash margin calls related to forward contracts they sold on commodities exchanges.

This has seen them tapping billions of euros and pounds of undrawn credit facilities at the banks, as well as seeking new bank support, in some cases with government backing.

European outperformance

European banks’ small size in fossil-fuel financing is often as much a product of their wider retrenchment in global wholesale banking as it is of their strategies around sustainability. However, recent metrics underline their relative outperformance in sustainability.

The Stockholm-based Anthropocene Fixed Income Institute, set up by former Barclays quant strategist Ulf Erlandsson, analyzes each bank’s share of fees from green bonds and loans, net of their fees relating to fossil-fuel extraction.

Focusing on the largest players in Europe and North America, Crédit Agricole, UBS and Santander come top by this measure. Three of the large Canadian banks – followed by Wells Fargo, Bank of Montreal (another Canadian) and JPMorgan – come bottom.

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James Vaccaro, Climate Safe Lending Network | Photo: Gail D'Almaine

Erlandsson’s research further highlights which banks have reduced their proportion of fossil-fuel fees most over the last two years. Comparing banks with a similarly sized fixed income fee pool, the Europeans again generally look better. Barclays and BNP Paribas saw steeper falls than Morgan Stanley and Wells Fargo, for example. The Canadian banks even increased their proportion of fees from fossil-fuel clients in 2021 and 2022.

Europe’s energy crisis has become increasingly entrenched as the war in Ukraine drags on, and European banks’ goals of reducing their exposure to the worst polluters will be sorely tested. Discussing the impact of those margin calls on energy firms, SocGen’s Palmieri explains: “We needed to make sure that the whole energy system would work at a time of unprecedented volatility by supporting our energy clients.”

Since the outbreak of war, the attention of many European bank investors has also turned away from sustainability.

“We’re still marketing ideas on sustainability to clients, but it’s difficult to find investors who care,” says a sell-side analyst covering European banks. “Before, all the discussion was about CO₂ emissions and reducing exposure to companies who are polluting the environment. Now, it’s all about looking after the people who are bearing the brunt of the cost-of-living crisis.”

In Europe, banks lobby against cutting fossil-fuel exposures more quietly and behind closed doors
James Vaccaro, Climate Safe Lending Network

That analyst says he might now get about 100 investor responses from research about the effect of higher interest rates on banks and five from research on sustainable finance.

Inevitably, advocates for the oil and gas sector now argue that today’s problems stem from insufficient investment in fossil fuels in the late 2010s – rather than insufficient investment in clean energy and reliance on authoritarian energy exporting states for the past 30 years.

“This whole period has been a giant bucket of ice water on our heads,” says the head of one London hedge fund, discussing post-Covid energy shortages. “We’ve let idealism run ahead of reality. It’s bonkers to be cutting off financing from low-cost energy sources.”

That message ignores technological advances in wind and solar power over the past two decades. But such views could be more pervasive than is apparent from public discourse. The UK government’s new licensing of North Sea oil and gas fields may have more support than commitments to net zero at many banks.

“In Europe, banks lobby against cutting fossil-fuel exposures more quietly and behind closed doors,” says James Vaccaro, executive director of the Climate Safe Lending Network and formerly head of corporate strategy at Dutch group Triodos Bank. “Financial institutions in the US are more emboldened to argue that going ‘too far’ on the environment would be a bad thing. There’s a consensus that you can’t say these things publicly as a CEO in Europe. That doesn’t mean their interests and business models are so different that they don’t have common interests.”

US emphasis

US banks reject the idea that they’ve been catching up with their European counterparts in sustainability since Joe Biden replaced Donald Trump as president in 2020. After the 2015 Paris Climate Accorda, when Barack Obama was still in the White House, the big US banks all promised to plough more money into green business and, over the longer term, to reduce their emissions.

US banks have certainly been putting more emphasis on sustainability since Trump’s departure. In the late 2010s, only one US firm was among the top 10 banks for green and sustainability linked loans, according to Dealogic. Since 2020, three of the top five banks have been US firms.

ESG-US banks -loans.jpg
ESG-Europe shares.jpg

In bonds, JPMorgan has grown its leading share in the green and sustainability linked ranking over the last two years, according to Dealogic data. Bank of America and Citi, as well as BNP Paribas, have leapfrogged two former close contenders for the number-one spot, Crédit Agricole and HSBC, in this period. SocGen has fallen out of the top 10 and Goldman Sachs has entered it.

One global head of sustainability at a large US bank tells Euromoney that there’s been a genuine shift in culture around its environment goals.

“Even our Houston oil and gas bankers are on board,” he insists.

Nevertheless, European banks, together with the Japanese, still dominate the global renewable energy loans rankings. Bankers at European firms argue their strong position in project and infrastructure finance – coupled with early moves in sustainability – continues to serve them well in sustainable finance, as they’ve built expertise and relationships in green sectors.

“When we started financing renewable energy projects, other banks thought it was impossible to provide long-term finance to solar panels because of the risk of them degrading,” says Lucas Arangüena, Santander’s global head of green finance. “We got our heads around this technology and decided that it was fully bankable.

“Success breeds success. There’s a network effect. As in solar and wind 10 years ago, we’re now looking at green hydrogen. A lot of the companies involved in that technology are the same,” he adds.

Bankers at both US and European firms say the passing of Biden’s Inflation Reduction Act this summer is a game changer. It promises $369 billion in federal backing for renewables and clean energy technology. Coming after last year’s €800 billion Next Generation EU fund – also partly orientated towards energy transition – this new US government funding could make sustainable business much more important for US banks.

“When you have enabling conditions that are promoted by public policymakers, that provides a real opportunity for the banks,” says Marisa Drew, chief sustainability officer at Standard Chartered.

Laurence Pessez, BNPP's head of corporate social responsibility, agrees.

“The current administration’s push on green business makes a big difference to what we’ve seen before in the US,” she says.

Whether or not this new green business will result in an equivalent reduction in polluting industries is another question.

In the lead up to the COP27 climate conference, the debate about banks’ climate commitments has focused on reports that US banks, to a far greater extent than Europeans, have pushed back on new guidance from the UN’s Race to Zero Campaign, which accredits their membership of the Net Zero Banking Alliance, including a stipulation that member banks shouldn’t finance new coal projects.

Part of the US banks’ concern about this, as well as with new disclosure requirements regarding climate commitments from the Securities and Exchange Commission, was reportedly to do with fears about falling foul of US competition rules that prevent companies from acting in concert.

Many still wonder whether the real reason for pushing back on tighter climate rules is worry about a growing backlash against ESG issues in Republican states or a lack of genuine enthusiasm for transitioning away from lucrative fossil-fuel business. The answer is probably both.

This has led to an absurd situation in which Republican-controlled state governments use good positions in industry sustainability rankings to choose which banks to ban, while the banks use bad rankings in NGO reports to defend themselves.

“Whenever someone says: ‘Legal risk’, we have it checked out immediately,” says a senior insider at one of the many European banks with a US subsidiary, pointing out the previous pain it has suffered from US litigation.

The bank’s lawyers aren’t concerned about the anti-trust implications of its commitments, the source reveals, and it would make no difference if the group was headquartered in the US.

Other European bank insiders take a similarly sanguine view about US competition law risks. They say they are not afraid of being accused of breaching fiduciary duty to clients by excluding companies that take no action to reduce their emissions because of the financial risks such companies pose.

Of course, European bank chief executives are not subject to the same degree of political scrutiny from climate-change sceptics as their US peers. Oil and gas production is far more important to the economy and employment in the US. That runs through cultural and consumption patterns just as much as it does politics. But some are unsympathetic with banks who might not have anticipated that the Race to Zero criteria would be strengthened.

“Suddenly it means you have to address your fossil-fuel financing, and I think that surprised a lot of banks,” says Johan Frijns, executive director at BankTrack, which co-authored the NGO report. “The Net Zero Banking Alliance seemed like a comfortable way of saying you’re doing something without doing anything.”

Frijns suggests talk of anti-trust legal risk may be “a nice alibi” for US banks averse to taking immediate action.

Project specific

Internal bank policies still leave much to be desired, and this is one reason why the energy crisis poses such a risk to the climate. Very few banks isolate energy companies with expansion plans in oil and gas, according to the NGO report. In fact, the only area in which any large bank’s policy scores well in oil and gas concerns project-specific financing, which is largely irrelevant as upstream oil and gas developments typically get funded at the corporate level.

Still, at the project-specific level, the average bank’s oil and gas policy score is much higher in Europe than in the US and Canada.

Moreover, in coal – with the notable exception of Germany – European banks’ policies are much more environmentally friendly than those of US banks in terms of excluding companies with high emissions relative to revenues or power generation and in absolute terms. Banks in Spain, the UK, Italy and Scandinavia all score well for their company-specific frameworks on coal. And French banks score exceptionally well in coal and oil and gas.

Jörg Eigendorf, Deutsche Bank.jpg
Jörg Eigendorf, Deutsche Bank

Contrary to the US dynamic, the more domestically focused players in France have more robust fossil-fuel policies than larger banks with bigger international operations. But even comparing globally active banks, French firms score far higher than global US peers on almost every metric.

“We demonstrated that we walk the talk, which also helped us gain market share in sustainable products and services because we are asking our clients to do things that we do ourselves,” says Pessez, discussing BNPP's climate policies.

European banks still say that they will deliver on these policy commitments, including nearer term goals to 2030, even if the next two years see an increase in emissions.

“There is pragmatism and short-term solutions, but we need to watch out for the lock-in effect,” says Jörg Eigendorf, Deutsche Bank’s chief sustainability officer.

In other words, more exposure this year to polluters through trade-finance facilities is better than extending a 10-year loan to a company that will still be pumping out carbon in 30 years. Financing LNG terminals, moreover, is better if they can subsequently be converted for hydrogen.

Caution at European banks around ramping up long-term funding to fossil fuels in response to higher energy prices is also partly due to greater supervisory scrutiny – based on prudential concerns about exposure to stranded assets – according to Ulrich Volz, economics professor and director of the SOAS Centre for Sustainable Finance.

“If you have a supervisor talking about climate change, as a bank you’re more likely to take it seriously than if you have a supervisor that doesn’t care,” he comments.

Sustainability might not be the top priority for clients like last year, but it is not de-prioritized. Sustainable finance is on a clear growth path. In the long run, the pressure to transition will be higher
Jörg Eigendorf, Deutsche Bank

The European Central Bank and the Bank of England both published the results of inaugural climate stress tests this year.

The Federal Reserve announced in late September it would be launching a pilot climate stress test, but it is a laggard here. Mark Carney launched plans for a stress test at the BoE in 2019. The Fed’s exercise won’t be launched until next year and only covers six banks, versus 104 by the ECB.

Partly due to the lack of data at the bank level, even these stress tests have only been learning exercises in Europe and have not resulted in higher capital charges. But by 2024 the European Banking Authority is due to publish firm-specific data showing which banks are doing most and least to tackle climate change.

Overall, there appears little doubt among European banks that scrutiny over the sustainability of their businesses will continue to increase. In the US, however, a future Republican president could make it much easier for banks to ramp up financing to fossil fuels again, for example by appointing a new SEC head who would reverse any new climate disclosure requirements.

While the US is largely able to meet its own energy needs, the energy crisis has glaringly exposed Europe’s reliance on Russian gas. There’s some optimism at NGOs that this will accelerate the transition.

“European banks will be transitioning to clean energy faster” because of the war in Ukraine, says Paddy McCully, an energy transition analyst at Reclaim Finance.

That is certainly the message from the banks too, which in some cases have stepped up their sustainability promises since the outbreak of the war. SocGen said in late October it was raising its 2025 target for reducing exposure to upstream oil and gas and stepping up its 2030 target for lowering the carbon intensity of its power generation portfolio.

In late March, ING also said it would be stopping financing dedicated to oil and gas fields, and growing financing for renewable energy by 50% by 2025.

“We’ve decided not to loosen the targets we have but rather to accelerate on the renewable book,” says Anne-Sophie Castelnau, ING’s global head of sustainability.

BBVA announced a similar tightening of its oil and gas project policy in October: reducing emissions from its oil and gas portfolio by 30% by 2025 and increasing its 2025 sustainable financing target to €300 billion.

“This is the biggest business opportunity we have had in our lifetimes,” says Javier Rodríguez Soler, BBVA’s global head of sustainability.

BBVA is focused on countries with little reliance on Russian energy, but German banks are on the front line of energy dependence on Russia and even they voice a similar resolve.

Commerzbank says it is still on track to meet one of the industry’s most ambitious targets for sustainable finance, relative to its size (also €300 billion by 2025). Last year, Deutsche brought its target of €200 billion forward to 2023.

“Economies are in survival mode,” says Eigendorf. “Sustainability might not be the top priority for clients like last year, but it is not de-prioritized. Sustainable finance is on a clear growth path. In the long run, the pressure to transition will be higher.”

Why European banks lead in sustainability

When looking at the relative progress by US and European banks in tackling climate change, it is important to consider their biggest clients in the fossil-fuel industry.

Data compiled by the Rainforest Action Network and four other non-governmental organizations focused on climate shows that each bank’s biggest fossil fuel client is almost always local, even at global firms.

Based on loan and bond financings recorded on Bloomberg, the data shows that, among the 35 top North American and European banks, the biggest fossil-fuel client for 28 of them came from the bank’s home country or region.

Meanwhile, of the wider banking industry’s top-10 biggest fossil-fuel clients, five are North American, but only two are European and none (with the partial exception of Shell) are from continental Europe.

Sometimes a bank’s biggest client is the local oil major, such as Eni for the big Italian banks and Total for Crédit Agricole. But for banks with bigger oil and gas industries in their home markets, the biggest companies can be among the newest: US shale producer Pioneer Natural Resources for Wells Fargo; US pipeline company Energy Transfer for PNC; or Norway-focused Lundin Energy at Danske Bank.

For other banks, commodities traders, which sometimes own mineral-producing assets in various countries, are the biggest fossil-fuel clients. Indeed, the world’s large oil traders all tend to be European in origin.

All of ING’s top three fossil-fuel clients are commodities traders, according to the report: Vitol, which is based in the Netherlands; followed by Geneva-headquartered Gunvor; and then Trafigura holding company Farringford. The latter is also listed as the biggest fossil fuel client at Societe Generale and BPCE.

When the biggest client is not local, this is sometimes because the bank has its biggest operations in former colonies of its home country. For BBVA, it is Mexican national oil company Pemex. For Standard Chartered, it is Pengerang Refining Co in Malaysia. But these banks are the exceptions.

The local bias even of big banks has a decisive impact on their fossil fuel policies and practices, according to Paddy McCully, energy transition analyst at Reclaim Finance, one of the report’s authors.

He says the French banks, particularly domestically focused firms La Banque Postale and Credit Mutuel, are leaders in sustainability partly because there are so few big French fossil-fuel companies.

France replaced coal with nuclear power decades ago, McCully notes, and it lacks the oil and gas reserves even of the UK. “The political situation is helpful in pressuring the banks,” he says. “There’s a less powerful fossil-fuel lobby in France than in the UK, the US or Canada.”

From a risk management perspective, this local bias also means US banks often have a better grasp than European peers of the risks involved in deep and shallow water drilling, and in shale oil and gas.

By contrast, Europe is a bigger renewable energy market. The top three renewable energy financings over the last two years, in both bonds and loans, were all for European projects, according to Dealogic. The proportion of bonds issued in euros versus dollars is also much higher for green and sustainability-linked deals than in the wider market.

“You could argue we were born in the right place,” says Lucas Arangüena, Santander’s global head of green finance, explaining why he thinks Santander has a top-tier position in renewable energy.

As he notes, there is no oil in Spain. However, some of the world’s biggest renewable energy firms, such as Acciona and Iberdrola, are Spanish.


Scoring quality as well as quantity

Management consultant reports on sustainable finance are almost as common as those on digitalization, but they are rarely bold enough to compare individual firms.

A recent offering from Alvarez & Marsal stands out in this regard. It ranks large US and European firms, focusing less on legacy business and more on growth and targets in sustainable finance, transparency of climate reporting and alignment to net zero, as well as issues such as innovation, advice and analytics.

As normal in sustainability, US banks come towards the bottom. “Europe is far ahead on the climate agenda – not just because of regulatory pressure but also from a business perspective,” says Fernando de la Mora, Alvarez & Marsal’s financial services lead in Europe.

JPMorgan scores relatively well, however. The report points to Carbon Compass, a methodology for reducing the bank’s financed emissions. It also points to JPMorgan’s growth in sustainable finance. JPMorgan announced an ambition last year to finance and facilitate more than $2.5 trillion in this area.

Overall, UK banks dominate the upper echelons of the consultancy’s ranking. Like JPMorgan’s relatively good score, that does not sync with the assessment of climate activists, particularly regarding emissions policies. UK banks’ climate policies are generally middling, according to a recent report by Rainforest Action Network and other organizations, while JPMorgan’s policies are weak.

Yet Alvarez & Marsal also likes some of the details about what UK banks are doing on the client side. It flags HSBC’s Sustainability Assessment Tool and its sustainable supply chain-finance programme with Walmart.

This is in line with bankers’ arguments that sustainability should be about engaging clients – using their expertise on transitioning – rather than just cutting off clients that fail to act.

BNP Paribas has brought together 400 people from within the group to form a Network of Experts in Sustainability Transitions to improve its technical understanding of its environmental impact. Last year, it also announced the formation of a Low-Carbon Transition Group made up of 100 recruits as well as 150 existing bankers and traders.

“You need to find the proper solution for the client and you need integrity,” says Antoine Sire, head of company engagement at BNP Paribas. “It’s like the interaction between M&A bankers and research analysts. You need to have people who can carry out transactions and you need to have market intelligence. We are trying to develop the same type of approach for ESG.”

Surprisingly, CaixaBank is bottom of the Alvarez & Marsal’s ranking. CaixaBank has been a big issuer of social bonds, but its merger with Bankia has delayed the publication of its emissions targets.


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EMEA editor
Dominic O’Neill is EMEA editor. He joined Euromoney in 2007 to cover emerging markets, focusing on central and eastern Europe, Middle East and Africa, and later on Latin America. Based in London, he has covered developed market banking since 2015.
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