The banks have promised to cut funding for oil drilling in the Arctic. The money flowed anyway.

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A battle has erupted between investors, environmentalists and banks over these promises. Some investors and environmentalists say they contain loopholes, and money has continued to flow from big banks to companies operating in oil and gas-rich parts of Norway, Russia, Canada and Alaska. Under pressure, two of the banks, BNP and HSBC, say they are reviewing their commitments to strengthen them.

The controversy over funding for Arctic oil and gas drilling comes as world leaders and major financiers prepare to gather in Glasgow, Scotland for the United Nations climate conference on reducing emissions from carbon. A key topic of the conference will be the promises made by governments and businesses and their significance in terms of real-world consequences.

Mark Carney, former head of the Bank of England and UN special envoy for climate action and finance, has pushed banks to sign broader ‘zero cleaning’ pledges that aim to phase out carbon lending from ‘by 2050. But many environmentalists, and investors, say those promises fall short of the measures needed.

“The policy is not waterproof,” said Federico Wynne, senior cross-asset analyst at Fidelity International, of the Arctic commitments. The asset manager was among 115 investment firms collectively managing $ 4.2 trillion and recently wrote to bank chiefs demanding more action to phase out fossil fuel financing.

Among the complaints about pledges: While banks have stopped lending directly to Arctic projects through so-called project finance loans, they continue to lend to oil and gas companies active in the region. ‘Arctic at the corporate level, where money is fungible.

Over the past decade, the melting Arctic ice has opened up areas previously inaccessible to oil and gas exploration. Arctic oil and gas extraction is expected to increase 19% to 13.7 million barrels of oil equivalent per day by 2026, according to analysis of Rystad Energy data by Reclaim Finance, a group based in Paris, which tracks oil investments in the Arctic.

Environmentalists and investors feared that opening up a whole new region of the world to drilling could divert efforts to invest in renewables.

The Yamal LNG plant in Arctic Russia in which TotalEnergies is an investor.


Photo:

Smirnov Vladimir / Zuma Press

Banks, including France’s BNP, began engaging in the Arctic in 2017. Since then, however, BNP has helped provide corporate finance to companies with operations in the Arctic. He was part of a group of banks that arranged a $ 6.35 billion loan in 2020 for TotalEnergies SE.

TotalEnergies is an investor in Arctic LNG2, a liquefied natural gas development in northern Russia. A spokesperson for TotalEnergies declined to comment.

More banks joined in the fray when President Donald Trump lobbied to allow oil development in Alaska’s Arctic National Wildlife Refuge, which escalated the problem.

At the end of 2019, Goldman Sachs was one of the first US lenders to declare that it would not directly fund oil exploration in the Arctic.

There is no indication that the banks have broken their promises, which focus on project finance or loans for specific projects. But about 90% of energy investments are financed mainly from company balance sheets, according to the International Energy Agency.

ConocoPhillips,

which claims to be Alaska’s largest oil producer, does not rely on funding for Arctic projects, according to a company spokesperson. But it receives corporate funding from several banks that have made Arctic drilling commitments. For example, earlier this year Goldman was part of a group of banks that helped ConocoPhillips borrow more than $ 3 billion. A Goldman spokesperson declined to comment.

A spokesperson for ConocoPhillips said that in Alaska, the company has “demonstrated an ongoing commitment to responsibly developing the state’s resources for over 50 years.”

Another problem is that banks have different – and often smaller – geographic definitions of the Arctic than environmentalists and some investors.

“Investors will be asking for a broader definition of the Arctic region,” said Roland Bosch, an executive in the EOS unit of Pittsburgh-based fund manager Federated Hermes Inc., which advises companies on how to improve policies. environmental. In 2020, Hermès’ EOS unit backed a resolution from Barclays PLC shareholders asking the bank to phase out fossil fuel financing.

BNP Paribas is reviewing its definition of the Arctic region where it excludes direct project financing.


Photo:

Theo Giacometti / Bloomberg News

BNP excludes projects located in the largest ice-covered offshore area over a 12-month period and in the Arctic National Wildlife Refuge. A BNP spokeswoman confirmed that it had lent to companies active in the wider Arctic region, but said it had fulfilled its commitment on direct financing of projects in its excluded area.

“The group is currently working on a review of its funding criteria in the Arctic region,” said the spokesperson. “Ongoing work will include an in-depth analysis of all existing definitions of the Arctic. “

“If banks are trying to be true to the spirit of the commitments they make, then we should try to close those loopholes,” said Robert Furdak, investment manager for environmental, social and corporate governance at the hedge. London-based fund. Man Group PLC. Man pushed companies on carbon issues and was among HSBC shareholders who backed a resolution asking the bank to phase out funding for coal.

In April 2018, HSBC pledged to avoid funding for new offshore oil and gas projects in the Arctic Circle area, an area smaller than some other banks. Since then, she has helped organize corporate finance for companies with projects in the Arctic. including Royal Dutch Shell PLC, TotalEnergies and Germany’s Wintershall Dea AG, according to Reclaim Finance.

“We are in the process of reviewing and updating our Arctic policy,” said a spokesperson for HSBC.

Arctic drilling commitments are important to investors who increasingly judge companies by their commitments to environmental, social and governance issues, known in the investment industry as name of ESG.

“You would be very disappointed if your bank with a stellar ESG score were involved in drilling in the Arctic,” said Mr. Wynne of Fidelity.

Write to Simon Clark at [email protected]

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