“Green” and “ESG” loans: a big gift to the banks, but without anything natural
Last year the world's largest banks made $3 billion in profits from underwriting bonds and setting aside loans in the "green" or "ESG" category.
This figure was compared to the $2.7 billion that banks made from bonds and loans made to the oil industry. Some may hail this achievement as a win for transition-oriented industries. But is it really like that?
First, as Bloomberg points out in the article containing data on loan profits, one of the reasons for the increase in transition financing is stricter EU regulation. With this regulation, the European Union essentially forced banks to grant more loans and underwrite more bonds for companies operating, for example, in the wind and solar energy sectors.
In other words, banks did not make more loans and underwrite more bonds for industries classified as environmentally responsible. It was a mandate from Brussels.
This is not to say that the development was entirely inadvertent, of course. By contrast, many banks have pledged to reduce their credit exposure to the oil and gas industry, with France's Credit Agricole being the latest to declare an end to financing new oil and gas projects last December.
However, the effect of tougher regulation by the EU should not be underestimated: banks risk higher capital requirements and even fines unless they lend more to transition-related industries and reduce funding to the oil and gas.
In this context, it is no surprise that European banks have led the rise in green financing, even though the largest issuer of such financing has been Japan's MUFG. In contrast, US banks have been less willing to finance projects labeled as green.
The reason is mainly political: There has been a backlash against what some states call discriminatory investment policies by some of the world's largest banks, which have sought to shun the oil and gas industry in favor of wind, solar, hydrogen and electric vehicles.
This backlash continues and has already forced some financial industry majors to declare that they are not, in fact, against oil and gas. It all started in 2022, when Texas accused BlackRock and nine European investment giants of boycotting the oil and gas industry and threatened to divest its money from them in response.
The asset manager responded by assuring Texas authorities that he does not boycott oil and gas and that he is strongly in favor of energy investments in the sector. In a letter to the Texas comptroller, BlackRock said it has approximately $310 billion in investments in the oil and gas industry, including $115 billion in Texas.
In the United States, therefore, so-called sustainable financing is moving more slowly in the direction desired by the government. But there it goes: Last year, Bank of America had an exposure of $32.3 billion in financing for low-carbon energy supplies, as Bloomberg reports, while its exposure to oil and gas was 32 billion dollars. Wells Fargo, on the other hand, has invested more than twice as much in oil and gas as in wind, solar, electric vehicles and hydrogen. Last year its exposure to low carbon emissions was $14.3 billion versus $35.7 billion for oil and gas.
Government policies and regulations, therefore, are critical to moving from the financing of oil and gas, which is considered an industry with no long-term future, to the financing of energy industries that are considered to have a long-term future. But there is also another critical factor.
Last year, wind and solar companies suffered a huge stock crash. The S&P Clean Energy Index has fallen more than 20% in two months. The reason for this collapse was the series of interest rate increases that the European Central Bank and the Fed have implemented over the past two years in an attempt to combat inflation. The reason wind and solar have been more susceptible to the effects of inflation-fighting monetary policy is that they are much more dependent on loans than oil and gas producers.
“To support rapid growth, you need to continue leveraging the balance sheet or issuing equity. In a zero interest rate environment, this formula worked. In a higher rate environment, it doesn't work,” David Souccar, portfolio manager at Vontobel Asset Management, told the Financial Times. So if green investments don't grow more rapidly, it's simply the fault of the ECB and its monetary policy…
In other words, low-carbon energy companies are particularly vulnerable to tariff increases because they lack the resources to withstand the effects of such policies. The reason they are so vulnerable is that they simply don't make as much money as the oil and gas industry. The market in which they operate is very different, with long-term fixed prices for the electricity they produce and equally fixed subsidies.
Banks, therefore, have made more money lending to wind and solar – and other industries classified as green – because these industries rely more on loans to operate and grow. Furthermore, they earned more by lending to these industries because many of them were forced to lend more to these industries.
By Irina Slav for Oilprice.com
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The article “Green” and “ESG” loans: a big gift to the banks, but without anything natural comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/prestiti-verdi-e-esg-un-grosso-regalo-alle-banche-ma-senza-nulla-di-naturale/ on Mon, 08 Jan 2024 07:00:24 +0000.