The State Bank of India (SBI) is among several global lenders to have poured billions of dollars into fossil fuel firms amid clarion calls to combat climate change.
Together, behemoths like JP Morgan Chase, Bank of America, Barclays, and BNP Paribas, along with SBI, have lent $5.5 trillion to such companies since the adoption of the Paris Agreement, according to a report compiled last month by a coalition of environmental groups.
The Paris Agreement, signed by 196 members of the United Nations Framework Convention on Climate Change in 2016, called upon global banks to set and publicly disclose their long-term and intermediate targets to reduce global emissions.
Yet, in 2022 alone, they lent $673 billion to the industry.
In 2022, however, overall funding activity turned slow: JP Morgan Chase, for instance, cut down funding to fossil fuel companies by 42% over 2021. Citi (28%), Wells Fargo (25%), and Mitsubishi (12%), too, have cut back. Funds disbursal by SBI, India’s only lender listed in the report, also stood at a five-year-low of a little over $1 billion.
Notably, though, 59 of the 60 banks surveyed by the Fossil Fuel Finance Report 2023, did not yet have robust policies to ensure that global warming remains less than 1.5°C , as required under the Paris Agreement.
In any case, the report said, “Fossil fuel financing plateaued in 2020, rebounded in 2021, and levelled out again in 2022 owing to unusual geopolitical and economic conditions, not shifts in bank policy.”
SBI’s funding to oil and gas companies
Between 2016 and 2022, the public sector bank financed new fossil fuel expansion projects worth $9.49 billion. In 2016, the largest share of its funding went to Hindustan Petroleum Corporation’s Rajasthan Refinery at $4 billion; in 2022, it went to NTPC at $200 million, the report said.
Climate risks are only going to intensify as India is keen on expanding commercial coal mining.
By 2025-26, the country aims to export coal after meeting its own needs. This will require opening new mines and expanding the capacity of existing ones, according to Amrit Lal Meena, India’s coal secretary. “The coal ministry has clear plans till 2047,” Meena told Moneycontrol last week.
All this firmly puts Indian banks, which are financing many of the expansion projects, at centre stage.
Not surprisingly, a survey of 34 banks by think-tank Climate Risk Horizons (pdf) concluded last year that India’s banking system is unprepared for the financial impact of climate change.
SBI, particularly, only has a target for long-term carbon neutrality by 2030. “It does not include an implementation plan…It also does not have an exclusion/screening list for prohibited activities,” the think tank report said.
Things aren’t very different at the global level either.
No policy on excluding risky projects
Over the past two years, several international banking giants have adopted net zero commitments as their key approach to tackling the climate crisis.
The devil is, as usual, lurking where it always does—in the details.
The Fossil Fuel Finance Report concludes that the banks’ targets are too low, or leave controversial portfolios such as LNG, pipelines, and other infrastructure, unaddressed. Most of their targets are limited to oil, gas, and thermal coal. Moreover, nearly all such targets are applicable to only lending, excluding bonds and equity underwriting.
Only seven of the 60 banks surveyed include both lending and underwriting when more than a third of overall financing is done through underwriting, the report said.
“The truth is that more and more businesses are making net zero commitments, but benchmarks and criteria are often dubious or murky,” UN secretary-general António Guterres said at the World Economic Forum earlier this year.
Huge profits have helped, not strict lending policies
In 2022, banks’ financing in the global fossil fuel sector was down 16% from the previous year at $668.6 billion.
However, the decline is attributed to soaring profits earned by oil and gas companies during the year. High inflation, aggressive rate hikes, and fears of a fuel shortage let these firms rake in record earnings of $4 trillion, the report stated.
Sufficient cash flow from profits reduced the need to borrow from banks. “There is little to instil confidence that this shift will become a positive, long-term trend,” the report said.
With giants like BP and Shell walking back on their climate commitments, experts argue fossil fuel companies are headed for the largest expansion since 2016. This will fuel borrowings from banks.
While most banks have policies to restrict lending on project-basis, funding for expansion plans is another thing, the report noted.
Even more stringent exclusion policies of banks are, therefore, the only answer.
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India’s top banking institutions have taken major steps to reduce their involvement in the global oil and gas sector by cutting back on lending. In an effort to protect their stakeholder interests and address environmental issues, the state-owned banks are selectively limiting the financing of high-risk projects.
State Bank of India (SBI), India’s largest lender, has taken a lead role in decreasing its oil and gas lending. In 2020, when global demand for oil and gas fell drastically due to the COVID-19 pandemic, the bank significantly reduced financing towards the sector. In overall energy sector financing, SBI’s exposure fell from 6.19% of its corporate loan book to 4.83%. Meanwhile, the volume of its oil and gas lending decreased by over ₹90 billion (1.43 billion USD).
Several smaller lenders, including Axis Bank and Punjab National Bank, have also curtailed their oil and gas loans as public opposition rises to extractive industries. These institutions have promised more transparency and better risk management in their lending operations.
Despite this trend of reducing oil and gas lending, the government has emphasized that this does not signify a complete uneasiness with the sector. To the contrary, the leading banks are still open to low-risk initiatives that are expected to pass rigorous environmental and social guidelines.
The overall shift towards more sustainable and renewable sources of energy has allowed the banks to finance a different array of projects without exposing themselves to significant risks. As investments in renewable energy surge in India, the leading lenders are likely to continue their gradual shift away from oil and gas-related financing.
It is evident that India’s top banking institutions are taking great efforts to mitigate the environmental impact of the energy sector. While they have placed cautionary measures on high-risk investments, their commitment to sustainable development remains unchanged. By diversifying their lending portfolios, the banks are setting an example for the industry, holding a vision of future energy security.
