In light of the Extinction Rebellion protests last month, it is clear that all industries, including banking and finance, are under increasing pressure to find solutions to the current climate crisis. The world’s largest public bank, the European Investment Bank (EIB) states its mission “is to foster sustainable growth within the EU and abroad.” Indeed the President, Werner Hoyer, wants the bank to lead the world in exclusively financing sustainable projects: aiming for over 50% of lending to relate to such projects by 2025 and pledging $1tn for climate-related funding through 2020-2030. The dates set for this particular goal also reflect his statement acknowledging the urgency of the crisis; “We have just over 10 years to turn the tide on the climate and environmental emergency.”
The next European Commission president, Ursula von der Leyen, also pledged to prioritise tackling climate change through her “European Green Deal,” suggesting turning the EIB into a “climate bank” to fund the transition to a low-carbon economy. United Nations experts concluded last year that oil usage would need to drop by as much as 87% by 2050 in order to contain the worst of the effects of a warming climate, and to keep the global temperature rise below the Paris Climate Agreement target of 2°C. Environmental groups such as Green Peace have said such drastic cuts would not be possible if banks continued to help the oil industry to increase capital. In acknowledgment of these points, in July this year President Hoyer proposed to cease fossil fuel lending completely by 2020; however, following the postponement of EIB’s decision on the proposal to November 14th, Alex Doukas, a lead analyst at think-tank Oil Change International, says this possibility is “vanishing.”
Lending nearly €2b to fossil-fuel projects last year, if the proposal is approved, the EIB would become the first bank to remove natural gas from its portfolio for new loans. Abandoning fossil-fuel projects would open up investment opportunities for renewable-energy expansions, fuelling significant progression towards EU climate targets.
EIB is not ahead of its time – last year HSBC declared that it would stop financing new coal-fired power plants globally, with the exception of Bangladesh, Indonesia and Vietnam, and many others are announcing similar pledges. Banks are not just doing this to further ESG claims – fossil fuels are on a fast track to unpopularity and the sooner banks can adapt the changes, the better off they will be in the future. Europe’s largest integrated utility, Italy’s National Entity for Electricity: ENEL, is already transitioning out of coal and is doing so whilst being able to generate employment in affected communities. ENEL is the 84th largest company in the world by revenue, with €70.59 billion and has a stock market capitalisation of €39.4 billion. Yet it is leading the changes in the reduction of fossil fuel generated electricity by its closure of 23 coal-fired power plants which happened in agreement with the sector unions. ENEL guaranteed that there would be no involuntary redundancies, and that the workforce would be redeployed within the company. The multinational energy company also sought out employment-generating solutions in communities serviced by coal, such as building renewable power or technology hubs.
However, the changes the EIB is proposing are not without opposition. Germany and Italy, EIB’s joint largest shareholders (along with France and the U.K) with a 16.1% share in EIB each, along with Poland (11th largest shareholder with approximately a 2% share), argue that natural gas (the 60% lesser-polluting rival to coal and oil) is necessary for a successful transition to cleaner energy, because it reduces the problem of unreliable supply from renewables. Furthermore, a reduction in gas infrastructure funding could possibly force existing coal stations to remain operational in order to compensate for the resulting reduction in generation not yet reliably covered by renewables. Germany worries the ban would actually hinder its targets of abandoning coal and closing nuclear plants by 2022, rather than helping.
However, the proposal does leave room for alternative solutions – as it would apply only to fossil-fuel projects emitting carbon dioxide, there is still the potential to fund infrastructure using technology such as carbon capture and storage.
So the solutions are there, but will the EIB utilise them? Either way it is clear that, as Alex Doukas further commented, “this is a test for whether the EU and its member states are serious about climate action”.
By Lauren Hayes
Sector Leader: Robert Hamblin