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May 10, 2022

BNP Paribas sets red lines for oil and gas funding

Financing oil majors remains at the heart of the French bank’s climate strategy, and there are certain exclusionary steps it will not take. Its corporate social responsibility chief explains why.

By Virginia Furness

Still firing: BNP Paribas says it will not systematically ban companies developing new fossil fuel exploration. (Photo courtesy of Dazman via iStock)
  • BNP Paribas has set new carbon reduction targets for power, oil and gas, and automotives, and tightened its exclusion policies in respect of the Amazon and Arctic.
  • The French bank’s support for oil majors remains a point of tension for non-government organisations.
  • BNP Paribas plans to extend targets to cover capital markets once the industry has developed a methodology to do so.

Perhaps more so than any other bank, BNP Paribas captures the tensions and contradictions associated with the energy transition. Both one of the biggest backers of the oil and gas industry and a leading arranger of sustainable finance, the French lender is known both for its green product innovation and being the object of sometimes violent action by environmental activists.

Last week, BNP Paribas announced a sweep of new climate measures, including plans to cut its credit exposure to the upstream oil industry by 25% by 2025, and in line with a raft of such moves by peers such as Barclays in recent weeks. This is unlikely to be enough to silence the critics at the French group’s upcoming AGM on 17 May, but it does show ambition to reduce funding of fossil fuels (see also chart below).

Despite reporting among the highest exposure to oil and gas of any European bank, BNP Paribas is recognised by the likes of campaign group ShareAction as having some of the most restrictive fossil fuel financing policies in Europe.

It began winding down its credit exposure to unconventional oil and gas companies in 2017. In 2021, the group’s credit exposure to upstream oil and gas stood at €24.7bn compared to £12.9bn of carbon-related assets in the oil and gas sector at Barclays.

Fossil fuel tensions

BNP Paribas – along with other banks and many investors – argues that oil majors will lead the energy revolution through their investment in renewable energy, green finance and biofuels, while at the same time maintaining economic and energy stability in a world still reliant on fossil fuels.

But non-government organisations (NGOs) say these companies are continuing harmful and unnecessary oil extraction that is incompatible with the aims of the Paris Agreement, and that renewables development remains a very small part of their business.

Capital Monitor spoke to Laurence Pessez, global head of corporate social responsibility at BNP Paribas, who leads its policy on climate alignment, about this tension and how the bank plans to navigate the process of transition.

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“We have an intense dialogue with NGOs, especially advocacy NGOs,” she says. “But what they are asking you to do is basically stop new financing of oil and gas now, which is not what is stated in the Net Zero [Emissions by 2050 Scenario from] the IEA [International Energy Agency].”

The bank says in its 'Climate Analytics and Alignment Report' that it has chosen not to “systematically ban companies developing new exploration based on the condition that their practices are more respectful of the environment than those of decommissioned facilities”.

“The IEA scenario says there is no need for actual exploration as of now, but all of the fields which have already obtained permits have to be kept up and running and invested in, so that is what we are doing,” Pessez says.

Unveiled last week, BNP Paribas’s new commitments for 2025 include emissions intensity reduction targets for its three biggest greenhouse gas-emitting industries, representing 7% of the bank’s total loan portfolio exposure: power generation, upstream oil and gas and refining, and automotive (see table below). The targets also include plans to reduce its financing of the upstream oil and gas sector.

As of the end of last year, BNP Paribas had €24.7bn in loans outstanding to the oil and gas sector, down from €35.7bn in 2020. It has set the new targets using the 2020 financing volume as a baseline. That will mean a €4.3bn reduction in its lending to oil and gas by 2025, according to analysis by Capital Monitor.

Pessez says NGOs have responded positively to these targets as they are more ambitious than the IEA's net-zero scenario. They have, however, flagged that the goals cover only the lending portfolio, not bond issuance, she adds.

In power generation, for example, the IEA’s net-zero scenario models 2025 intensity at 332 grammes of carbon dioxide equivalent per kilowatt hour (gCO2/kWh). The bank says its own power portfolio target is a carbon intensity of less than 146gCO2/kWh. BNP Paribas’s target for its oil and gas portfolio is also lower than the IEA’s net-zero scenario, at 61 grammes of carbon dioxide per megajoule (gCO2/MJ) versus 68gCO2/MJ for the latter.

The lender intends to extend its targets to cover capital markets once the industry has developed a methodology for doing so, as it plans to have done later this year, Pessez says. BNP Paribas was a founder member of the Katowice group of banks, which came together with the non-profit think tank the 2° Investing Initiative, to adapt the Paris Agreement Capital Transition Assessment (Pacta) to credit portfolios.

Uncomfortable reading

However, NGO initiatives, such as the 'Banking on Climate Chaos' report, which tracks the fossil fuel exposure of the world’s banks, make for uncomfortable reading for BNP Paribas. The French bank has channelled $141.6bn into fossil fuels between 2016 and 2021 according to the report, making it the tenth-largest global backer of the industry, says the Rainforest Action Network (Ran). That said, the annual figure fell markedly from $42.66bn in 2020 to $14.75bn last year.

Dig deeper, and the picture is more complex. Take Arctic oil and gas financing. Ran identifies BNP Paribas as the biggest financier of Arctic oil and gas in the world and calculates that the bank has extended $5.97bn in financing to the sector between 2016 and 2021.

By contrast, the bank says since 2017 it, in fact, has not financed any oil and gas projects in the Arctic region – which it now defines as that area covered by the Arctic Monitoring and Assessment Programme, a working group of the Arctic Council, an intergovernmental forum promoting cooperation in the region – though it continues to make an exception for Norway.

The huge discrepancy between the BNP Paribas and Ran figures stems from the fact that the bank’s policy excludes companies that derive more than 30% of their revenues from non-conventional sources (such as shale gas, shale oil and tar sands), rather than oil majors that may have interests in the region. This has been tightened further to those that derive 10% or more of their revenues from the Arctic region.

In 2017, BNP Paribas began a phase-out of oil and gas companies that derive more than 30% of their revenues from non-conventional sources such as shale gas, shale oil, oil from tar sands and the Arctic. Credit exposure to these businesses was €4bn at the end of 2016 and had dropped to zero by 2021. The phase-out involved ending its relationship with around 70 oil and gas clients in the US and Canada, Pessez says.

The bank is not, however, prepared to reduce its financing to or support of the majors that derive some of their revenues from unconventional sources as the NGOs are demanding, Pessez says. “It’s not a good option for us. On the contrary, we have to support those guys who are diversifying their business models to develop biofuels.”

The bank declined to disclose its exposure to oil and gas majors, or the portion of its overall oil and gas portfolio that is attributed to majors.

BNP Paribas’s approach is to support energy producers that have credible emissions reduction strategies in place and allocate capital expenditure to transition to a low-carbon economy.

“Transition is something which takes time,” Lessez says. “Even if we are conscious of the climate emergency, you want to do this in a smooth and acceptable manner. You can’t dismantle the current system without having alternatives at scale.”

For instance, BNP Paribas has committed to providing €30bn of financing for renewable energy projects by 2015, up from €18.6bn in 2021, and intends to mobilise at least €350bn of loans and bond issues covering environmental and social topics for corporate clients.

A question remains, however: how long will a “smooth and acceptable” transition take? Time the planet does not have, many would argue.

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