The investment community, both within Australia and globally, is becoming more environmentally aware. Nearly every company, bank and investment manager are being put under increased pressure to have not just an Environmental Social and Governance (ESG) policy, but to implement actual change.
One area of pressure for many conservative investors in Australia is investments with the four major banks who are accused by many including various environmental lobby groups of funding the fossil fuel industry as other ADI’s do not lend to this area. Amicus’ view is this is not so much a reflection of different ESG policies between the major banks are other ADI’s, but one of history and size. The fossil fuel industry is dominated by large corporations and only the major banks can fund these industries. Before ESG issues became a public concern, the major banks were funding fossil fuel producers and it is a market they cannot easily exit without “the lights going out” quite literally, however they all make representations as to their good intentions in this area. We detail below their actual scorecard so investors can judge whether their intentions are being backed by actions.
Between 2015 and 2017, the major banks reduced their lending to fossil fuel industries (coal, oil and gas extraction and burning of these hydrocarbons to generate power) by an average of 10% per year for a greater than 30% overall reduction. However, progress appears to have stopped in 2018.
According to a survey by environmental campaign group Market Forces in 2018, Westpac’s exposure increased by 140% and ANZ’s by 27%. CBA’s exposure dropped by 7% and NAB’s exposure was largely unchanged. All the banks tried to increase their exposure to the renewables sector. In aggregate, the four major banks currently have $29 billion of lending to the fossil fuel industries and $11 billion of lending to renewables.
Westpac explained its increased fossil fuel lending by saying it had recently funded a large metallurgical coal project but would soon be reducing its exposure to another coal project so its exposures in 2019 would be broadly in line with 2017 numbers.
ANZ said its exposure had increased not due to new lending, but to mergers and acquisitions of different coal assets within its client base.
CBA, which was the only bank to decrease its fossil fuel exposure and increase its renewables, said this was in line with its business strategy and its coal funding was “comparatively small and trending downwards” whereas it had executed some significant renewables transactions in Australia and overseas.
NAB said that within its portfolio there was a move away from thermal coal (power generation) to metallurgical coal (steel making) which offset each while also stating it was the largest lender of the big four banks to renewable energy project finance and had committed to providing $55 billion to this sector by 2015.
Overall, it appears as if the banks are moving slowly in the right direction from an ESG perspective. However, the intractable problem remains that fossil fuels are still part of the overall energy mix within power generation and will continue to be for some time and that there is no current substitute for coal in steel making. While these two industries persist, it is likely they will continue to be funded by the major banks.