Western banks’ fossil-fuel finance gives South African lenders a free ride

By David Whitehouse
Posted on Wednesday, 10 August 2022 06:00, updated on Monday, 15 August 2022 06:12

JPMorgan Chase is top of the league for fossil-fuel bond underwriting fees, according to Toxic Bonds. REUTERS/Andrew Kelly

The financing of fossil fuel projects by Western banks is giving South African lenders free reign to fund the development of the continent’s oil, gas and coal reserves.

According to a report in July by Toxic Bonds, a global group of civil society organisations, three US banks, JPMorgan Chase, Citigroup and Bank of America led the way in terms of underwriting fees for bonds for fossil fuels from 2016 to 2022. They were followed by British bank Barclays in fourth place.

“The bond market, where companies can borrow money from investors by selling debt assets, has become a safe haven for the fossil fuel industry,” Toxic Bonds says. Goldman Sachs, HSBC and BNP Paribas also made the top 10, but there was no African bank in the top 20.

That makes it much easier for South African banks to justify finance for fossil fuels, despite the fact that global warming is faster in Africa than the global average. Fossil-fuel finance standards released by South African bank Absa in May leave it trailing behind domestic competitors, according to analysis from shareholder activist group Just Share.

The bank published updated fossil-fuel financing standards in May. The coal policy recognises that “power generation from coal is the largest source of greenhouse gas (GHG) emissions that lead to global warming. In addition, it contributes to significant air pollution, which is particularly evident in South Africa due to its reliance on coal-fired power plants.”

  • But Absa will continue to fund new coal projects, excluding new coal-fired power plants.
  • The bank will also keep funding oil and gas. These, Absa says, account for about 20% of Africa’s GDP and are “important for the economic development of producing countries, providing access to hard currencies and tax revenues to support government fiscal spending.”

Absa responds

The policies “do not take the bank’s position on climate change forward in any significant way,” Just Share says. “Absa’s policies demonstrate that it still lags in its understanding of climate risk and the imperative to transition to a low-carbon, resilient, and sustainable economy.”

A spokesperson for Absa made the following response to The Africa Report’s request for a response to the Just Share analysis:

“We fully appreciate the gravity and urgency of climate change and broader sustainability issues facing society globally. Managing climate change risks and opportunities is a key priority within our Group strategy. We have done substantial work on managing climate change risks, including physical risks, and calculating our indirect or financed emissions that is ahead of what several peers disclosed.

“Like most banks globally, we still need to complete significant further work to calculate our overall baseline financed emissions, before setting absolute long-term targets. We are investing in this space and will continue to improve in what is an evolving area. Our commitment to addressing climate change is evident in many areas, including in our position as the leader in financing renewable energy in South Africa. We view Just Share as an important stakeholder in this space and we will continue to engage them appropriately on this imperative as we have done in the past.”

  • The bank says that its renewable energy book made up 74% of total energy lending at the end of 2021, including oil, gas and coal. Absa forecasts that renewable energy loans will double as a share of total group loans by 2030, and that by 2040, renewable energy loans could reach 5% of overall group lending, more than five times its exposure to fossil fuels.

The plus points in the policies, Just Share says, are the exclusion of funding for new coal-fired power plants. That commitment was made by Nedbank as far back as 2018, by FirstRand in 2021, and by Standard Bank in 2022. Just Share also welcomes Absa’s commitment to disclose GHG emissions from its lending to the agriculture and real-estate sectors.

Overall, Absa’s standards appear made-to-measure to suit its existing business portfolio rather than an attempt to address energy and climate issues. Just Share points to the absence in the Absa standards to “relevant exclusions” in oil and gas financing. The only exclusions relate to tar oil/sands, Arctic oil and gas and Amazon rainforests, which are immaterial to the regions in which Absa operates.

The made-to-measure approach looks set to continue.

  • The bank says it will strive to achieve a “balanced energy portfolio” diversified between renewable energy, oil, natural gas, biomass, hydrogen and coal.
  • “The hydrocarbon split between liquids and gas will be rebalanced over the next decade as a results of LNG transactions commencing operations.”

Bottom line

African banks will continue to believe they are justified in financing fossil-fuel development until Western lenders take the lead.

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