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May 27, 2020

Clearing the Air: Recent bank announcements to not finance Arctic drilling lacks potency and clarity

In December 2019, Goldman Sachs made headlines as the first U.S. bank to pledge not to finance drilling in the Arctic. Several of the largest banks in the U.S. (and the most prominent funders of fossil fuels in the world) have since updated some of their lending policies relating to environmental conservation. Given the potential environmental and social impact of these policies, it is worth looking beyond the headlines to understand the actual changes some of these banks are proposing and the effectiveness those updated policies will have towards reaching our common climate goals. Below is a quick synopsis of the recent announcements made by five prominent U.S. banks:

·      Goldman Sachs (Dec 2019) announced it would decline 1) any financing that directly supported new upstream Arctic oil exploration or development, 2) any financing directly supporting the development of new coal-fired power generation unless it had carbon capture and storage or equivalent carbon emissions reduction technology (CCS),and 3) any transactions directly financing new thermal coal mine development or mountain top removal (MTR) mining. All other forms of fossil fuel development are permitted though may be subject to “enhanced due diligence, including understanding companies’ strategy and commitment to reducing overall GHG emission.” 

·      JPMorgan Chase (Feb 2020) announced it would no longer 1) provide project financing where the proceeds will be used for new oil and gas development in the Arctic, 2) provide project financing where the proceeds will be used to develop a new, or refinance an existing,coal-fired power plant, unless it is utilizing CCS technology, and 3) provide lending,capital markets or advisory services to companies deriving the majority (>50%) of their revenues from the extraction of coal.

·       WellsFargo (Mar 2020) announced it would not 1) “directly finance oil and gas projects in the Arctic region”,and 2) extend credit or facilitate capital markets transactions to individual MTR mining projects or coal producers engaged in MTR mining, with the exception of supporting existing customers “to help them manage the changing economic cycle.”

·      Citigroup (Mar 2020) announced it will 1) “not provide project-related financing for oil and gas exploration within the Arctic Circle”, 2) “not provide project-related financing for new thermal coal mines or significant expansion of existing mines”, and 3) “not provide project-related financial services for transactions supporting the construction or expansion of coal-fired power plants”. Citi will phase out corporate-level financing for mining companies that drive “> 25% of their revenue from thermal coal mining” over a ten-year period through 2030.

·      Morgan Stanley (Apr 2020) announced it will “not directly finance new oil and gas exploration and development in the Arctic” without senior management approval. All forms of fossil fuel development are permitted subject to “enhanced due diligence”.

While these pledges are certainly worth celebrating, it is a far cry from where we need to be at this point and shouldn’t provide anyone the false hope that these institutions are doing what needs to be done when it comes to climate action. Instead of outright bans on these projects and other especially dirty and potentially dangerous forms of fossil fuel funding altogether (i.e. deep water drilling, tar sands, etc.), these pledges are generally limited to new projects within the specific region of the Arctic National Wildlife Refuge and in almost all cases leave loopholes for existing projects, projects utilizing “carbon capture” technology to an unspecified degree and corporate-level financing. It’s also worth noting that the break even price of Arctic exploration is estimated to be between $70-$100/barrel while the price for oil has hovered well below that limit for the better part of the last five years, making exploration in the area uneconomic in the first place.

So, while I applaud each of the participating banks, the guidelines outlined provides no reason to think that lending to the fossil fuel industry and other sectors extremely harmful to the environment will materially decrease from current levels in the near-term. Rather than making meaningful and urgent steps towards climate-positive policies, the major U.S. banks appear to be wisely avoiding the bad publicity of drilling new holes in one of the world’s most important nature sanctuaries at an economic loss…without performing “enhanced due diligence” measures first.

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