Pressure builds on oil, gas funding as HSBC rolls out net-zero lending targets

HSBC laid out plans Feb. 22 to cut its lending to oil and gas clients based on their carbon emissions as the UK bank looks to align its loan portfolio with the International Energy Agency's landmark scenario for hitting net-zero by 2050.

Disclosing its "financed emissions" portfolio for the first time, HSBC said it is targeting a reduction of 34% in absolute emissions from oil and gas companies it lends to by 2030. In the power and utility sectors, the bank said it is also targeting a 75% reduction in emissions intensity by 2030 from its clients, as measured by CO2 equivalent/TWh from a 2019 baseline.

The moves mark a further tightening of institutional funding for fossil fuel projects as more banks look to align their lending with Paris Agreement climate goals to curb carbon emissions.

More than 100 banks worldwide representing 44% of global banking assets have already committed to aligning their lending and investment portfolios with net-zero emissions by 2050, according to the UN's Net-Zero Banking Alliance.

It also comes a week after campaign group ShareAction estimated that Europe's biggest banks have lent some $400 billion to companies expanding oil & gas production since 2016. The group estimated that HSBC was the biggest lender to the sector, with some $8.66 billion directed to oil and gas in 2021.

HSBC said it is scaling up its investment and financing for renewable and other low emission sources of electricity, in addition to supporting the decarbonization of high-carbon sectors such as aviation.

"Partnering and engaging with customers in the transition to net-zero is at the heart of our approach," HSBC's CEO Noel Quinn said in a statement. "We are supporting clients to evolve their business models and replace old technology with new, greener alternatives. We will request and review science-based client transition plans and use them as the basis for further engagement."

Pressure on climate goals, exposure

For oil and gas companies, HSBC said the new loan target is equal to the percent reduction that the IEA indicates in its net-zero scenario for global sector emissions to 2030 from a 2019 baseline. The bank said its on-balance sheet financed emissions for oil and gas in 2019 were 35.8 million mt of CO2 equivalent.

Published in May 2021, the IEA's Net Zero Emissions Scenario lays out a pathway to limit global warming to 1.5 degrees Celsius by 2050 and assumes a halt to spending on all new oil and gas projects.

Last year, the Bank of England introduced climate "stress test" targets for large banks and insurers to evaluate their planned approaches to managing climate risk.

"Investors, at least for the last three years have been looking at how they look at net-zero across their investment portfolio," Doug Johnston, partner for climate change and sustainability at EY, told the International Energy Week event on Feb. 22. "I think the big change is the attitudes of the banks ... you could see a point over the next five years, where traditional oil and gas assets will just not be able to get the funding that they need to continue to operate."

ESG ranking

While a shrinking oil market under the IEA's net-zero scenarios would change the supply landscape dramatically, it would not remove the need for continued investment in upstream projects.

If investments were to continue in producing oil and gas fields and those already under development, global upstream investment would still average about $350 billion each year to 2030 and then fall to $170 billion each year to 2050, according to the IEA's net-zero energy scenario.

HSBC said its new lending targets for oil and gas focus on upstream companies, and integrated or diversified energy companies, assessing their portfolios covering Scope 1, 2 and 3 greenhouse gas emissions of financed counterparties.

In the power and utility sector, HSBC said it believes that power generation is where the majority of sector emissions occur through the use of fossil fuels as a source of energy. The bank said the adoption of an emissions intensity metric rather than absolute emissions for power and utilities reflects the need to reduce global greenhouse gas emissions from power generation while also meeting growing electricity demand.

Noting that HSBC has already announced plans to achieve net-zero emissions in its own operations and supply chain by 2030 and in its financed emissions by 2050, S&P Global Ratings said Feb. 2 that environmental, social and governance factors have "no material influence on our credit rating analysis of HSBC."

In January, S&P Global Ratings gave HSBC an ESG Evaluation score of 76 out of 100 "reflecting HSBC's increasing level of development and integration of ESG considerations into its operations."