Is Wall Street Turning Its Back On Fossil Fuels?
Goldman Sachs said that it would no longer finance coal projects, or oil and gas exploration in the Arctic.
In a new environmental policy framework, the investment bank acknowledged the urgency of climate change and noted that not acting would be “costly for our natural environment, humans and to the economy.”
It appears to be the first time one of the largest U.S. banks has cut off financing for entire swathes of the fossil fuel sector. “Goldman Sachs’s updated policy shows that US banks can draw red lines on oil and gas, and now other major US banks, especially JPMorgan Chase – the world’s worst banker of fossil fuels by a wide margin – must improve on what Goldman has done,” Jason Opeña Disterhoft of Rainforest Action Network said in a statement.
Goldman Sachs also said that it would make $750 billion in financing available for “climate transition and inclusive growth finance” over the next decade.
Separately, Morgan Stanley wrote in a note that the focus on ESG (environment, social and governance issues) has increased, “creating both risks and opportunities” for the U.S. energy sector. An “ESG discount” is not yet evident, Morgan Stanley said, but there is an “increasing risk of relative underperformance for companies that fail to integrate ESG best practices into their core business.” Going forward, the bank said, “we expect the focus on ESG to intensify.”
Activist investors also continue to mount pressure from within companies themselves. The Dutch shareholder activist group Follow This is preparing more climate resolutions at the upcoming annual shareholder meetings of ExxonMobil, Chevron, Royal Dutch Shell and Equinor.
In a major “decarbonization” report issued earlier this month, Goldman Sachs noted that the number of climate-related shareholder proposals has almost doubled since 2011, and the percentage of shareholders voting in favor of those resolutions has tripled. Half of those resolutions target the oil, gas, utilities and coal industries. “In our view, this is creating a severe tightening of financing conditions across the hydrocarbon industry, leading to a new age of capital constraint,” the investment bank said in a report.
However, it is important to note that shifting financial conditions of certain industries undercuts the significance of Goldman’s new policy. The coal industry is dying a slow but painful death; it’s not clear why major investment banks would want to get into that sector anyway. The same is true for Arctic oil. Royal Dutch Shell abandoned a major Arctic exploration program earlier this decade, and it wasn’t because of concerns about climate change.
Goldman can simply close the door on unprofitable financing ventures while also taking credit for “leading” on climate change. Notably, Goldman did not close the door on other forms of oil and gas, including oil sands and shale.
Furthermore, the bank notes that “underinvestment” in oil will lead to “structural” supply tightness in the 2020s. In a recent equity research note, the investment bank sees this as an opportunity, and finds companies that are “undervalued” that it can recommend to its clients. So, the commitment to sustainability only goes so far.
But, debt-fueled drilling has also turned some banks and lenders away from shale as well. “Reserve-based lending to E&Ps for new oil & gas developments is down 90% from the peak,” Goldman wrote. Tighter financial conditions in the oil and gas industry is leading to consolidation and higher barriers to entry, creating a “new oligopoly” in the oil industry.
“High yield credit to the US E&Ps, the financing of choice of smaller US shale producers, has also dried up since the beginning of 2019, leading to a 25% fall in US shale activity ytd.” As smaller companies are forced out, the bank says the sector’s profits could rise.
In its decarbonization report, Goldman urges the oil majors to undertake a transformation into lower carbon businesses. Dubbed the “Re-Imagining Big Oils” analysis, Goldman says the majors can pivot into a variety of other sectors, including EV recharging, renewables, biofuels, nature-based solutions and carbon capture.
“This transition will require deep cultural and corporate changes and may leave the higher carbon parts of the value chain financially stranded and underinvested, such as oil production,” the bank concluded.
Goldman Sachs cutting off coal and Artic oil is another milestone in the energy transition, although its immediate impact is debatable. Big Finance is still very much in the game for the rest of the fossil fuel sector.