High Energy Prices Challenge Wall Street’s Green Shift

Source: By Amrith Ramkuma, Wall Street Journal • Posted: Thursday, April 7, 2022

Some banks including Citigroup arranged more oil-and-gas than green debt in the first quarter

Banks have funded more wind and renewable projects in recent years but now face pressure to finance more oil-and-gas projects after Russia’s invasion of Ukraine. Photo: PHOTO: Bing Guan/REUTERS

Wall Street arranged more bonds and loans for clean-energy projects than oil-and-gas companies in the first quarter. The shift could be short-lived amid the push to boost fossil-fuel supplies after Russia’s invasion of Ukraine.

Banks underwrote more than $100 billion of bonds and loans for clean-energy uses in the first quarter and arranged $95 billion in borrowing for oil-and-gas firms. The pace of underwriting slowed in both categories from last year, when total oil-and-gas and green debt issued in each area totaled about $570 billion.

The shift toward more green-debt underwriting has been dramatic in recent years. The ratio of oil-and-gas to green debt underwritten fell to 0.9 in the first quarter from 1 last year. In 2018, four times as much money was raised by banks for fossil fuels than for clean-energy uses.

Debt underwriting involves finding buyers and backstopping prices when necessary. It is one of the main ways banks help companies and governments raise money. The data don’t include direct lending, equity underwriting or other borrowing linked to sustainability measures.

While the overall industry did more green underwriting in the quarter, some banks reversed course. Citigroup Inc. arranged more green debt than fossil-fuel debt for the first time last year. In the first quarter, it did more oil-and-gas debt. Other banks that underwrote more oil-and-gas than green debt and also saw the ratio increase in the first quarter include Wells Fargo & Co. , Mizuho Financial Group Inc. and Société Générale SA.

Banks say they can’t transition away from fossil fuels too quickly given limitations on clean-energy capacity and that their lending activity reflects broader industry trends. Oil and natural-gas prices have surged, turbocharged by the war in Ukraine, improving the outlook for many producers and prompting calls for increased output. Meanwhile, supply-chain disruptions have pushed up costs and delayed many clean-energy projects.

Still, some analysts argue that many banks overstate their commitment to limiting climate change because they are still consistently funding fossil fuels.

“It’s really tough to know when it’s turning into greenwashing,” or misleading about climate progress, said Margaret Peloso, a partner at law firm Vinson & Elkins LLP who advises banks on environmental issues.

Many financiers also say they must work with companies to bring down emissions rather than divesting from high-emitting industries.

JPMorgan Chase & Co. , the largest U.S. bank and biggest energy-sector financier last year, cut the ratio of oil-and-gas to green-debt underwriting to 1.2 last year from 10 in 2018. The ratio stayed at that level in the first quarter, again indicating more fossil-fuel activity than the broader industry. JPMorgan last year pledged oil-and-gas companies in its portfolio would substantially reduce operational carbon intensity—emissions per unit of output—by 2030.

Analysts say carbon-intensity targets are less aggressive than outright emissions-reduction figures because carbon intensity can decline while overall emissions increase.

Citigroup in January said it was targeting a large absolute drop in financed energy-sector emissions by 2030, a move that analysts said surpassed similar pledges by its peers. Its ratio of oil-and-gas to green-debt underwriting rose to 1.4 in the first quarter from nearly 1 last year. Citigroup Chief Executive Jane Fraser spoke at last year’s Glasgow global summit about the need to scale climate solutions and has said the bank might have to cut off clients to meet its climate targets.

Wells Fargo arranges much more fossil-fuel debt than green debt, with a ratio of 6.7 in the first quarter and 6.3 last year. That is down from 68 in 2018. The San Francisco-based lender  recently joined other banks in saying it would cut its net emissions to zero by 2050.

Among the energy companies that raised billions in debt through large banks in the first quarter were commodity traders Vitol SA and Trafigura Pte. Ltd. and oil-and-gas producer ConocoPhillips.

Many environmentalists are also concerned that the pace of clean-energy financing is slowing, delaying the spending needed to reach the world’s climate goals and reduce global reliance on oil and gas. Biotech firm Amgen Inc. andHonda Motor Co. were among those that raised green bonds to reduce emissions last quarter, but the total amount raised was well below last year’s pace.

Some analysts say between five and 10 times last year’s total in green bonds and loans is needed annually by the middle of the decade to accelerate the energy transition.

“The rest of this year will give us a good indication of whether it’s feasible or not,” said Krista Tukiainen, head of market intelligence at the Climate Bonds Initiative, a nonprofit promoting green investment.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com