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Oil and gas companies face virtually no extra borrowing costs compared with less polluting companies, despite efforts by the UN and international organisations to encourage banks and big investors to reduce their lending to the fossil fuel sector which is behind global warming.
Since 2010, borrowing costs for oil and gas companies in the US and Europe have largely mirrored those for other debt issuers, except for during sharp falls in commodity prices, according to analysis by S&P Global Ratings seen by the Financial Times.
“Environmental concerns seem to be far from the most important factor for funding oil and gas companies,” the rating agency’s analysts said.
Michael Altberg, a managing director at the agency and one of the report’s authors, said: “It shows lenders are not really baking in premiums for [environmental, social and governance]-related factors.”
Climate-related financial initiatives such as the Glasgow Financial Alliance for Net Zero, a coalition of banks established in 2021 to coincide with the UN climate summit and led by former Bank of England governor Mark Carney, have “yet to impact capital market access for oil and gas issuers”, S&P found.
This is despite oil and gas accounting for more than half of global energy-related carbon dioxide emissions in 2022, according to S&P data, and many European and US banks joining climate initiatives such as the UN-convened Net Zero Banking Alliance to decarbonise the economy.
There is no “premium” for buying bonds issued by oil and gas companies, one credit investor told the Financial Times, adding that their organisation’s environmental, social and governance criteria did not limit investments in bonds issued by fossil fuel companies.
S&P said that more than 40 per cent of banks, financial services firms and insurers have committed to reducing direct emissions from their operations and indirect emissions from the energy they buy, known as scope one and scope two.
But only a fifth have pledged to reduce scope three emissions, which are linked to their investment and lending activities. Restrictions on these emissions could restrict the oil and gas sector’s ability to work with banks to borrow money.
The Net-Zero Banking Alliance, a UN-convened group of leading global banks committed to decarbonisation, is discussing adding emissions related to the services banks provide — such as raising debt and equity on behalf of clients — to its guidelines on climate targets, with members voting on proposed updates to its guidelines in April 2024.
However, the surge in energy prices driven by Russia’s full-scale invasion of Ukraine has pushed energy security higher up the agenda of policymakers, while record profits from high oil and gas prices have boosted companies’ profits and share prices.
“Oil and gas are not going to go away. They’re going to have a piece of the energy pie, just a bit less of it,” said Thomas Watters, managing director at S&P Global Ratings and another of the report’s authors.
While there has been a fall in new bond issuance from oil and gas companies since 2021, S&P attributed this to firms’ high cash levels, which have also helped them pay down debt. The fall was owing to “lower funding needs as opposed to market access challenges”, it said.
The International Energy Agency, the west’s energy watchdog, recently forecasted that global oil, gas and coal demand will peak before 2030 due to the growth of renewable energy and electric vehicles.
S&P said it expected funding to become more difficult for smaller oil and gas players as global demand for oil and gas falls, but said that borrowing would remain simpler for longer for larger companies.
“The smaller guys aren’t getting the returns that the larger guys are,” said Watters. “As regulation steps up, the money allocation will be given to companies who are making more for the portfolio.”
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