Westpac has told oil and gas producers it will no longer accept them as new customers unless they have clear, publicly-documented strategies to align their activities with the Paris climate goals.
It follows similar announcement by the Commonwealth Bank of Australia, and signals the banking and finance industry is now turning its attention away from thermal coal – which most of the big banks have already said they will stop funding – to two other main causes of global warming.
Westpac said its decision, which appeared with no fanfare on page 52 of its half-year results on Monday, was an entirely financial one, based on the “transition risk” of climate change. All the big banks have framed their existing coal screening policies in similar terms, as financial rather than environmental or moral decisions.
In Westpac’s case, oil and gas makes up just 0.22 per cent ($2.3 billion) of its total lending portfolio, so its exposure is negligible from a financial point of view.
The decision is almost certainly a response – at least in part – to increasing requirements by the Australian Prudential Regulation Authority that banks accurately report their exposure to climate risk.
It is also likely influenced by growing public and shareholder pressure, led by groups like Friends of the Earth affiliate Market Forces, which increasingly use shareholder resolutions to pressure lenders, institutional investors and insurers to reduce their support of fossil fuels.
Westpac’s move was cautiously welcomed by environmental groups, but with some important caveats.
The decision will only cover new customers, with existing oil or gas customers continuing to be eligible for loans. The bank also failed to go into any detail about what it considered to be “Paris-aligned business goals”, other than that they are consistent with the aim of keeping global warming well below 2 degrees and as close to 1.5 degrees as possible.
The latter is an important point, because there is no standard definition of Paris-aligned targets, and many oil and gas companies that claim to be going “net zero” have fudged the numbers by excluding scope three emissions. For an oil or gas company, scope three is pretty much all that matters, because it includes the emissions created when customers burn the oil or gas it sells.
But Jack Bertolus, campaigns coordinator with Market Forces, said he believed Westpac should be looking at the full picture.
“For this policy to have any meaning, it would have to be done properly – so that means looking at a prospective clients’ entire emissions portfolio, including scope three.”
He said APRA’s growing interest in climate risk would increase the pressure to focus on total emissions, not just scopes 1 and 2, as the gas producers might wish.
He said while the announcement was in itself a “small first step”, it nevertheless signalled the start of the “next wave” in fossil fuel divestments.
“It’s the first step on a path to excluding and divesting from oil and gas. We’ve learned that from the thermal coal story,” he said.
The announcement follows a flurry of new, ambitious emissions reduction commitments made at US president Joe Biden’s climate leaders’ summit last month – including by Australia’s biggest international gas customer, Japan.
At the meeting, Japanese prime minister Yoshihide Suga surprised the world (and, according to reports, many in his own government) by committing to reducing emissions by 46 per cent by 2030, close to double what had previously been promised. If achieved, that would require a massive, rapid pivot to renewables, and so a corresponding fall in demand for gas.
The huge volumes of natural gas and oil currently under development around the world (much of it in Australian territory), if burnt, would far exceed the world’s carbon budget for a 1.5 to 2 degree world.
The Production Gap Report 2020 estimates that fossil fuel production must decrease 6 per cent every year between 2020 and 2030 to be consistent with the aims of the Paris Agreement. That translates to a 11 per cent reduction in coal production, a 4 per cent reduction on oil production, and a 3 per cent reduction in gas production.
The reality is that fossil production is moving in the opposite direction, and is projected to increase on average by 2 per cent a year over the next 10 years.
James Fernyhough is a reporter at RenewEconomy. He has worked at The Australian Financial Review and the Financial Times, and is interested in all things related to climate change and the transition to a low-carbon economy.