The Carbon Accounting Finance Partnership Recently welcomed its 100th member, a milestone that reflects the growing attention of banks on the measurement of financed issues. But while robust carbon accounting is needed in the long run, it is not a substitute for immediate action. To accelerate the pace of the Paris alignment, banks must immediately start targeting financed emissions in carbon-intensive sectors.
Improving data and disclosure is a valid long game, with mandatory climate risk disclosure and corporate leadership playing an important role. But financial institutions already have many tools and many data points to accelerate action in carbon-intensive sectors.
Using the best available data to start turning net zero commitments from pledges into priorities is the key task for banks in 2021. Banks are well positioned to accelerate climate action for businesses and can start by using relationships, knowledge and capital to change business practices through carbon. -intensive sectors, including oil and gas and transport, among others.
In the immediate term, banks can work to end routine flaring of natural gas, which – without being the largest source of long-term oil and gas emissions – represents a particularly exploitable decarbonization opportunity. visible and profitable.
Flared natural gas: an immediate decarbonisation opportunity
Flaring is as risky as it is unsightly.
As a major source of greenhouse gas emissions, flares expose banks to significant ESG concerns. In the Permian Basin, for example, flaring is one of the largest sources of methane emissions. Recent scientific work by EDF in the Permian field found that 11% of the flares were either extinguished or partially burned, venting unburned methane and exacerbating local air pollution in communities. Although Permian methane emissions declined early in the pandemic, new research shows methane levels have returned to pre-COVID high levels.
These unnecessary issues contradict the wave of Paris and the promises of net zero sweeping the banking sector.
Managing carbon risks is a critical function for banks in the 2020s and beyond. Banks hoping to maintain healthy credit books should push their oil and gas customers to end routine flaring by 2025 or earlier and tackle episodic flaring. As BlackRock wrote in its recent comment, “In order to meet a goal of net zero by 2050, a virtual elimination of flaring, with government policies and industry commitment, must occur by 2025.. “
Flaring also creates waste, as gas that could be monetized is burned for no gain. In 2019 alone, the operators of the Permian basin burned over $ 400 million of natural gas. This figure represents a loss of revenue for businesses and a financial risk for lenders, given that 84% of routine flaring can be reduced at zero cost.
Fortunately, the technology and governance strategies needed to resolve the flaring already exist. In 2019, companies like Occidental, Chevron and Pioneer reported flaring intensity levels of 1% or less through management attention and use of best practices, with Diamondback most recently reporting an intensity level of 0.9% and Apache pledging to end routine flaring of U.S. ground operations by the end of 2021.
Constructively helping operators to end routine flaring over the next four years is both realistic and achievable, and banks can play a leading role.
How banks can limit routine flaring
Financial institutions can tap into their relationships with oil and gas producers to accelerate the elimination of routine flaring. Banks could start by making commitments with their oil and gas customers on flaring, establishing routine zero flaring by 2025 as an explicit performance benchmark, and incorporating these climate concerns into stock research and analysis.
Banks can help their customers with information on best practices to eliminate flaring and improve torch monitoring and performance in the meantime. Crucially, banks also need to start holding companies accountable for flaring goals and timelines through loan eligibility, adjusted cost of capital, or other tools.
After all, in the new world of net-zero-financed issuance pledges, an operator’s flaring problem is also a problem for the banks it borrows from.
JP Morgan, Bank of America, Citi, Goldman Sachs and Morgan Stanley are among those well positioned to generate a positive impact on a large scale given their outsized lending to oil and gas companies. These five banks provided approximately $ 789 billion in financing to fossil energy producers between 2016 and 2019, nearly 30% of new financing to the sector.
Through active engagement with operators and time-bound performance expectations backed by consequences, the banking community can help end flaring – a tangible victory on the longer path to energy system change and the achieving an economy-wide net zero emission economy.
Carbon accounting should not hinder carbon liability. It’s time for banks to put their muscles where their mouths are.