The ‘olive’ finance debate is back 

Welcome back. As Moral Money readers are well aware by now, the role of multilateral lenders is one of the hottest issues in the climate and energy transition space. One of the most striking elements in the COP27 closing statement was a call for these institutions to “reform [their] practices and priorities” and “define a new vision” that could properly address the climate emergency.

Much of the criticism in this area has focused on the World Bank, whose president David Malpass stands accused of failing to take this challenge seriously. In contrast, the EU’s European Investment Bank is widely seen as a climate leader: it has been a pioneer in the issuance of green bonds and has taken a hard line against financing fossil fuels.

Not hard enough for some, however. As we highlight today, the EIB has come under fire for its willingness to fund renewable power projects by companies that are heavily polluting in other parts of their operations — rather than cutting such businesses out altogether. It’s another manifestation of the debate over “olive” finance — pumping money into companies that are gradually shifting from brown to green.

Is this the sort of pragmatism that’s needed to maximise clean power investment — or a sign of messed up priorities? Let us know what you reckon at [email protected]

Have a good weekend. We’ll see you next week, when Gillian and I will be reporting daily from the World Economic Forum in Davos. (Simon Mundy)

EIB’s green credentials in the spotlight

The European Investment Bank, one of the world’s largest multilateral lenders, pledged in 2021 to stop providing new loans to companies involved in activities deemed incompatible with the Paris agreement to curb climate change, such as new oil production and Arctic drilling.

But last year, during the spiralling energy crisis, the bank relaxed its rules: such companies would temporarily be eligible for loans for all renewable energy and electric vehicle charging infrastructure projects inside the EU. In other words, oil and gas majors could receive concessional EIB funding for renewables schemes, even if they were simultaneously powering ahead with fossil fuel production.

The new exemption, which will run until 2027 (subject to a review in 2025) has triggered a debate that raises difficult questions for the EIB and other institutions. At a time of energy market turmoil, is this sort of move necessary and pragmatic, or evidence of dangerous backsliding?

 “We are coming back to the issue of greenwashing,” said Anna Roggenbuck from the campaign group Bankwatch. “The EIB claims it will still be requesting decarbonisation plans. But these kinds of plans wouldn’t be Paris agreement-compatible and credible if a company continues to be involved in the dirtiest fossil fuels. The bank should change its decision as soon as possible.” 

But Peter McNally, global sector lead for industrials, materials and energy at research company Third Bridge, said if the goal “is to maximise the investment in renewables, then there should be no exclusions for anybody willing to commit capital, including the oil majors”.

Announcing the rule change in October, the EIB said its new exemption would allow it to finance “a greater number of clean energy projects with a wider range of clients and utility companies”.

The change broadened the circumstances in which the EIB could provide concessional debt, or loans at better than the market rate, to companies involved in activities deemed noncompliant with Paris. A previous exemption had existed only for highly “innovative” green projects, such as renewable hydrogen schemes.

Multilateral development banks have come under growing pressure over the past 18 months to align their financing with the Paris agreement goal of limiting warming to 1.5C, and to do more to encourage climate-conscious investing.

Green groups have also demanded that banks stop lending to fossil fuel companies and underwriting their transactions. The EIB has moved more boldly on this front than peers such as the World Bank, promising in 2019 to phase out lending for unabated fossil fuel projects by the end of 2021.

EIB president Werner Hoyer told the FT in September that the bank would reject calls from some developing countries to support gas projects, to avoid being stuck with “stranded assets”.

However, the Ukraine war and energy crisis have prompted a rush to replace the fossil fuels no longer coming from Russia and to roll out new solar and wind farms. The UK approved a new coal mine last year, in the face of widespread opposition, while Germany has been in discussions with Senegal about new fossil fuel exploration. All of this, of course, is happening against a backdrop of sharply rising interest rates.

“The overall context is that debt costs, financing costs have gone up a lot for renewable projects,” said Antoine Vagneur-Jones, head of trade and supply chains at research company BloombergNEF.

“Whether or not oil and gas majors need concessional financing is a loaded question. A lot of them have made big profits recently,” he said. But he added that he did not think the new exemption was a “big issue”, since “we don’t have enough of a [renewable energy] pipeline . . . to weed out less-deserving companies”.

No loans have been announced under the new exemption, which does not apply to companies investing in new thermal coal mines and greenfield coal-fired power plants. But “we know there is interest”, said one person with knowledge of the situation.

High-emitting companies using the exemption must publish “Paris-aligned” decarbonisation plans, which include interim, rolling, quantitative emission reduction targets aligned with the 1.5C goal. The plans do not need to be third-party approved or audited.

An EIB official defended the rule change, saying it was made “in support of the REPowerEU plan to end dependency on Russian fossil fuel imports”.

“We remain fully committed to our policy of not financing unabated fossil fuels,” the official said. (Camilla Hodgson)

Chief executives take fright at global tensions

It’s been nearly eight years since the UN laid down its sustainable development goals: a set of 17 targets to be achieved by 2030, including an end to extreme poverty and universal access to affordable energy.

If any of those goals are to be achieved, business will need to play a role. So at the halfway mark of the 15-year campaign, how do business leaders think progress is going?

Not too well, according to a new report from the UN Global Compact and Accenture, which surveyed 2,600 chief executives in 128 countries. As war rages in Ukraine and tensions simmer between China and the US, 87 per cent of respondents said that geopolitical instability was undermining progress towards the SDGs.

The survey by the UNGC — an initiative to align businesses behind sustainability goals — has been published annually since 2012, and this year’s responses showed some interesting trends and divergences.

Even as they warned of the global impact of geopolitical turmoil on SDG progress, most business leaders in Europe, the Americas and Australasia said that their own companies’ sustainability efforts had not been set back — unlike their counterparts in Asia and Africa, where a majority said that their own sustainability efforts had taken a hit. Globally, smaller companies were more likely than larger ones to confess that their sustainability strategies were fraying under the strain, as intergovernmental strife plays havoc with supply chains and market prices.

Compared with previous surveys, chief executives appear to be far more willing to take personal responsibility for sustainability issues — despite the fact that two-thirds said their businesses were not linking pay to sustainability goals.

Seventy-two per cent strongly agreed that they were accountable for such matters at their company — up from just 19 per cent a decade ago. And a full third said that climate change was already having a high impact on their businesses — putting it behind only inflation, talent scarcity and public health threats in the ranking of top concerns. (Andrew Jack)

Smart reads

• Will Saudi Aramco be the last oil major standing? The FT’s Tom Wilson heads to Dhahran to dig into the hydrocarbon giant’s long-term strategy — and its contentious green claims.

• The European Commission has warned that more than half of the environmental claims used to market products in the EU are misleading or unfounded. This comes as it prepares to draw up new rules to govern such claims.