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Bank's new climate goals add to hurdles for fossil fuel producers, users

In another sign that access to capital is going to get more difficult for fossil fuel producers and users, Morgan Stanley became the first major U.S. investment bank to pledge it would achieve a net-zero emission goal in its lending portfolio by 2050, in line with the goals of the Paris Agreement on climate change.

While none of the other five U.S. "bulge bracket" banks — Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. — has echoed that pledge, the move brings the U.S. closer to Europe, where investment banks have said emissions will become part of their credit criteria using net-zero by 2050 as the benchmark.

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Morgan Stanley has just over $20 billion in commitments to energy and utility companies, according to SEC filings, which is more than 6% of the roughly $300 billion the six big banks committed to fossil fuel producers and utilities in the second quarter. The bank was vague about how it would unwind that business over 30 years and did not reply to questions regarding the new policy.

Defining the problem will come first, Morgan Stanley said in its Sept. 21 announcement. To that end, the bank said it is collaborating with its peers on defining how to measure and disclose emissions.

Smaller U.S. banks were already backing away from giving oil and gas companies more credit, mainly due to low commodity prices, an S&P Global Market Intelligence analysis of second-quarter bank lending found.

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Analysts at credit rating agency Moody's noted that despite low prices and increased investor concern, banks keep lending to the fossil fuel industry. "Energy returns have been lackluster even before the coronavirus pandemic and a production standoff upset oil prices in early 2020," Moody's said Sept. 24. "Yet the financing of fossil fuel industries continued unabated during 2016-19, with 35 banks providing some $2.8 trillion in financing for fossil fuel activities over that period."

"Oil demand will continue for many decades, regardless of when it peaks, and companies will still seek capital, even if their financing costs rise," Moody's said. "Investors in several recent investment-grade deals have asked for more 30-year bonds, and in at least one case in early 2020 an energy company issued a 40-year bond."

On the other hand, for the most carbon-intense fossil fuel — thermal coal — loans are drying up and insurance companies are refusing to write new policies, coal executives said, a shift from a decade ago when coal dominated U.S. power generation.

"It's always good to be on the winning side," University of Pittsburgh professor of sustainability and ethics C.B. Bhattacharya said of Morgan Stanley's motivation. "The wind has changed ... fossil fuels do not have a future. Even banks, which are perennially slow to adapt to these things, they have woken up and have realized that it's now or never."

Bhattacharya, who has advised many corporations on sustainability, including financial institutions, said Morgan Stanley's net-zero pledge should include steps to progress, rather than just a single 30-year goal. "Without targets, there is a danger of greenwashing, a perception of greenwashing is coming through," he said.

Bhattacharya teaches a couple of miles across town from the headquarters of the U.S.'s largest natural gas producer, EQT Corp. His advice for CEO Toby Rice and other oil and gas producers is to start tapping the engineering brainpower of employees and start up new renewable units and companies.

"The message I would give to Toby Rice: Define your purpose," Bhattacharya said. "Electricity is just an enabler, so it does not have to be sold as so many cubic meters of gas; it could also be a service." He singled out Italian power company Enel SpA as a company to emulate. Enel is steadily selling fossil fuel plants worldwide and replacing them with renewable power projects.

More skeptical about the impact of climate change goals was Craig Webster, an analyst with energy investment bank Tudor Pickering Holt & Co., which does most of its business in the oil patch. "The International Energy Agency's stab at a sub-2 degree pathway suggests that 2040 oil demand would need to be down about 25% from today, with gas demand about the same as today. What would a corporate strategy that tracks this scenario look like?" Webster asked in a May 15 note. "Climate activists point to the risk of stranded assets as a reason to curb production. Companies point to their position on the global cost curve as a reason not to."

"The outcome will be determined by economics, the evolution of policy and shifts in societal expectations," Tudor Pickering Holt said. "Most of the models will be wrong. Hope and dogma will be irrelevant."