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Banks must address underwriting exposure to fossil fuels, not just lending

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Banks must address underwriting exposure to fossil fuels, not just lending

While some European lenders are reducing their lending to fossil fuel projects to meet climate change goals, they are not taking into account underwriting or working capital financing in oil, gas and coal, according to speakers at a conference organized by the Organization for Economic Cooperation and Development.

Major European banks such as ING Groep NV and BNP Paribas SA are taking measures to reduce their exposure to the coal, oil and gas sectors as they bring their lending portfolios into line with 2015 Paris Agreement on climate change, market participants say. The Paris accord aims to limit the global temperature rise to below 2 degrees C above pre-industrial levels and to try to limit the rise to 1.5 degrees.

"There is still one major loophole in the way the finance looks at aligning policy with the Paris agreements, there is a lot of attention on how banks reduce their exposure to coal or other extreme fossil fuel sectors, unfortunately these commitments only concern lending not the underwriting," said Lucie Pinson, a senior campaigner for the Friends of the Earth in France, adding that underwriting accounts for 50% of the financing of the coal industry.

She said banks were not willing to lose clients by exiting fossil fuel projects, and noted that some lenders were increasing coal investments, including HSBC Holdings PLC, which was financing coal plants in Bangladesh, Indonesia and Vietnam.

Pierre Sorbets, the vice chairman of global banking at HSBC France, speaking at the same conference, said the lender had phased out coal investments in nearly 200 countries, but was continuing coal investments in those three Asian nations because coal offered the energy that those particular populations needed.

He acknowledged the risks facing the banking sector and said the bank was applying Task Force on Climate-related Financial Disclosures' assessments to its clients. The G-20's TCFD, has provided companies with a voluntary framework since June 2017 and outlines how large companies should assess and disclose their physical and transitional risks associated with climate change.

Catastrophe if banks exit oil and gas

"If our clients do not follow the right path to transition, our portfolio will suffer," he said. While the bank was working with clients to get them to adhere to climate change, he conceded it was a major challenge.

"We can't withdraw our support from those clients because first they are clients. If the banking sector were to withdraw from oil and gas, it would create a major economic and social catastrophe so we have to balance things."

The 1.5 degree to 2 degree scenario under the Paris climate agreement "is an additional challenge and we shall have to accelerate. It's our common challenge."

Anne-Sophie Castelnau, director of wholesale banking at ING France, said her bank's strategy was not to exclude companies that invest in potentially non-environmentally friendly projects but to help them become more "green."

The bank was able to offer a discount in pricing for companies that took sustainability very seriously because it sees them as less risky over the longer term, she said.

"We see the risk that are embedded into those companies far more remote than the ones that are not taking action," she said.